Price Action Patterns Do Not Mean the Market Isn't Random

[SIUYA 11]

dont worry 1a2b3cppp - what ever works for you......

 

The problem for me is while you have a lot of 'what if, what if, what if,' when it comes from building a position of strength, you ignore these when using your method from building a larger position from a position of weakness with losses.

 

You could easily rephrase everything you have said in your blog such as 'what if it does not keep going up?" with such phrases as "what if it does not reverse?" or "what if it does keep going up?" etc; etc......

or this "Adding to winning trades is only profitable if price keeps going in your direction, and a small movement against you can turn your winner into a loser."........but you would rather accept the exact opposite and ride losses and actually magnify losses if you dont get the right entries and exits. So far you have not explained this yet - maybe you should shed some light on this aspect of it.....???

 

 

When you say....

"I expect to get criticism for it, though, since it's basically the opposite of every trading "rule" out there." ..... there is generally a reason for these trading rules....trading being the operative word.

 

This looks more like it follows the passive investment strategy rules such as....

"Its not timing of the markets, but time in the markets that is important"

"What does down must go up"

"Its ok if you dont crystallise the loss"

"buy when everyone else is selling"

 

This is not a trading strategy for me in any sense of understanding for me (which is why it appears to break a lot of trading rules - and yes everyones definition of trading or investment is different). This is a position taking strategy and you are buying and selling around a position, getting in and out, profit taking little bit when you can and building a position over time ---- but in the hope of what because you will take it off at the slightest gain it seems.....

 

Personally i would view this as a simplistic passive investment asset allocation strategy generally pushed by investment advisers. If it can be applied in a manner that outperforms the selected instruments it invests in with a better risk reward profile then yes it certainly has merits.

Here then lies another the issue i would have with such a strategy as a trading strategy - it cannot really be leveraged as a trading strategy - hence its very limiting, and it shows its real risks. Not that i am saying leverage is the be all and end all of things, and generally i think many people actually over leveraged themselves - but if something is not able to be leveraged it is really limited as strategy because its real risks and flaws are so easily highlighted and shown up. It requires a large account, the right instruments and a long enough time frame.....and in the end of the day a stop watch is right at least twice a day, and everything ends at zero.....

 

I would still like to see more info on your entries and exits. This strategy will still only work with reasonable levels, or can fail miserably - there is that fine line between clever and stupid, and if it works for you maybe you have a skill that is not being recognised....

[1a2b3cppp 10]

Ok let me ask the following. Would you do the following exercise:

 

Simulate a random market (a random walk), enter trades and apply your strategy, and each time you enter and exit subtract a small amount to represent spread and commission.

 

This is a simulation so you can try this over as long a period as you want and you can get the end result of your strategy. If you wouldn't be willing to do it, why not? Do you expect that you will make money in this or lose money?

 

Sure, given the constraint that price cannot go to zero and assuming you start with a realistic price and not like 1,000,000 or something where the position sizing would take forever to hit the levels. As I've said (either in this thread or the other thread), if SPY were trading at $1,000 per share I'd have to do things a little differently, but I'll deal with that if it gets there.

 

I would make money over time.

Edited May 2, 2013 by 1a2b3cppp

[1a2b3cppp 10]

dont worry 1a2b3cppp - what ever works for you......

 

The problem for me is while you have a lot of 'what if, what if, what if,' when it comes from building a position of strength, you ignore these when using your method from building a larger position from a position of weakness with losses.

 

You could easily rephrase everything you have said in your blog such as 'what if it does not keep going up?" with such phrases as "what if it does not reverse?" or "what if it does keep going up?" etc; etc...... or this "Adding to winning trades is only profitable if price keeps going in your direction, and a small movement against you can turn your winner into a loser."........but you would rather accept the exact opposite and ride losses and actually magnify losses if you dont get the right entries and exits. So far you have not explained this yet - maybe you should shed some light on this aspect of it.....???

 

The goal is to get the biggest position with the lowest average price. Adding to winners is counterproductive to this strategy.

 

I do not mind riding drawdown when a trade temporarily goes against me because it probably means I will be able to buy more shares at a better price.

 

When you say....

"I expect to get criticism for it, though, since it's basically the opposite of every trading "rule" out there." ..... there is generally a reason for these trading rules....trading being the operative word.

 

Those may be the same rules that the 95% of people who lose money follow.

 

This looks more like it follows the passive investment strategy rules such as....

"Its not timing of the markets, but time in the markets that is important"

"What does down must go up"

"Its ok if you dont crystallise the loss"

"buy when everyone else is selling"

 

Does "crystallise" mean close out the position for a loss?

 

This is not a trading strategy for me in any sense of understanding for me (which is why it appears to break a lot of trading rules - and yes everyones definition of trading or investment is different). This is a position taking strategy and you are buying and selling around a position, getting in and out, profit taking little bit when you can and building a position over time ---- but in the hope of what because you will take it off at the slightest gain it seems.....

