The Truth of Trading

[daedalus 10]

Found this post on a blog comment and was blown away by what was said. I think there is a LOT of truth in the following paragraphs. Well worth every struggling traders time.

 

"Too many traders are looking for setups, when in fact they're the ones being set up."

 

----------------------------------------------------------------------------------------------

 

Hi XXXXXX,

 

I've been reading your blog for quite a while now but haven't commented yet. However, I feel I need to comment now.

 

If you don't mind I'm going to be very straight forward, and blunt even, but I hope you'll take it from a spirit of sincerity and genuine desire to help. It's going to be a long comment, so I'm going to break it up into 2 or 3 comments.

 

Here's the situation as I see it: For the last few months, and possibly much longer, you've just been spinning your wheels while thinking that you are getting somewhere. The reason for this is that you are going about learning how to trade in the wrong way, in my opinion. I say this because I've been trading much less than you, a little over 2 years now, and yet because of the way I went about learning and what I focused on, last year I netted $150k while nearly quintupling my account, without a single losing month, and while only risking a very small portion of my account on any single trade. Now there could be many reasons for the difference in performance, but I think one of the main reasons has to do with what you are focusing on and how you are going about the learning process.

 

To try to put it as succinctly as possible, in my view traders that are focusing all their attention on "set-ups" and finding out which combinations of indicators work are never going to become profitable. They are trying to follow the advice of trading books that say trading is simple and psychology is everything. So they search for set-ups that 'work', and that can take the guess work out of trading. They want to be "disciplined" and have simple rules that guide all their actions. But there's a few problems with this. Namely, while psychology is HUGE, it's not everything. And while trading is all about simple principles, actually having an edge is NOT simple. It's a myth that you can have a couple simple price or indicator set-ups and make money consistently if only you are disciplined. That's a load of crap. It keeps the dream alive for wannabe traders who never realize what it's truly about. Well let me tell you what it's truly about...

 

Trading is about being okay with ambiguity. It's about tolerating confusion. It's about sitting with discomfort and being at peace with it. It's about not having an exact script of when to trade or not to trade, or what's really a high odds trade, and being okay with that. It's about exceptions to the rules. It's about contradiction. It's about uncertainty.

 

And yet traders left and right want to make it simple. They want to reduce it to a few simple set-ups to trade with discipline. And yet the market is not simple. The market is all about uncertainty, and complexity, and ambiguity. Simple set-ups could never capture that, and they can never give you a true lasting edge.

 

So what's the solution? Is the problem in the simple set-ups themselves? No, it's in how they're being used. The bottom line is, every trader needs to learn to READ the markets. This means that simple rules will not do. There has to be a synthesis of different elements (whether they be price action, indicators, inter-market themes or whatever), and real-time interpretation must take place. It has to be all about CONTEXT. Once you can read the markets, and don't fool yourself it is a very complex process, then you can choose to employ "simple" set-ups to enter and exit. But the real work will be in interpreting the market to see when you should use which kind of set-up. Seeing a hammer or whatever near a support means nothing unless you've identified the broader picture and gotten a sense of the kind of tactics you should be using, and what the odds are for different scenarios unfolding.

 

Now I know you, and most traders do this to a certain extent, but your main focus is on the set-ups. It's not on reading the market from minute to minute, hour to hour, figuring out the odds of it doing this or doing that, adapting dynamically, and thinking of trade ideas from all your observation as the day unfolds. Rather, it's waiting for some simple set-up to pop up and then taking it.

 

Now is it easier emotionally to have clear set-ups to wait for and trade in this simple manner? Absolutely. But who said 'easy' would make you money. If I've learned anything, it's that the market rewards what is hard to do. It's hard to have ambiguity surrounding your market reads. It's hard being uncertain. It's hard dealing with competing and sometimes conflicting signs. And yet, this is what it's all about. You have to stop trying to avoid this by needing things to be clear cut. And is it hard to be disciplined when there's so much uncertainty about what is the right trade to make? Of course. But instead of trying to avoid the uncertainty by looking for simple set-ups, or some straight-forward method, train your mind to be able to deal with the uncertainty.

