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

[andrei_lint 10]

Everything that you don't understand in the market looks random.

 

However, there are unfortunately things that you think you understand but you don't

 

No market is actually random since it's made from a lot of orders each with a particular purpose. Problem is there are so many traders with so many interests out there that they actually create a total mess.

 

Anyway, please feel free to share how you make money considering a market is random.

[suby 10]

As much as I subscribe to randmoness in the markets... There's a lot more regularities than you think

 

Pay attention to the first 30 minutes of trading and where a market closes

[kuokam 10]

Okay, now to the real thing: how do proceed to randomly pick your entries? your stops? your targets?

 

I think I may have phrased that wrong :o

 

The "so far I have been entirely unable to do so" meant predicting price direction in general, not that I had given up on the DOM thread after only two weeks. I'm wordy sometimes and I edit and reposition sentences and sometimes the end result doesn't come out the way I intended.

 

 

 

Absolutely agree. I haven't given up on the DOM yet.

 

 

 

In the beginning I had those thoughts. You know, cult mentality, "everyone gets this but me! I just have to study harder. I have to figure out the secrets behind the vague fortune cookie advice." But then you realize no, no one gets it. No one is profitable. Not even the "teachers." (this is referring to the vague threads and methods by some of the well-known internet trading "gurus")

 

I worked in education for a bit in the past and one of the things you learn is that not everyone's learning style is compatible with everyone's teaching style. So it's definitely possible. But I'm a good student, and I ask very good questions, and when they get answered with vagueness and doublespeak, I don't think it's me who is failing to understand the teachings; I think it's that there's really nothing there to be understood.

 

Specific questions always get specific answers. Always. No vagueness. No doublespeak. No laughing it off with a joke (distraction) or other silly frame control nonsense.

 

Someone once shared a story about going to a trading seminar and they were talking about following short term trends during the day and someone in the audience asked how they knew which way price was going to go or something like that, and the "guru" replied, "I don't need a weather man to tell me if it's going to be raining 5 minutes from now." :crap:

 

I'm sure everyone laughed at the obvious simplicity and logical nature of that answer.

 

But if you actually think about it, that's a BS answer that didn't tell you anything.

 

So is it possible it's just me who can't understand the wise "gurus"? Yeah, it's possible. But somehow I don't think that's where the problem lies.

 

And even if that is the case, and all these dudes actually are profitable traders who are just so wise they are unable to explain their method to anyone else (or just me), that still doesn't change my basic premise that price is random (to me), and until I figure out how to predict price direction, I will continue to trade the way I do.

[howthom 10]

1a2b please continue with your thread. I think I understand what you are saying about treating the market as if it were random.

 

There are times when I enter a trade at a level of support, on a WRB up, with all the stars lined up and for some reason the next day or two, watch it reverse direction. I understand that for some reason supply entered and demand weakened. But, I don't know why. If I were to hold to my position, that there still must be buyers there because I saw that strong demand a couple of days ago and not follow the reality of what I'm seeing in the moment, I could ride a loosing trade. So, to me in that instance, the market feels random. It probably isn't because the people who are driving the price down and catching the long stops on the way are doing it to make money too.

 

So, I think I understand what you are saying. And as you said earlier, it works for you to think that way. So, please continue with your thread. I'd like to hear about your entry/exit and money management strategy.

[1a2b3cppp 10]

1a2b please continue with your thread. I think I understand what you are saying about treating the market as if it were random.

 

I made a new thread so as to not get this thread off topic.

 

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

[ed_inacloud 10]

Well done 1a, the more times people start threads with their experiences then the more chance that newbies and strugglers will have to see that they are far from alone.

 

I have been trading (well gambling) Forex for about the same time as 1a, since 2008 and have looked at every major indicator and the few strategies that are put out there. I have developed many of my own and have even tried trading them from both sides but everything loses in the end, primarily because market either ranges or is in a trend and entry points are 180 degrees apart for either.

 

Randomness is very easy to test for, there are only two aspects of bar formation that is direction and size. A simple indicator that counts the number of contiguous bars in any direction will show that you will get a Gaussian or normal distribution as a result. It’s random, no arguement. Even I was surprised to find the same result when looking at a 500 pip up move in €/$. If you look at the size of the bar then the same curve is found although it does move slightly in favour of the direction of any move, but now you’re thinking about how much profit or loss you’re going to take whereas your primary decision is which direction (ie the random bit). Again a simple indicator to find how many bars hit certain levels is easy to put together.