 

Personally i would view this as a simplistic passive investment asset allocation strategy generally pushed by investment advisers. If it can be applied in a manner that outperforms the selected instruments it invests in with a better risk reward profile then yes it certainly has merits.

 

"Investing" is just slower trading. I tend to think of "investing" as buying and not planning on selling for years. I sell my positions within days to months depending on what price does, so I personally don't quite define it as "investing."

 

Here then lies another the issue i would have with such a strategy as a trading strategy - it cannot really be leveraged as a trading strategy - hence its very limiting, and it shows its real risks. Not that i am saying leverage is the be all and end all of things, and generally i think many people actually over leveraged themselves - but if something is not able to be leveraged it is really limited as strategy because its real risks and flaws are so easily highlighted and shown up. It requires a large account, the right instruments and a long enough time frame.....and in the end of the day a stop watch is right at least twice a day, and everything ends at zero.....

 

I would still like to see more info on your entries and exits. This strategy will still only work with reasonable levels, or can fail miserably - there is that fine line between clever and stupid, and if it works for you maybe you have a skill that is not being recognised....

 

I wrote more about entries and exits in the other thread but if you have specific questions feel free to ask and I'll do my best to answer them.

[1a2b3cppp 10]

There are really only two ways this strategy can lose:

 

1) if the S&P500 goes to zero.

 

2) if the S&P500 goes down in price and then chops there endlessly without ever going down to the next buy level or going up to a level where I could exit in profit, and even then I'd still be getting paid dividends every so often so on an infinite time frame I'd eventually make my money back

 

But yeah if either of those things happen then I'll lose money.

[1a2b3cppp 10]

To be fair, recently I've been getting into trading the weighted indexes (SSO, QLD) which doen't pay much dividend at all but let me buy the equivalent of a much bigger position for cheaper.

 

Assume I have $10,000 to spend on the initial entry and lets use the current SPY and SSO prices as examples.

 

SPY is $159.74. That means I'd get 62 shares ($9,903.88). SPY also pays a 2.03% dividend which means if I ended up holding this position for a year I'd be paid approximately $203.

 

But SSO is 2x weighted SPY so it moves approximately twice as much as SPY. SSO is $75.77. SSO pays a .44% dividend.

 

So if I wanted to buy an SSO position that was equivalent to $10,000 worth of SPY, I would only need to buy $5,000 worth, or 65 shares ($4,925.05).

 

If the S&P goes up 5%, SPY will be worth about $167.72 per share, and my 62 shares would be worth $10,398.64, which is a gain of $494.76.

 

If the S&P goes up 5% then SSO will go up 10% to approximately $83.34 and my 65 shares would be worth $5,417.10, which is a gain of $492.05.

 

So you can spend half as much and get the same total return. But of course SSO doesn't pay as much dividend so you're giving that up.

[SIUYA 11]

The goal is to get the biggest position with the lowest average price. Adding to winners is counterproductive to this strategy.

 

I

 

this says it all - you forgot about the part regarding winning and making money without crossing the fingers........

adding winners in no way is counterproductive to this - its all about having the largest position possible with the smallest risk for the maximum possible gain.

 

Good luck to your methods and to those who follow it, there will be plenty who try and fail.

I will prefer to stick to the idea that 'losers average losers' (and this does not necessarily have a lot to do with why 95% fail - as i would think most of those dont average either way consistently - they probably only average losers occasionally out of desperation)

There is a lot to be said just for going all in.

 

could you please direct to those entry and exits - i missed it - unless of course it is simply a matter of random entries and exits and an crossing the fingers then there is not much more to say....thanks.

[1a2b3cppp 10]

this says it all - you forgot about the part regarding winning and making money without crossing the fingers........

 

And you forgot about the part where I said price is random.

 

adding winners in no way is counterproductive to this - its all about having the largest position possible with the smallest risk for the maximum possible gain.

 

Sure it is. If you add to winners and price keeps going in your favor, you make more. But how long do you let it go in your favor for before it reverses and turns your winner into a loser? And then what do you do? Cross your fingers and hope it goes back up?

 

Good luck to your methods and to those who follow it, there will be plenty who try and fail.

I will prefer to stick to the idea that 'losers average losers' (and this does not necessarily have a lot to do with why 95% fail - as i would think most of those dont average either way consistently - they probably only average losers occasionally out of desperation)

There is a lot to be said just for going all in.

 

To each their own. It wasn't my intention to convert anyone or convince anyone that this method is the best way. I'm only sharing the way I do things because it might help someone else think about things differently.

 

could you please direct to those entry and exits - i missed it - unless of course it is simply a matter of random entries and exits and an crossing the fingers then there is not much more to say....thanks.