 

As for the learning process of how you go about doing this, it's all about being constantly engaged with the markets, trying to figure things out and learn from experience. For me, for instance, what I did was each and every day take notes in a journal all about market action and what I think it means, and how I should trade, and what is working and what's not. I didn't write a journal describing the trades I took, or what my emotions were during the day. It was all about market action. And it was all my perception and interpretation. Day after day, week after week, making mistakes, wrong calls, being clueless as to what was going on, not knowing how I should trade, not knowing if my views made sense or not, and yet I continued taking notes and learning. Then I would view charts and combinations of historical intraday charts, and I'd note certain behavior. For example, I'd study trend day after trend day and try to notice what they had in common and how I could have picked up on it in real time. Then I'd study range days. Then I'd study a price chart of the ES versus the Advance decline line and see what the relationship was across many different days. Then I'd do the same with the ES and TICK chart. And on and on. Over time, this gave me a feel for the markets, and a certain understanding of how certain days differ and many subtle signs and tells for each type of environment and context.

 

As for set-ups, I didn't use any predefined ones. I just formed trading ideas and then tried to get in at good trade locations. Even this, which is the art of execution, is quite complicated and not straight forward. I started realizing that in some environments it's best to wait for pullbacks, in others I need to get in at market or I'll be left in the dust. In some markets I can buy low and sell high, in other markets the opposite is in order. And so on.

 

I became consistently profitable in a timeframe of a few months by doing this. But of course before that I had read 30 or 40 books and so I had all the technical background. I had also worked a lot on my psychology and personal issues. But all of this was in conjunction with a method of learning and trading the markets that was mostly in opposition to what the general wisdom says about simple set-ups and exact rules.

 

Now of course you might say that everyone has their own style, some discretionary and some not. Absolutely. But even the purely mechanical traders are very adept at reading markets, and are aware of all of the complexity and ambiguity inherent in it. Their system might end up being simple, but it will come about through a very deep and complex understanding of markets. And usually this system will take the market environment (i.e. context) into account. It wont just be simple mindless set-ups.

 

In the end, all of what I am saying is meaningless unless you come to a personal realization. Take a look at your trading career thus far. Do you truly believe that if you just learn to focus and take all of your set-ups then your equity curve will reverse and you'll be a consistently profitable trader? Why would the world's top institutions spend millions and billions on R&D when a few simple set-ups could make them all of the money. This doesn't mean that to make money you need extremely complex mathematical models. Far from it. What it does mean is that you need extremely complex mental maps that take time and experience to develop, and that will never develop if you spend the whole trading day simply waiting for set-ups to materialize. That just won't cut it.

 

Right now your learning curve is stagnant because you're not truly studying the markets. Your day is wasted in waiting mode. It's not in observing and absorbing mode. Also, because you fear loss, you aren't willing to experiment. This means that you aren't making mistakes and failing regularly, which is what you need to do to learn quickly.

 

So to conclude, based on all of the above, my advice to you would be to stop trading and make a mental shift. Realize what you need to do to become successful, and it's definitely not staying on this endlessly unfruitful path being supported by the hope of future profits. You're just running in your place unless you change your focus and your learning method. And if you thought the journey was tough so far, you haven't seen anything yet. Get ready for uncertainty and ambiguity like you've never seen it before. But this shouldn't be scary. It should be exciting, because this is what trading is all about. This is why it's called an ART. And it truly becomes one when you change your focus and your learning process. Then everything, including success, becomes possible. And until then, it'll be a distant dream that keeps appearing to be so close and yet stays so far away.

 

So you need to re-align with a new thought system and then get on the simulator and trade. Take losses. Make mistakes. Be clueless. Don't be afraid of it. It's okay, that's the only way you'll progress. And trust me, progress you will.