 

To the left of the chart shows lots of reason why it cant be random, but as we all know we cant trade that bit. It does raise the question as to why it appears one way but is clearly not. To my mind the markets move on far greater aspect than we try to see in the detail of the charts. Moves are based around Sentiment tempered by News which if great enough can reverse sentiment, although even there an element of randomness exists as shown this week when German PMI was down and shares and the Euro rallied (and please don’t give me the ‘built into the market bullshit’).

 

Now consider that we all take sentiment as our decision on direction then that would be too easy to make money and so is complicated by randomness, as I say you can prove it for yourselves. Now as to how and why randomness occurs is up to you, I’ve spoken with LIFFE and LSE and was advised that the control algorithm would never be released and am happy in my own skin that there is a central control.

 

There are two easy ways to make money in this game, either start a spread bet company or sell your trading ideas to the gullible. If you do either then you need keep as many people in the game as possible....and get rid this crazy idea that the markets have a random element.

 

If you’re going to trade successfully then accept the randomness arguement as an element within moves and find ways to identify when it’s not in control of direction or make sure you set stops wide enough to take account of it.

 

If you’re new to this thread then you’ll see lots of people before saying markets cant be random because they are successful individuals, not much of an arguement really. I’ve never really understood what people gain by claiming undocumented success other than trying to show others that whatever struggles they’re having they should persevere. If you really want to share your success then show how others can benefit from it, otherwise it’s those nasty SB co’s and Trainers that take the money.

 

Well done 1a for sticking your head above the parapet.

[TheDude 10]

This thread is a classic example of why TL is quickly degenerating into a jerk fest like T2W.

 

Give me a break.

 

The chap never said the markets were random, or that there are no non random elements. It wasnt an invitation for others to try and inflate their anonymous egos that no one really gives a hoot about with how much they think they know.

 

So a chap comes around and admits a 'weakness', and describes a solution that addresses his weakness. To me, this shows attitude, it shows humility, it shows someone who's got a better chance of success than our own house guru who failed to make a living selling ebooks on T2W. Yes, we remember that pittyfull plagiarism of someone else's work.

 

Any one with more than a years solid trading experience could see the benefit or how the approach could work. And for the gurus here who are childish enough to jump on the idea before it's even got off the ground by twisting what was initially put forward, here's how it works:

 

You enter based on 'random', you keep risk to a very slight amount, and you hold with some kind of position management. Sure a very high % of trades will lose the small amount, but you only need the odd 1 that really goes to the moon and it's a winning strategy. Not too dissimilar I would imagine from Talebs method of buying loads of OTM calls, knowing most will expire worthless - thus losing money mostly, but catching the occasional black swan that covers the losses and makes good money on top.

 

Any real trader here will know from personal experience that the best trades are the ones that go to profit almost immediately and never look back. But clearly the gurus on this thread dont actually seem to have ever traded. They like to sit round and say 'yeah baby I remember the market back in 2002 - those were the days'. Gimme a freakin break.

 

We all know these gurus dont really trade because they spend way too much time sitting round here telling others how to trade that they cant possibly have any time to trade. Besides, if they were successful traders, they wouldnt spend so much of their spare time on the internet feeding their egos 'teach' anonymous people how the markets are. No - they'd be out spending money, having fun.

 

TradersLabororatory? LosersLaboratory more like.

[kuokam 10]

Woah!

A name! a name!

 

This thread is a classic example of why TL is quickly degenerating into a jerk fest like T2W.

 

Give me a break.

 

The chap never said the markets were random, or that there are no non random elements. It wasnt an invitation for others to try and inflate their anonymous egos that no one really gives a hoot about with how much they think they know.

 

So a chap comes around and admits a 'weakness', and describes a solution that addresses his weakness. To me, this shows attitude, it shows humility, it shows someone who's got a better chance of success than our own house guru who failed to make a living selling ebooks on T2W. Yes, we remember that pittyfull plagiarism of someone else's work.