 

Entries and exits are discussed in this post:

 

http://www.traderslaboratory.com/forums/technical-analysis/16226-how-i-trade-if-price-random.html#post178883

 

I've also been posting every entry and exit in real time (or before) for years in my journal threads on another popular forum. I use the same username there so you can probably find it easily. I recently started posting them on Twitter, too, but that's just in the last few weeks so it doesn't have my complete history the way my journal threads do.

[arvo 10]

this says it all - you forgot about the part regarding winning and making money without crossing the fingers........

adding winners in no way is counterproductive to this - its all about having the largest position possible with the smallest risk for the maximum possible gain.

 

It's very good that this thread got past the issue of "randomness" (it's a relief that the thread title did not mean to say what it said after all) and got into the essence of this position trading strategy. I still do not understand one thing and that's about the maths of this stragegy. The statement that "adding to winners" is counterproductive and "adding to a losing position" is somehow superior just doesn't add up to me.

 

Consider this, just a theoretical mathematical model, no charts needed to illustrate the point: if you scale in same size at equal intervals, your average price will always be the middle of the range covered by the scaling-in exercise, only the odds (edge!) for the position are much worse if you scale into a losing position - I suppose that's where the common sense of "never adding to a loser" originates.

 

E.g. you scale into your position in equal parts in five steps every 10 ticks. If you do this with a position going your way, then after the fifth scale-in your average price will be 20 ticks away from your first entry price and 20 ticks away from your last entry price, with the entire position 20 ticks IN PROFIT . If you do the same with a losing position, your average price will be 20 ticks from your first entry and last entry, with your entire position 20 ticks IN LOSS. that's a 40-tick actual difference between both positions. If the price had not reached the 40 tick mark by a tick and you had not entered the last part into your position just yet, the difference would be even bigger between the losing and winning position.

 

Now, as far as reward is concerned (let's not deal with risk so far, as a position trader may rightly or wrongly assume that risk can be avoided and you can simply make money by spraying the entire price history range and then some extra with your entries and the price will eventually come back within that range and you will just net whatever profits you see at your leisure), in order to make a 20 tick profit on such a position, the winning position holder could just close it right there if it does not travel any further. The losing position holder would have to stay at the mercy of the market and wait for the price to reverse and travel back to the original entry price, i.e. make a 100 pct / 40 tick retracement. I just don‘t understand how adding to a losing position could be more profitable in position trading, given the uncertainty of such retracements? At the very least you lose time - and a lot of time in some cases.

 

Also, this approach begs the question of what you do if your first entry is spot on and takes off in your favour? At what point will you kill it and start scaling in countertrend? That idea alone sounds a bit funny. If you keep this trade running and don't scale in as you do with the countertrend positions, then the unfortunate thing is that the trade where you happened to have a good entry advantage will be a heavily undersized one. So basically, by applying the scaling-in tactic with a preference exclusively to losing trades you are reducing your edge even more in position trading - even if you assume you have enough capital to ride the entire price history range risk-free, you are still minimizing your profit this way.

 

I'm not saying this strategy cannot be profitable - it can be profitable with adequate capital to avoid the need of having to close negative positions. The interesting question is do you think this strategy can be profitable if you do not have the means to cover the entire range, but only a small part of it - i.e. if you put a stop loss order somewhere? If risk is assumed, then it would be interesting to hear about where you exit winners and losers? The question of the risk-reward ratio arises. When do you exit with a loss, and how many winners of what size do you need to make up for one loss? What hit rate do you need to stay profitable in the long run? How much price range and on which time frames do you think is a reasonably safe start for this position trading strategy?

 

BR

 

arvo

Edited May 3, 2013 by arvo
adding content

[SIUYA 11]

so we are back to the price is random stuff --- fine...

 

Here are two trade scenarios in no particular order, and both are equally likely to happen as its random, there is no prediction etc etc........

 

Scenario A: buy at 1, buy at 2, buy at 3 - average entry price 2

Scenario B buy at 1, buy at 2, buy at 3 - average entry price 2

 

which scenario would you rather be in?

Scenario A: where price is at 3, the last trade entry, OR

Scenario B: where price is at 1, the last trade entry

 

If you choose B then you either dont think markets are random or are an idiot and would prefer to have losses in an account. (As market price is at 1, average price is at 2) v profits in an account (As market price is at 3, average price is at 2)

 

.............

Also dont forget - in scenario A, you have been proven right twice already, and in scenario B proven wrong twice already - maybe you might try and justify that the market is really random and hence i am due to be wrong on my next pick.....

In which case the logic is still flawed.