 

Best of luck to you, and I wish you much success.

[TheDude 10]

And so it was settled. The end of all internet debate about trading. There was no more to say. Nothing.

 

But I'm sure some one will disagree with me on that :haha:

 

Great post

[markl67 10]

Wow, I'm glad I came across this post because looking for set ups is exactly what I've been doing for over a year now - I'm about ready to throw in the towel to be honest...

[dwg0 10]

Here's a blog post of the same article, but the comment section here has some further discussion with the original author Ziad:

 

Learning to Become a Successful Trader | E-Mini Player

[Tiobingo 10]

I found this post very useful too. Thank you. One thing that I thought of when reading this post was the idea that it takes 10,000 hours of hard work to become a real professional at something. That's about 1250 full 8 hour days, or 250 weeks working full time 5 days per week, about 5 years with a few timely breaks here and there.

[TheDude 10]

Try 16 hour days 6 days a week (the 6th day should be reviewing the last week, and spending more time on sim IMO, same for the other 5 days when market is shut). A newbie may get a look in then.

[bathrobe 10]

Context is king, without a doubt. Setups come and go, the plan is always evolving based on the state of the market.

 

I know longer have any "if, then" setups, 1 year ago I was already profitable and had a book full of them. I am sure 6 months from now my trading will be a little different than now.

 

Regarding books, I have many on the markets, probably 50-100 but have only read 2

[Tiobingo 10]

The market is infinitely changing that's for sure. I have a handful of robust systems I rely on that are dynamic and take into account the ever changing markets. They have served me well now for several years and continue to work for me. I'm the kind of trader who will just stay with what's working until it isn't. But so far, it keeps working and I'll keep trading the way I do. My two favorite trade books are two obvious ones; Reminiscenses of a Stock Opererator and Trading in the Zone.

[bathrobe 10]

My two favorite trade books are two obvious ones; Reminiscenses of a Stock Opererator and Trading in the Zone.

 

I have not read either but I would like to read Reminiscences of a Stock Operator; I love the original market wizards book and I also read Trend Following when I was pretty green but do not trade futures as described in the book.

 

When I wanted to absorb all the info I could I also read one of the Jim Cramer books in 2006. Now my mantra is "keep it simple" so I would not read books describing a strategy or setup. I have both Douglass books but have not read them I really do not have the time now.

 

Chris

[Kiwi 16]

Ahh well ... I'll be the naysayer in this one.

 

This is another example of someone describing what happened to them and how its worked for them. But it is typical of the problem. And the problem is that people describe their current perception of what works for them.

 

They are not skilled at analysing what they are doing.

They are not skilled at teaching.

 

And as with sports and other performance fields, the players ability to translate their experience into something taught to others is a rare thing to behold.

 

The markets are a wonderful thing with a myriad of ways for people to succeed and/or fail. And two people using the same method will usually have different results.

 

Beware

[Dinerotrader 10]

Here is the problem I see.

 

There is a great level of randomness to the market and it is very easy to start feeling like you have a context in which to trade and that context turns out to be incorrect. An example might be, today has no news announcements and its highly likely market will be rangebound so I start trading expecting that and it turns out to be a hard trending day. My expectation of context was dead wrong. I'm not saying this is a correct contextual clue, I'm just saying that is the type of trap I think context analysis can give you. The context issue is normally why I think you hear traders talk about how they would be much better off if they didn't override the system that they developed to trade.

 

I'd really appreciate the input from someone on what context they think is accurately readable and useful in their trading to further this discussion.

 

The positives for a setup is that you can trade that setup no matter the market conditions and have plans in place in the event the setup is not working that day or in that type of market.

[Cory2679 11]

I'd really appreciate the input from someone on what context they think is accurately readable and useful in their trading to further this discussion.

 

For me, context is very important...it is what has made the difference for me coming from consistently losing weeks to consistently winning weeks.

 

My entries are based on "123" and "2B" setups, but that's only a small part of my trading...I don't think I'd be profitable trading every perceivable "setup," but I'm selective because of context.