 

Any one with more than a years solid trading experience could see the benefit or how the approach could work. And for the gurus here who are childish enough to jump on the idea before it's even got off the ground by twisting what was initially put forward, here's how it works:

 

You enter based on 'random', you keep risk to a very slight amount, and you hold with some kind of position management. Sure a very high % of trades will lose the small amount, but you only need the odd 1 that really goes to the moon and it's a winning strategy. Not too dissimilar I would imagine from Talebs method of buying loads of OTM calls, knowing most will expire worthless - thus losing money mostly, but catching the occasional black swan that covers the losses and makes good money on top.

 

Any real trader here will know from personal experience that the best trades are the ones that go to profit almost immediately and never look back. But clearly the gurus on this thread dont actually seem to have ever traded. They like to sit round and say 'yeah baby I remember the market back in 2002 - those were the days'. Gimme a freakin break.

 

We all know these gurus dont really trade because they spend way too much time sitting round here telling others how to trade that they cant possibly have any time to trade. Besides, if they were successful traders, they wouldnt spend so much of their spare time on the internet feeding their egos 'teach' anonymous people how the markets are. No - they'd be out spending money, having fun.

 

TradersLabororatory? LosersLaboratory more like.

[SIUYA 11]

Any one with more than a years solid trading experience could see the benefit or how the approach could work. And for the gurus here who are childish enough to jump on the idea before it's even got off the ground by twisting what was initially put forward, here's how it works:

 

You enter based on 'random', you keep risk to a very slight amount, and you hold with some kind of position management. Sure a very high % of trades will lose the small amount, but you only need the odd 1 that really goes to the moon and it's a winning strategy. Not too dissimilar I would imagine from Talebs method of buying loads of OTM calls, knowing most will expire worthless - thus losing money mostly, but catching the occasional black swan that covers the losses and makes good money on top.

 

 

 

Thanks for contributing to the jerk fest - it seems there is a lot of angry in the water these days. Whats going on? you are meant to be the Dude - a slacker

 

Dude did you read the strategy i am surprised you dont shoot it down? (I agree with you regards the best strategies) ....

one of the problems is that this is the exact opposite to the strategy suggested by 1a2b3c

 

- which maybe why some hopped on the case....it has flaws.

Every strategy has its pros and cons and as per usual one of the biggest objections or issues surrounding around a lot of these threads is the complete disregard for properly defining or incorrectly labeling issues....setting the paramaters at the start is required, and using spurious evidence to claim something unrelated should be shot down.

 

The whole random non random threads, efficient market stuff is a red herring, and good on 1a2b3c for putting his ideas forward he knows there are things to discuss and not everyone will agree - thats what forums are for....

[TheDude 10]

Thanks for contributing to the jerk fest - it seems there is a lot of angry in the water these days. Whats going on? you are meant to be the Dude - a slacker

 

Dude did you read the strategy i am surprised you dont shoot it down? (I agree with you regards the best strategies) ....

one of the problems is that this is the exact opposite to the strategy suggested by 1a2b3c

 

- which maybe why some hopped on the case....it has flaws.

Every strategy has its pros and cons and as per usual one of the biggest objections or issues surrounding around a lot of these threads is the complete disregard for properly defining or incorrectly labeling issues....setting the paramaters at the start is required, and using spurious evidence to claim something unrelated should be shot down.

 

The whole random non random threads, efficient market stuff is a red herring, and good on 1a2b3c for putting his ideas forward he knows there are things to discuss and not everyone will agree - thats what forums are for....

 

In fairness, the first post never really put forward a strategy. He just mentioned he cant 'predict' the market, so treats entries as random. In my book, thats a tactic - part of a strategy.

 

Given we should be in the business of managing probabilities over predicting, then to start off from a random view leaves the trader with only 1 solution - manage the position according to probabilities.

 

Who was the famous trader on the LIFFE floor who's mantra was 'manage the trade'? I wish I could remember. Basically, he'd take a position - the bigger the better and manage it accordingly. He never took a view as such. If it kept going, he'd hold it, trade some more etc. Basically he'd do the exact opposite of what one of our guru's just advised a few pages back. Known trader v wannabe trader cum guru. lol

 

This thread had the chance to finally start discussing real trading issues, rather than rehashing vague 'advise' or some crappy method of analysing markets, based around plagiarism from some old codgers findings from the turn of the last century.

[TheDude 10]

 

And none of it has anything to do with prediction. That's a loser's game.

 

Indeed.

 

So why all the Wyckoff threads about analysing markets if you are not trying to get some insight over future direction? Isn't that a form of prediction?

[kuokam 10]

Oh! Eventually the cat is out of the bag !