 

If the market is random, and your picks are random then the last entry is still 50-50 likely to be right or wrong as its independent.....in which case there are a number of possibilities....and I am giving them equal % moves to be fair for comparison

 

Scenario A: you are wrong price retraces 50% from 3 down to 2 - you are at break even

Scenario A: you are right, price rises by 100% from 3 to 6. - happy days

Scenario B: you are wrong again price retraces 50% from 1 down to .50 - ouch

Scenario B: you are right, price rises by 100% from 1 to 2. - you are at break even

 

If you change the right from wrong because you think you are due to reverse your last two results....such that you should revert back to some random average of rights and wrongs - scenario A, you are due to be wrong......worst case is break even after a 50% pullback

scenario B, you are due to be right......best case is break even after a 100% rally

 

.......................

Not trying to convince anyone of anything but thats how my mind works....

 

Which is why you need more than just a strategy of adding to losses which does not make sense. Apart from cross the fingers....

I also think testing will show you what an optimal number of additions may be, when to not add, when to ideally take profits etc.....otherwise crossing the fingers works.

I know which scenario i would rather be in when it comes to the finger crossing strategy.

 

yes clearly there are other issues of dividends etc. but this is not then random - this is based on other valuation decision making rationale.

 

thanks for the entries link - one key issue you make there which i think you might do well to really highlight is the very small trade size at the start of the process and the increasingly larger bet sizes you require as the price goes against you. Plus its not much of a discussion - what do you do when you mange to by pure luck or skill pick the bottom and enter with your smallest position possible.......

 

...............

I also checked the web (amazing what a quick google can reveal) I found this as one of the first points...

on ET

Posted by 1a2b3cppp on 01-24-09 11:43 PM:

 

it's annoying.

 

I usually trade 1 contract but sometimes I'll increase a bit.

 

............But it does not matter. These things are irrelevant and be taken out of context with a poorly worded and half assed strategy IMHO.....

 

The method has some merits, but random its not - 50% retracements I love as a structure....but thats nothing to do with being random. You introduce the whole subjective element of which re tracement you are trading, if you go long or short etc etc.....

 

..............for those of you new to it willing to give it a go - be aware there are a lot more subjective, psychological and money management issues here and dont be fooled by the randomness BS.

[SunTrader 10]

Not playing shrink here but I think someone choosing to buy at a lower price is using the rationale that although price is lower and can lower, much lower instead look at it as:

 

a) it's on sale

b) how much lower can it really go

c) i'll just buy more and lower my cost basis

d) maybe i'll hedge with another market

e) anything else I can think off without having to admit a loss (which every trader has and most of us have more losses than wins - me for one) and just get over it.

 

I don't see how it can be advantageous to add to a loser simply because of the uncertainty of adding to a winner. Either trade can be a winner .... or loser.

 

But probabilities say over time with the trend and not against are better.

 

If anything when price is going down is the time to short, not add to a losing long.

[arvo 10]

thanks for the entries link - one key issue you make there which i think you might do well to really highlight is the very small trade size at the start of the process and the increasingly larger bet sizes you require as the price goes against you.

 

The strategy description there does not seem to mention that you have to scale in with increasingly larger size each time (and the example with a chart in this thread does not, either) - that would be the Martingale strategy, which maximizes your potential loss with every countertrend scale-in even more... (I know this too well from my own experience in the past :doh:).

 

I guess the unwillingness to take a loss while it's small comes from a distorted perception of risk. Mark Douglas wrote in Trading in the Zone that for some reason some traders become more risk averse as their profit grows, as they become overwhelmed by fear that the open profit will be gone soon and they will have lost an opportunity. This is perceived as a double blow: loss of a rarely available good win plus the hurt pride (being proven wrong in the end), even if you close at breakeven. Meanwhile, the opposite rationale is that when you're in an open negative position, you are still entitled to not consider that money in the red as a loss until its closed (which you hope will not happen, because the top/bottom is nigh), plus you get a kick out of knowing that you WILL HAVE picked the bottom or top and you get a kick out of actually riding that reversal in complete composure and see your rightness proven, and even if you exit at breakeven or with just a small profit (because the positive risk aversion kicks in), you feel very good. But when you put emotions aside and measure the results, risk, reward, expectancy etc, you realize that this approach is BS. Been there myself...

 

BR

 

arvo

[SIUYA 11]

The strategy description there does not seem to mention that you have to scale in with increasingly larger size each time (and the example with a chart in this thread does not, either) - that would be the Martingale strategy, which maximizes your potential loss with every countertrend scale-in even more... (I know this too well from my own experience in the past :doh:).

 

 

it does if you read the fine print

from 1a2b3cppp when he states above.....

Entries and exits are discussed in this post:

 

http://www.traderslaboratory.com/for...tml#post178883

 

 

'Step 3-x: Continue to buy more SPY when it continues to go against you. Again, you can use Fibonaccis, or you can divide its current price into increments (such as if SPY is at $140 and you buy every time it drops $10), or into percentages (such as if you buy every time it drops a certain percentage), etc. Remember that each add is going to be bigger than the previous. This is averaging down. Remember that you are not using margin. Begin your first add with a small enough size that you can continue to buy more as it goes against you

 

.......i think many who have been there also recognise the problems, and if you survive long enough to fight again choose not to repeat it.