 

Context, for me, is all on a chart...nothing fundamental...I focus on waves/swings/highs/lows...where are we in relation to the last swing high/swing low, are we in a prevailing up/down trend, is price basing, are we at major support/resistance...if so, how is price reacting to it, are we in a "chop zone"...and so on...

 

However, a lot of my contextual decisions are somewhat subjective...

 

[SIUYA 11]

 

I'd really appreciate the input from someone on what context they think is accurately readable and useful in their trading to further this discussion.

 

.

 

One - a lot of setups already have context in built. eg; looking only to take longs after X, Y and Z have occurred. However, why does this look different to the last time.

 

Two - context reading like anything comes with experience and can be as simple as intuition telling you not to take a trade.

 

Three - context can be as simple as a few rules to say, market has been up a lot the last few days, sentiment is bearish, I will just look to take any sell setups.

 

Four - The issue of context - at least mainly for me - is about which trades to avoid and what makes them higher possibility setups...eg; only buying in an uptrend. But then how to define a trend? and when in an uptrend not to take a long

 

Five - a lot depends on further separating entries and exits into the divisions of context, setup, trigger, trade management. Not every 10 range bar up tick is the same as the next.

 

Six - knowing when major market moving figures are coming out, and if they are being focused on by the markets

 

Seven - it depends on the time frame being traded.

 

Eight - context that is accurately readable - its not. Have you seen the example of a paragraph of writing whereby every word has the letters between the first and last letters of each word scrambled up within the word itself. (hope that make sense) Each word itself makes no sense, however when you read the paragraph from the top it makes sense.....thats context (I could not find the example on the net). the brain is an amazing thing.

 

A lot of these things boil down to can you tell a computer a set of rules to define context - if you can then just automate it all. If you cant....then you probably have context. Computers are binary, we are not. A good analogy I read just the other day was try and teach a computer how to ride a bicycle.....very tough, and yet most 4 year olds can do it.

Edited June 18, 2010 by SIUYA

[SIUYA 11]

found it

 

[natedredd10 10]

A lot of these things boil down to can you tell a computer a set of rules to define context - if you can then just automate it all. If you cant....then you probably have context. Computers are binary, we are not. A good analogy I read just the other day was try and teach a computer how to ride a bicycle.....very tough, and yet most 4 year olds can do it.

 

haha, well first I love those kind of jumbled word things you posted...I've seen those before and it really bothers me that I feel I can read those much much faster than actual english, probably because the brain starts to skim for the releventant information and actually becomes optimal vs reading every whole word. A counter though is I doubt you could read a whole book like that.

Like trying to prove a sprinter is a better marathon runner than a marathon runner by measuring the first 100 meters.

I do agree on the "context" part of this discussion.

CONTEXT:

the parts of a piece of writing, speech, etc., that precede and follow a word or passage and contribute to its full meaning.

 

Its simply lazy though to say that a computer can not do this...to me its like saying the context of something is not quantifiable because its based on "magic".

Discretionary trading wise I consider myself a tape reader, I have no idea though how to write an "indicator" of what I'm doing. Its certainly not though because what I'm doing is using "magic", its only because I don't currently know how to quanitify what I'm doing.

If you look up what a poisson distribution is used to make predictions with probabilistically, if you had never heard of a poisson distribution it sounds like "magic".

IMO market "context" is that the brain can pick up patterns in the markets unstable distribution better than those grafting stable distribution time series analysis ideas on to an unstable distribution. Thats why an MA cross system can work for a discretionary trader IF they know the context to pull the trigger and why you are BSing yourself if you try to walk forward a 2 parameter MA cross system automated wise. The automated system isn't just ignoring the single variable of "context", its ignoring a shitload of variables because context is a shitload of variables.

Its ammusing for some reason with trading people like to turn to the logic of "OR" as to why most people can't do this. Assuming everything is correct in the system besides one part of it when they start running good and making assumptions on the last part they tinkered with as being the solution...