 

Indeed.

 

So why all the Wyckoff threads about analysing markets if you are not trying to get some insight over future direction? Isn't that a form of prediction?

[Seeker 11]

I really don't see why people need to go on the attack. Just be polite and argue your case.

 

The initial poster posted "I never became profitable until I started to treat the market as if it were random."

 

Random can mean different things to different people, but as I posted before, if it is always 50-50 chance of going up as down at every moment in time, then you can never make any money, regardless of your money management, regardless of how you manage the trade. Some people can see this immediately, others will need to think a bit harder to realise this truth.

 

Therefore, if it possible to make money, then at various points of price or time, it must be the case that one outcome is more likely than the other. Does treating the market as random help you find this? Depends on what you mean by random.

 

If your strategy capitalises on this phenomena by how you manage the trade then good, you've found some non-random walk parts to the market. Treating entries as random may help you find this. But that doesn't mean that all entries SHOULD be random. The aim is to profit from situations where one outcome and payoff is greater than another and keeps risk small, is it not?

 

Now suppose he treats the market as entirely random. He's already mentioned he adds to losers. So we get a trader that may keep adding to losers in the hope that the markets are completely random so I'll double up and my next trade has a 50% chance of making all my money back. This is dangerous thinking, wouldn't you agree theDude?

[Ammeo 10]

There is and never will be a holy grail but after all my trading experience one thing i did learn overtime was never to put price action technicals over the market fundamentals...one you get to follow the fundamentals then u realize how the big investors,banks and hedge fund managers did it which a retail trader never does..

[BlueHorseshoe 10]

So we get a trader that may keep adding to losers in the hope that the markets are completely random so I'll double up and my next trade has a 50% chance of making all my money back. This is dangerous thinking, wouldn't you agree theDude?

 

I wouldn't agree. Lots of people grind down accounts with stop-losses - death by a thousand cuts - and call it "risk management". Once the money is gone, it's gone, so it really doesn't matter whether you blew it all on one trade, or you got stopped out a thousand times.

 

Knowing the probabilities involved in each is the only thing of importance . . . Can anyone name an ETF that went to zero? Can anyone even show me a chart of an instrument (any one will do) that fell, let's say, more than 50% from it's highs without a pullback that would have provided a better than worst case exit?

 

Doubling up on a position is only dangerous if your starting position is heavily invested or heavily leveraged. Otherwise, it's just buying more of something at a cheaper price.

 

BlueHorseshoe

[Seeker 11]

I wouldn't agree. Lots of people grind down accounts with stop-losses - death by a thousand cuts - and call it "risk management". Once the money is gone, it's gone, so it really doesn't matter whether you blew it all on one trade, or you got stopped out a thousand times.

 

Knowing the probabilities involved in each is the only thing of importance . . . Can anyone name an ETF that went to zero? Can anyone even show me a chart of an instrument (any one will do) that fell, let's say, more than 50% from it's highs without a pullback that would have provided a better than worst case exit?

 

Doubling up on a position is only dangerous if your starting position is heavily invested or heavily leveraged. Otherwise, it's just buying more of something at a cheaper price.

 

BlueHorseshoe

 

Depends on your reason for averaging in. If you're adding to your position, but it's not a loser, then you're establishing a line. If done according to your strategy, fair enough, but then why not also add to winners?

 

Adding to a loser is a different thing, or at least I interpret that phrase to be. That implies a trade that you accept is a loser, but will hold on anyway, and add in to try to 'make up' for the earlier loss.

 

The probabilities are never known for sure, so throwing around the statement "Knowing the probabilities involved in each is the only thing of importance" is no help imo. The probabilities are NEVER known for sure. We can have an idea about them, but if it gets to the case that you're currently down large, and you want to double up, then it is a fair bet that whatever you used to decide the probability that got you into the initial trade may just be wrong. Therefore how much trust do you continue to place in it? Risk the whole account? Or take the loss and move on?

 

As for the statement that there is no difference between being willing to put it all on one trade that's currently losing, or taking lots of losses that eventually erode the account, I'd have to disagree. Taking losses that slowly erode your account gives you experience of trading, and gives you plenty of opportunities to stop before it's too late. Adding into a loser with all your account at stake gives you only two options, you get out of trouble or you blow your whole account.