Scaling in an out is not for every strategy or person and not recommended all the time, but as you say so long as the risk rewards are fully understood....

Personally I try never to touch this sort of thing with a barge pole based on a random entry method, and new traders would be advised to tread very carefully.

[zdo 20]

Exactly!

 

“Scaling in an out is not for every strategy”

“Scaling in an out is not for every person”

“Scaling in an out is not recommended all the time”

“never … touch this sort of … based on a random entry method”

 

To partially rephrase and emphasize the above -

Genuine (and modified) scaling requires generous capitalization.

Genuine (and modified) scaling still requires a max risk per load / campaign comprising only a small portion of total capitalization.

Genuine (and modified) scaling just simply done (“randomly”) is asking for additional trouble – more pain and trouble than most traders need or even can endure. I personally only do genuine scaling into pretty sweet looking convergences of cycles. My ‘rules’ for modified scaling are looser, but still aren’t by any stretch of the imagination done completely on a whim…and time based stops and other techs that are congruent with counter trend trading are used, etc… (even though the scaling typically continues after the trend has turned... ie rarely is the full load on before the turn).

Genuine (and modified) scaling is barely ‘skills’ based … more accurately - it’s ‘virtues’ based.

 

 

… I don’t know how ‘on topic’ / relevant to OP’s methods this is… but still … hth

 

 

PS re: randomness

so many randomness threads and arguments lately... what's up with that? Wonder if they've traversed the same crossmappring, args. and conclusions in the 'big' forums?

:haha:I'm thinking we need more "randomness " threads ... wish I had time to start one...

[1a2b3cppp 10]

It's very good that this thread got past the issue of "randomness" (it's a relief that the thread title did not mean to say what it said after all) and got into the essence of this position trading strategy. I still do not understand one thing and that's about the maths of this stragegy. The statement that "adding to winners" is counterproductive and "adding to a losing position" is somehow superior just doesn't add up to me.

 

Think about like this. If you're adding to a winner, your average cost is going up with each add. The more you add, the close it gets to the current price (assuming price is still moving in your favor). When do you call it quits? Now? Now? Oops, you waited too long and now price just moved against you and your winner is now a loser.

 

If you have a systematic method for closing winners that have been added to while they are still winners, then do it that way. I do not. I do not know when price is going to reverse. I do not know how many times I can add to a winner before it will reverse and turn into a loser.

 

I do know that if I keep adding to losers with proper position sizing and money management, eventually it will reverse and become a winner. That's why I do it the way I do it.

 

E.g. you scale into your position in equal parts in five steps every 10 ticks.

 

I do not add in with equal parts. I make each subsequent add larger than the previous to lower the average cost more than with equal parts.

 

Also, this approach begs the question of what you do if your first entry is spot on and takes off in your favour?

 

Sometimes that happens. As I've mentioned before, I don't make much money when that happens because it happens with a small position. That's one of the downsides of trading like this is that sometimes price just slowly trends upward and I either don't have a position at all, or I have a small position.

 

Again, this is not the holy grail. There are situations when it doesn't make a lot of money, and that is one of them.

 

At what point will you kill it and start scaling in countertrend? That idea alone sounds a bit funny. If you keep this trade running and don't scale in as you do with the countertrend positions, then the unfortunate thing is that the trade where you happened to have a good entry advantage will be a heavily undersized one. So basically, by applying the scaling-in tactic with a preference exclusively to losing trades you are reducing your edge even more in position trading - even if you assume you have enough capital to ride the entire price history range risk-free, you are still minimizing your profit this way.

 

I've mentioned all this before, too. Yes, if price goes up and I have a small position or no position, it minimizes the profit.

 

But I don't see it as a bad thing, it's just an aspect of how I trade. It's a weakness of my system. It doesn't result in losses, but it results in smaller profits sometimes. It's something I'm willing to accept because the opposite side of that is the more price moves against me, the more I make.

 

I'm not saying this strategy cannot be profitable - it can be profitable with adequate capital to avoid the need of having to close negative positions.

 

Good, because I've been trading it profitably with all entries posted in real time for years.

 

Yes, position sizing is important. I have to start small and scale in. Sometimes this results in very small winners. When price moves against me, it eventually results in bigger winners.

 

It's the only way I can do it since I can't predict price direction.

 

The interesting question is do you think this strategy can be profitable if you do not have the means to cover the entire range, but only a small part of it - i.e. if you put a stop loss order somewhere? If risk is assumed, then it would be interesting to hear about where you exit winners and losers? The question of the risk-reward ratio arises. When do you exit with a loss, and how many winners of what size do you need to make up for one loss? What hit rate do you need to stay profitable in the long run? How much price range and on which time frames do you think is a reasonably safe start for this position trading strategy?