Pyschology turned the corner, risk management turned the corner, started making things more simple tactically, added 1 indicator, subtracted 1 indicator, changed time frames to longer, changed time frames to shorter, changed from candlesticks to whatever, blah blah.

You never hear of a winning trader who moved to renko charts or whatever and started losing money. As if "winning" traders NEVER tinker around with what they do to try to make more cash...

If you don't start from the logic of AND, that everything you have read and know is wrong and you have to prove it correct...Starting from nothing, I'm wrong tacticaly AND on risk management AND pyschology AND...ect...you get lost on the forest.

Retail traders are a lazy bunch in general, selection bias would dicate this game will attract a lot of people looking to make "easy" money who simply do not like to "work". Not to mention you have to have some degree of Narcissistic Personality Disorder to believe you are smarter than almost everyone on the globe and willing to play a high barrier to entry gambling game on it.

When you cut the fat away, 99% retail fails because they are lazy narcissist AND can not only take the pounding/variance in the pocket book, but the mirror to their ego that they are not the smartest person on earth when that pocket book takes any kind of hit.

The reason to stay in the retail game if you have that degree of narcissim and pocket book is "smart money" is argueably more stupid actually at this point, but just has deeper pockets to withstand variance and company structure makes it easy to pass the blame, so its a highly exploitable situation for those who are not lazy at the retail level. If you disagree its highly likely you have never met the actual "boogie men" who run "smart money" and what complete dipshits they are. Not talking of course the overlords of the hedge fund industry, but the big bank "whales".

[markl67 10]

Invest on the best penny stocks there is! The best profitable stock picks on the market.

 

Get Free update on stock by an email!

 

This is a joke...right...?

Edited June 20, 2010 by TLAdmin
Spam URL Removed

[SIUYA 11]

Nat-"Its simply lazy though to say that a computer can not do this...to me its like saying the context of something is not quantifiable because its based on "magic"."

 

I agree with you however impossible to do and lots of hard work are different matters. Not everyone has the computing skills, time, and even once you are finished, then the ability to maintain and stick to the computerized system once its running. This does not necessarily make someone lazy. (Yet while many retail traders are mesmerized by quick profits, there are also many lazy insto traders as well - I have worked with some - also there are very few real prop traders in the insto world....many rely on flow, products, inbuilt corporate edges - hedge funds can be different again - the retail punter sitting with very little information is a different kettle of fish)

To date I have not heard of anyone be able to program context - and some of these people are hard working programmers and CTA fund managers running a lot of money - though I am sure people have variations of it in the way of filters. Most of the time the reply is that you just have to wear the volatility of the system as thats the way its designed etc; etc;

(when you ask them off the record they will all tell you context is tough to define and hence program)

There are clearly lots of programmers on these forums yet I have had very little feedback on the forum of a thread I started asking about context and systems. Maybe this is just the wrong forum for it.

And maybe, just maybe you have hit the nail on the head - context is a s...t load of variables and constant tinkering is part of it.

There is an interesting example between two well CTA long term trend followers that I have been following of the years....one group tinkers, continually optimises and adjusts the system, the other just sticks with their original system over the long run through thick and thin.....who is right and who is wrong is an ongoing debate -their return profiles from a volatility point of view are different, but their net long term returns are similar. (And this does not include any survivorship bias for funds that dont survive)

[Kiwi 16]

In few words ....

 

 

Some things are pretty easy to code .. basic price patterns, relationships to mas, fibs on the last swing ... etc etc.

 

Some things are bloody hard to code ... which swings matter, what is the overall picture, how many times has it tried at a high (when some times it comes within x and other times it breaks slightly each time). Where is SnR and how does it relate to big round numbers ...

 

The hard stuff is context

[duhhhh 10]

It's luck for me got a chance to read this invaluable post.