 

It's all quite simple. If you have no edge, you shouldn't be trading. Nothing else to be done there. If you do have an edge, the only thing that can stop you from making a success at it, is risking too much so that you blow your account.

 

Go to a casino and try to convince them that they should let someone gamble the entire casinos wealth on a red or black. Do you think they'll think that's a good idea? Or do you think they'll have a limit on what can be bet?

[SunTrader 10]

Maybe this is just me but doubling up is saying, hey I was wrong so far but maybe I won't be wrong a second time.

 

I have no problem saying I am wrong (the first time) and get out.

 

"The first loss is the best loss" - somebody wise once said.

[MightyMouse 12]

Maybe this is just me but doubling up is saying, hey I was wrong so far but maybe I won't be wrong a second time.

 

I have no problem saying I am wrong (the first time) and get out.

 

"The first loss is the best loss" - somebody wise once said.

 

Losses should be painless. So, in a leveraged position, I prefer to chop it quickly when I am wrong; probably as you say above. However, in a longer term trade where I enter with a small, mindless position to open, then I have much bigger stops since the loss doesn't matter to me.

[SunTrader 10]

Losses should be painless. So, in a leveraged position, I prefer to chop it quickly when I am wrong; probably as you say above. However, in a longer term trade where I enter with a small, mindless position to open, then I have much bigger stops since the loss doesn't matter to me.

The market doesn't care about us, whether we have a small or big stop, whether we double down or not.

 

Price is going to do what it will do.

 

But I place my stop where the market tells me I am right or I am wrong and which means only one thing. Continue holding or get out, and plan the next trade.

[1a2b3cppp 10]

Depends on your reason for averaging in. If you're adding to your position, but it's not a loser, then you're establishing a line. If done according to your strategy, fair enough, but then why not also add to winners?

 

Because adding to winners raises your average cost and a small movement against you can turn it into a loss. Since I have no idea where price is going to go, I don't know if it's going to make a small move against me and turn my winner into a loser.

 

Adding to winners only works if you know price is going to trend in a certain direction for a while, and if you know that's going to happen, it would be better to take a very large initial position instead.

[SIUYA 11]

Because adding to winners raises your average cost and a small movement against you can turn it into a loss. Since I have no idea where price is going to go, I don't know if it's going to make a small move against me and turn my winner into a loser.

 

Adding to winners only works if you know price is going to trend in a certain direction for a while, and if you know that's going to happen, it would be better to take a very large initial position instead.

 

rephrasing this....

Because adding to winners raises your average cost and a continual movement for you can turn it into a massive win. Since I have no idea where price is going to go, I don't know if it's going to make a small move against me and turn my potential large winner into a small loss.

 

Adding to winners only works if you know price is going to trend in a certain direction for a while, and if you know that's going to happen, it would be better to take a very large initial position instead, except its called money management building from a position of strength.

 

OR

rephrasing this...

"adding to losers raises your total loss and a small movement against you can turn it into a bigger loss. Since I have no idea where price is going to go, I don't know if it's going to make a small move against me and turn my losing trades into a bigger loss.

 

Adding to looser only works if you know price is going to reverse in a certain direction for a while, and if you know that's going to happen, it would be better to take a very large initial position instead"

 

............you can rephrase this as much as you like.

 

When do you exit and enter is still the important part, because you can still get this horribly wrong. One comes from a position of being able to turn a series of small bets into a large winner, the other from a position of turning a series of small bets into a large looser, or a small win.

 

Same old thing......you are saying you cant predict, but then are expecting something to happen. A reversal - and a reversal that is good enough that your entries and exit will be justified. (and hence why they are still so important)

 

The strategy has some merits - no denying that - but also some massive flaws..... but if if you cannot predict the market and go for random entires - your mentality is that it is better to be loosing than winning......i guess that works for some.

 

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

Blue - dying by a 1000 cuts happens because you have not done some testing, or shown some apptitude for a talent to time things well means you die before you even did your first trade. The exact same thing can occur here except its more likely that you trip one time in front of the steamroller picking up pennies.

 

There is some merit in these types of strategies, but it still requires a strategy for obtaining favourable entires and exits, and its a system that still requires a fair amount of prediction and assumption. How different is this to someone trying to wait and trade extreme moves?

[TheDude 10]

I really don't see why people need to go on the attack. Just be polite and argue your case.

 

The initial poster posted "I never became profitable until I started to treat the market as if it were random."