 

I structure my position sizes such that I don't have to take losses. Sometimes I don't make much. Sometimes I have big wins. It depends on what the market does.

 

If you trade this style with a hard stop, eventually it will be hit and the loss will be catastrophic, requiring perhaps years to recover. Since I can't predict price, I wouldn't know where to put a stop loss, and so the only way I can do it is to use position sizing that doesn't ever require a stop. It's also why I don't use margin.

[1a2b3cppp 10]

so we are back to the price is random stuff --- fine...

 

Here are two trade scenarios in no particular order, and both are equally likely to happen as its random, there is no prediction etc etc........

 

Scenario A: buy at 1, buy at 2, buy at 3 - average entry price 2

Scenario B buy at 1, buy at 2, buy at 3 - average entry price 2

 

which scenario would you rather be in?

Scenario A: where price is at 3, the last trade entry, OR

Scenario B: where price is at 1, the last trade entry

 

I would never be in either scenario because I don't add to winners.

 

If you choose B then you either dont think markets are random or are an idiot and would prefer to have losses in an account. (As market price is at 1, average price is at 2) v profits in an account (As market price is at 3, average price is at 2)

 

.............

Also dont forget - in scenario A, you have been proven right twice already, and in scenario B proven wrong twice already - maybe you might try and justify that the market is really random and hence i am due to be wrong on my next pick.....

In which case the logic is still flawed.

 

It's not about being right or wrong. If you've "already been proven right twice," that's awesome. Do you know when to exit before your winner turn into a loser? I don't. That's why I don't trade that way.

 

If the market is random, and your picks are random then the last entry is still 50-50 likely to be right or wrong as its independent.....in which case there are a number of possibilities....and I am giving them equal % moves to be fair for comparison

 

Scenario A: you are wrong price retraces 50% from 3 down to 2 - you are at break even

Scenario A: you are right, price rises by 100% from 3 to 6. - happy days

Scenario B: you are wrong again price retraces 50% from 1 down to .50 - ouch

Scenario B: you are right, price rises by 100% from 1 to 2. - you are at break even

 

If you change the right from wrong because you think you are due to reverse your last two results....such that you should revert back to some random average of rights and wrongs - scenario A, you are due to be wrong......worst case is break even after a 50% pullback

scenario B, you are due to be right......best case is break even after a 100% rally

 

Your scenarios aren't really applicable to how I trade because a) they used equal position sizes at each add and b) I wouldn't add to winner anyway.

 

But I'll give you this:

 

Scenario C: buy 1 @ 3, buy 3 @ 2, buy 5 @ 1.

 

I'd be happy to be in that scenario. Average cost is below 2 and a small retracement will get me back into the positive. The exit would likely be 3.

 

.......................

Not trying to convince anyone of anything but thats how my mind works....

 

Cheers. I am here for discussion anyway.

 

Which is why you need more than just a strategy of adding to losses which does not make sense. Apart from cross the fingers....

I also think testing will show you what an optimal number of additions may be, when to not add, when to ideally take profits etc.....otherwise crossing the fingers works.

I know which scenario i would rather be in when it comes to the finger crossing strategy.

 

yes clearly there are other issues of dividends etc. but this is not then random - this is based on other valuation decision making rationale.

 

thanks for the entries link - one key issue you make there which i think you might do well to really highlight is the very small trade size at the start of the process and the increasingly larger bet sizes you require as the price goes against you. Plus its not much of a discussion - what do you do when you mange to by pure luck or skill pick the bottom and enter with your smallest position possible.......

 

Yes, as I mentioned, sometimes price starts going in my favor when I have a small position. I don't have big winners when that happens, but I don't ever know if that's going to happen or not, either.

 

...............

I also checked the web (amazing what a quick google can reveal) I found this as one of the first points...

on ET

Posted by 1a2b3cppp on 01-24-09 11:43 PM:

 

it's annoying.

 

I usually trade 1 contract but sometimes I'll increase a bit.

 

That post is from over 4 years ago and is related to daytrading the ES from back when I was still trying to learn how to predict price movement. Needless to say I was never successful.

[1a2b3cppp 10]

Not playing shrink here but I think someone choosing to buy at a lower price is using the rationale that although price is lower and can lower, much lower instead look at it as:

 

a) it's on sale

 

That's awesome!

 

b) how much lower can it really go

c) i'll just buy more and lower my cost basis

d) maybe i'll hedge with another market

e) anything else I can think off without having to admit a loss (which every trader has and most of us have more losses than wins - me for one) and just get over it.

 

I don't see how it can be advantageous to add to a loser simply because of the uncertainty of adding to a winner. Either trade can be a winner .... or loser.

 

But probabilities say over time with the trend and not against are better.