Really Really helpful post ever

 

 

Thanks daedalus

[Tiobingo 10]

I love these kind of trade discussions. I'd like to add my 2 cents to some already very thoughtful and insightful posts. To me, context to one trader is goobly glop to another. It's one of those beauty is in the eye of the beholder, type of things. That's what makes a market, right? I view the interpretation of context as the 'art part' of trading.

 

Here's what I mean. I have tried to reduce my trading down to a trade system that is easy to follow with rules that make sense and provide robust and positive results across different markets and timeframes. I base it on price action, mostly and use my very few indicators to either confirm my setups or to calculate my trade profiles. That is the objective side. I believe much of the 'necessary' context as stated in a prior post, is baked into the price action, or at least, enough to base my trades on, so I'm one of those guys. However, over time I have learned to improve my results by a few percentage points but adding about 10% art to my trading. I view this as interpretting some context -- but not too much.

 

Too much 'art' impacts my results negatively and analysis paralysis becomes a problem. All of a sudden my system that was working, isn't as effective. So the trick is (for me anyway), finding the balance between my objective system and my subjective interpretation of context mixed in, just a little.

 

After a lot of experience, and improving by learning from my bonehead mistakes, my feel for my market is worth more than it was in the past. In my view, only experience can give you this sort of thing. I do not believe it can be taught. Perhaps intellectually, but not in practical terms that would be meaningful to someone who hasn't put the time in to gait experience. As a result, I have even been able to reduce most of my 'discretionary' trade decisions into rules that have since become part of my objective system. In the end, my contextual (10% art side to trading) has slid over to the objective side of the equation and is now not really art anymore. lol.. That could be programmed I think, without much difficulty, although I am not a programmer. I hope I am making sense. In my mind I am.. lol..

[bathrobe 10]

The newest and hottest Canadian stock newsletter is here. Subscribe now

 

CLICK HERE

 

Oh yes, a third!.

 

Mods, please find a way to remove, please. Love TL, Hate the new spammers.

 

Take Care

Edited July 6, 2010 by TLAdmin
removed referenced spam url

[EsotericRule 10]

I've found that the most successful traders are the same as the most successful individuals in other endevours.

 

The most success goes to the one who most thoroughly questions all preconceptions and seeks in places others fear to tread.

 

A fruitful study of trading systems specifically (or of life in general) is best undertaken by reviewing the fundamental assumptions underscoring said.

[BlowFish 10]

Oh yes, a third!.

 

Mods, please find a way to remove, please. Love TL, Hate the new spammers.

 

Take Care

 

Best just to use the 'report' button at top right of the post. By quoting (or even posting) in the thread there is always a chance that the mods will miss your follow up post thus actually preserving the infringement. (that appears to have happened in this case).

[BlowFish 10]

I've found that the most successful traders are the same as the most successful individuals in other endevours.

 

The most success goes to the one who most thoroughly questions all preconceptions and seeks in places others fear to tread.

 

A fruitful study of trading systems specifically (or of life in general) is best undertaken by reviewing the fundamental assumptions underscoring said.

 

Certainly agree with your second two statements. Not sure about the first, trading requires quite the paradigm shift. There are all sorts of learnt behaviours that stand you well in 'regular' professions that can hold you back trading. The road to (trading) hell is paved with doctors, lawyers, accountants etc. etc. Some of the preconceptions are hard to shift prcisely because they work so well in other walks of life. People like Douglas & Steenbarger talk about some of these things at length.

[Tams 20]

I've found that the most successful traders are the same as the most successful individuals in other endevours.

....

 

ROTFLMAO...

 

I have met my share of successful traders who are also loners, and/or... divorced, overweight, uncontrollable compulsive smoker/drinker, ostracized social misfits...

 

I have also met a little old lady who trades nothing but Q options. Her appearance is so unassuming, if you run into her in a supermarket, you would not imagine she swings a 7 digit account everyday.

 

What I am trying to say it.... it takes all kind to make this world, and we are nothing more than a statistic in a normalized demographic study.