 

Random can mean different things to different people, but as I posted before, if it is always 50-50 chance of going up as down at every moment in time, then you can never make any money, regardless of your money management, regardless of how you manage the trade. Some people can see this immediately, others will need to think a bit harder to realise this truth.

 

Therefore, if it possible to make money, then at various points of price or time, it must be the case that one outcome is more likely than the other. Does treating the market as random help you find this? Depends on what you mean by random.

 

If your strategy capitalises on this phenomena by how you manage the trade then good, you've found some non-random walk parts to the market. Treating entries as random may help you find this. But that doesn't mean that all entries SHOULD be random. The aim is to profit from situations where one outcome and payoff is greater than another and keeps risk small, is it not?

 

Now suppose he treats the market as entirely random. He's already mentioned he adds to losers. So we get a trader that may keep adding to losers in the hope that the markets are completely random so I'll double up and my next trade has a 50% chance of making all my money back. This is dangerous thinking, wouldn't you agree theDude?

 

Sure. You make a valid point.

 

Remember that he said he 'treats' the market as if it is random, not that it is. i.e. random is a model - like mp, or any other model.

 

Personally, I dont like adding to losers. But if someone else can do it with success then good for them. It's really difficult to comment given so little info has been divulged - because the guru's pissed on his fire before it got burning.

 

With so little detail to discuss, I cant help feel we are ourselves just making random remarks!

[MightyMouse 12]

Sure. You make a valid point.

 

Remember that he said he 'treats' the market as if it is random, not that it is. i.e. random is a model - like mp, or any other model.

 

Personally, I dont like adding to losers. But if someone else can do it with success then good for them. It's really difficult to comment given so little info has been divulged - because the guru's pissed on his fire before it got burning.

 

With so little detail to discuss, I cant help feel we are ourselves just making random remarks!

 

Adding to a loser is a bad idea if it is random. Adding to a position in an instrument that is time wasting or is subject to cyclical supply and demand forces is not a good idea either. Adding to a stock index position when it is lower than your entry has worked very well if one can hold for a long period of time. The strategy has worked and has paid very well for the last 80 years. Day trading an index and wanting to be out in at most a few days will lead to severe bleeding if one adds to a loser.

[1a2b3cppp 10]

rephrasing this....

Because adding to winners raises your average cost and a continual movement for you can turn it into a massive win. Since I have no idea where price is going to go, I don't know if it's going to make a small move against me and turn my potential large winner into a small loss.

 

Adding to winners only works if you know price is going to trend in a certain direction for a while, and if you know that's going to happen, it would be better to take a very large initial position instead, except its called money management building from a position of strength.

 

OR

rephrasing this...

"adding to losers raises your total loss and a small movement against you can turn it into a bigger loss. Since I have no idea where price is going to go, I don't know if it's going to make a small move against me and turn my losing trades into a bigger loss.

 

Adding to looser only works if you know price is going to reverse in a certain direction for a while, and if you know that's going to happen, it would be better to take a very large initial position instead"

 

............you can rephrase this as much as you like.

 

When do you exit and enter is still the important part, because you can still get this horribly wrong. One comes from a position of being able to turn a series of small bets into a large winner, the other from a position of turning a series of small bets into a large looser, or a small win.

 

Same old thing......you are saying you cant predict, but then are expecting something to happen. A reversal - and a reversal that is good enough that your entries and exit will be justified. (and hence why they are still so important)

 

The strategy has some merits - no denying that - but also some massive flaws..... but if if you cannot predict the market and go for random entires - your mentality is that it is better to be loosing than winning......i guess that works for some.

 

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

Blue - dying by a 1000 cuts happens because you have not done some testing, or shown some apptitude for a talent to time things well means you die before you even did your first trade. The exact same thing can occur here except its more likely that you trip one time in front of the steamroller picking up pennies.

 

There is some merit in these types of strategies, but it still requires a strategy for obtaining favourable entires and exits, and its a system that still requires a fair amount of prediction and assumption. How different is this to someone trying to wait and trade extreme moves?

 

Yes, if you add to a winner and it keeps going in your direction, you make more money.

 

But what if it reverses and starts to trend in the new direction heavily? You can get a lot of drawdown that way, more than if you didn't add to the winner, and when it goes against you by a certain amount you need to add more to lower your average cost, and if you've added to it when it was a winner your average cost is going to be that much higher.