 

If anything when price is going down is the time to short, not add to a losing long.

 

If you are able to short when price is going down and are consistently profitable, then keep doing what you are doing! I am unable to trade that way (I never know when price is going to come back up!) so I have to trade this way.

 

I feel like some of these replies are framed like I'm trying to say this is the only way there is to trade. I hope no one thinks I'm saying that. I'm only sharing the way I trade, which is (currently) the only way for me, because I cannot predict price direction so all this "trend following" stuff doesn't work for me.

 

I would love to be a trend follower. I would love to let the market stop me out when the trend reverses. I haven't had any luck with that, although I still come up with new ideas and test them all the time.

[steve46 12]

I think the idea that you can't predict price direction is correct.....you can however anticipate the likelihood that price will trend (one way or the other) and the value of that.....arrives in your neighborhood when you understand that volume leads price....from that point its a short hop to finding a way to read volume patterns and understanding what triggers interest (the first step in a trend) and then momentum (the persistent increase in volume over time that sustains trend)....Its about that simple, except that most folks stand around looking for others to show them how it works....or sell them something that bypasses the process....if there was some indicator or system that did that, believe me when I say it wouldn't be a secret for very long...

 

by the way for those who need a map

 

1)You find someone who says they can do it

2)You watch them do it

3)You either go your own way and try to figure it our yourself, or you try to get them to show you....

 

Every time a guru or vendor has shown up to claim that they have a really great system or software I have asked that they demonstrate for prospective students....so far zero..

 

and yes I demonstrate my skills for every class. If you can't/won't do that why should people pay you?

 

Seeya

Edited May 3, 2013 by steve46

[1a2b3cppp 10]

I think the idea that you can't predict price direction is correct.....you can however anticipate the likelihood that price will trend (one way or the other)

 

I can't even do that.

 

by the way for those who need a map

 

1)You find someone who says they can do it

2)You watch them do it

3)You either go your own way and try to figure it our yourself, or you try to get them to show you....

 

Agreed. I would also add the condition that if you ask a specific question, expect a specific answer. So many "gurus" answer with vague garbage that seems profound but really doesn't say anything, especially in response to questions about why they didn't happen to take trades that their system would've triggered that would've ended up being losers (for example, like if someone is saying MACD is the holy grail and posting after the fact charts only showing winning trades and ignoring all the signals that fit their rules but would've been losers, and you call them on it).

 

If someone cannot give you a specific answer to a specific question, it means one of the following:

 

1) they are BSing you

2) they are unable to explain in a way you can understand (this happens sometimes)

3) they don't want to teach you

 

In all 3 cases, they aren't someone you can learn from, so move on.

 

Every time a guru or vendor has shown up to claim that they have a really great system or software I have asked that they demonstrate for prospective students....so far zero..

 

Agreed, with a heap of nonsensical "explanations" thrown in.

 

and yes I demonstrate my skills for every class. If you can't/won't do that why should people pay you?

 

Completely agree.

 

Of course I'm not charging anything, but I've been posting every trade in real time for years, something that I haven't seen a "guru" do.

 

Funny how it works like that.

[SunTrader 10]

Think about like this. If you're adding to a winner, your average cost is going up with each add. The more you add, the close it gets to the current price (assuming price is still moving in your favor).........

It (averaging in) works the same way with the price going down.

 

Buy at 100, price goes to 200, so you buy again = 2 buys at average of 150.

 

Buy at 100, price goes to 50, so you buy again = 2 buys at average of 75

 

In the first example you need price to at least stay at or hopefully go above 150 to get in the green

 

In the second example at or hopefully above 75 to get in the green.

 

To beat a dead horse only thing is in the second example price has already gone down, not up.

 

Mean reversion works to a certain extent with the stock index futures. Never liked that game though. More preferable to find markets "..... in motion tends to stay in motion unless an external force is applied".

 

If is going that-a-way that's the way I want to go.

[1a2b3cppp 10]

More preferable to find markets "..... in motion tends to stay in motion unless an external force is applied".

 

Until I learn how to detect that external force, I'll continue to trade the way I do.

 

I don't know when a trend is starting, and once I see one in hindsight, I don't know how much further it will go.

 

The idea of trading with the trend appeals to me on an emotional level, but it doesn't work for me on a practical level.

[Patuca 13]

when you understand that volume leads price....from that point its a short hop to finding a way to read volume patterns

well..slap my jaw and knock my bacca out. i did not know that you understood such things. very few do.

[steve46 12]

I can't even do that.

 

 

 

Agreed. I would also add the condition that if you ask a specific question, expect a specific answer. So many "gurus" answer with vague garbage that seems profound but really doesn't say anything, especially in response to questions about why they didn't happen to take trades that their system would've triggered that would've ended up being losers (for example, like if someone is saying MACD is the holy grail and posting after the fact charts only showing winning trades and ignoring all the signals that fit their rules but would've been losers, and you call them on it).

 

If someone cannot give you a specific answer to a specific question, it means one of the following:

 

1) they are BSing you

2) they are unable to explain in a way you can understand (this happens sometimes)

3) they don't want to teach you

 

In all 3 cases, they aren't someone you can learn from, so move on.

 

 

 

Agreed, with a heap of nonsensical "explanations" thrown in.

 

 

 

Completely agree.

 

Of course I'm not charging anything, but I've been posting every trade in real time for years, something that I haven't seen a "guru" do.

 

Funny how it works like that.

 

Real time posts.....for years? really? You must be very proud of your record to go to that trouble.....Where can we see that record of your trades......do you have an Internet link...? Wouldn't it be helpful to show people the kind of long term success they might see if they chose to try this method..?

 

Thanks

Edited May 4, 2013 by steve46

[arvo 10]

Since I can't predict price, I wouldn't know where to put a stop loss, and so the only way I can do it is to use position sizing that doesn't ever require a stop. It's also why I don't use margin.

 

1a, first of all, thank you for taking the time to answer all of the questions here about your strategy. It's become a very interesting discussion, indeed. I was going to try to write another post about how adding to winners is mathematically proven to be much more profitable than adding to losers, but then I realized that this does not actually apply to your strategy -- because you have sufficient capital to never accept a loss. Therefore, I think before recommending this strategy to anyone (especially beginners), it is essential to fully ascertain all the aspects of it - especially the need for equity. I tried to sum your strategy up in a list and it would be interesting to get your feedback if you think these points are right or wrong (I like your idea that specific answers are the best proof):

 

- The essence of this strategy is to scale into pullbacks in the current SPY uptrend (on the highest timeframes) with increasing size and then take profits when they become available;

- no margin is used, only own funds;

- positions are never exited while in loss and not a single loss is taken;

- the scaling in is done at a predetermined step until the entire position turns profitable or at least breakeven;

- the step for scaling in is a retracement of USD 10 in SPY price;

- the size is increased each time from the previous partial position -- CAN YOU SPECIFY THE MULTIPLIER for increasing size? Is it the full Martingale "double up each time" or a smaller multiplier?

- The prerequisite for not having to worry about risk of ruin from a single loss is sufficient capital to sustain a full and sudden SPY trend reversal - e.g. if SPY tumbled from its current price back to 70, just like it did in 2008-2009, and you had started scaling in under this strategy from one contract at around 150, you would require the following amounts of money (I'm quoting two cases - one where you scale full Martingale and the other where you just add one extra contract with each scale in, like 1, 2, 3, 4 etc):

- Full Martingale (double up with each scale in): 511 contracts or around USD 5.621 million to get a good average price of 79.82 less than 10 dollars away from your last entry;

- Increase by one contract only with each scale-in: 45 contracts or around USD 495,000 to get an average price of 96.67, still 26 dollars away from your last entry, and no guarantee of a quick move to breakeven.

- even when such capital is present, there is a danger of having it all locked up for many months and possibly years and be unable to use it for trading without accepting a serious losses.

 

If that is really the case, then I guess the first thing to mention when presenting this strategy is the need for this kind of institutional-level capital in order to trade it profitably (well, it cannot be traded otherwise :doh:). Anyone with smaller capital and/or trading on margin would still be exsposed to a risk of a sudden and total ruin, if one applied this strategy. Would you agree?

 

BR

 

arvo

[1a2b3cppp 10]

Real time posts.....for years? really? You must be very proud of your record to go to that trouble.....Where can we see that record of your trades......do you have an Internet link...? Wouldn't it be helpful to show people the kind of long term success they might see if they chose to try this method..?

 

Thanks

 

I have a few journal threads on another forum whose name has an abbreviation that is the same as the name of a movie about an extra terrestrial. I think I read that we aren't supposed to link to that forum but if you were to search my username you would probably find it.

[Seeker 11]

Steve, on more than one occasion, you made the comment "volume leads price" . IMO It's a ridiculous comment and the more I think about it the more ridiculous it becomes.

 

If you don't have the price, the volume isn't going to help you.

 

Lets try a simple experiment. Take a timeframe, 1min, 5 min 20 min 1 hour whatever you want. Delete price from the chart and just have volume plotting, you don't even get to see the bid-ask. Do you actually believe you can trade that profitably with no price? Is this what you're suggesting?

 

Well according to your statement, you should be able to, because Volume leads price, so apparently tells you where it is going...

 

Is it just a sales pitch? Because it's nonsensical as a statement.

 

If on the other hand you mean that given a pre-existing context involving price, that certain patterns appear in the volume that often preclude a directional movement that is visible on the volume before it is directionally visible on the chart, then ok. Say that. Because the volume leads price comment is silly.