 

I am not comfortable adding to winners. I wrote a pretty long post with charts about why on blog which I'll post here rather than typing it all out again:

 

Why I Don't Add To Winning Trades

 

As you know, I trade by adding to my position when price goes against me.

 

Most people say you’re not supposed to do that. Here is where I point out that when I add to my position, I do it with specific risk tolerances rather than haphazardly adding as long as price keeps going down, which is a good way to lose all your money.

 

Adding to a position brings the average cost closer to the most recent add. For example, if I go long ES at 1,000 with 1 contract and then price decreases to 995 and I add another contract, my average price is now 997.50, which is closer to the most recent add. The more you add to an open position, the more price moves closer to the most recent add. For example, if I have one ES contract long at 1,000 and price decreases to 995 and I add 2, my average cost is now 996.66, which is closer to the most recent add than it was when I only added 1.

 

When you add to a losing long position, your average cost decreases which means it only takes a smaller movement for your trade to turn into a winner.

 

But when you add to a winning position, that means it takes a smaller move against you for your position to turn into a loser.

 

Let’s assume price is trending upward and is making a few pullbacks along the way, making HHs (higher highs) and HLs (higher lows). If you were long at the start of the trend and then added to your position at each pullback, it would look like this:

 

That is an ideal situation, but let’s assume for now that that’s what happens.

 

The green lines are buys and the green circle is selling your entire position.

 

If you could trade like this, you’d have a nice winning trade.

 

But let’s look at what is happening. When you first open the position, your average cost is right at the first entry point. No problem.

 

When you add the second contract, your average cost has now risen.

 

The red dash shows where your average cost is after each add (this assumes you start with one contract and add one contract at each buy level):

 

Now that’s fine and all if price keeps going up, but what if it doesn’t?

 

How do you know that each of those pullbacks is just going to be a LH and that price isn’t going to keep going down? When you’re looking at the hard right edge of the chart, can you tell?

 

If price doesn’t keep going up and instead keeps going down, your previous winning trade has just turned into a losing trade:

 

In that last situation, if you hadn’t added to your winning trade, it would still be a profitable trade as price is still above your initial entry point (and average cost).

 

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.

 

I’m not saying it’s wrong. If you can make it work for you then you should keep doing it. I’m just explaining why I don’t add to winners. Since I cannot predict direction, I have no idea if that pullback is going to be a pullback as part of a bigger trend or if it’s the beginning of a bigger movement in the opposite direction which would turn my winning trade into a losing trade. I have also never seen anyone who can tell in real time if a pullback is a LH or the beginning of a downtrend. I’ve seen a lot of gurus post after the fact charts where everything looks all perfect, but I’ve never seen a single one make a real time call. In fact, this is a good way to tell if someone who claims to be a trading instructor is scamming you or not. If they only show you after the fact charts and cannot demonstrate in real time that they can trade profitably, then they are probably scamming you. If they show a chart and say “add here on the pullbacks” without explaining how they knew they were just pullbacks and not the beginning of trends in the opposite direction, they are scamming you.

 

Refer back to this image:

 

 

When you’re in that position, can your “guru” trade instructor teach you how to tell if that’s going to be a pullback (in which case you should buy) or if it’s the beginning of a down trend (in which case you should not buy)?

 

Sure, he can post after the fact charts like the first one I posted in this entry, but after the fact charts don’t help you.

 

Source

 

Averaging into trades does not work for me. That doesn't mean it's wrong. That doesn't mean it might not work for you. It just means it doesn't work for me.

 

The way I trade is discussed in detail in the other thread so I'm not going to get too much into here, but let me clarify a few things that people don't seem to fully understand:

 

1) the market may not actually be random, but I cannot predict it, so it is random to me

 

2) averaging down on a short timeframe using more leverage than you can afford will eventually blow your account

 

3) averaging down on a long timeframe in the S&P500 will probably eventually work out in your favor, and as long as you only use the cash in your account and add at the right levels, you won't run out of money or blow your account.

 

4) I never said this strategy was the right answer for everyone, or that it is the holy grail, or that it is better than some price predictor strategy, or that it beats buy and hold in a bull market. All I said is that, given that I cannot predict price direction, it is the best strategy for me.

 

I expect to get criticism for it, though, since it's basically the opposite of every trading "rule" out there.

[Seeker 11]

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?