Tip for Better Trading :

[SunTrader 10]

....... All the range-based bar types such as kase, renko, range, and others like kagi and PnF, all attempt to "hide noise," but they wind up hiding a lot more than that. In hindsight on a static chart they look magical, but in real time it's a different story.

Yeah I used to like the idea of smoothing things out a bit until I realized ..... I don't want smooth!

 

The more you smooth, the more you lose. Average traders use moving averages kind of thing.

[Roger Felton 10]

You must be proud of this post of yours; you have it in two threads. Maybe your intended audience missed it the first time you put it out there. It happens.

 

I think it would get the most reception in the Trading Room 101 thread. Why don't you post another copy of it there? The thread starter there says he has a special place in his heart for multiple broadcasts of trading articles.

 

Yeah, sorry....had posted on another thread and realized it hadn't been used in over a year. Nobody goes there & couldn't take it down .

[Roger Felton 10]

I respect the choice of those who choose to use Renko. I have tried many times, but they are absolutely the worst bar type for me personally. I use time-based bars for certain things, and my main daily structure is plotted with hilo volume bars. Renko conceals the very things I like to see... it smooths out, but at a huge cost, a cost too high for me. All the range-based bar types such as kase, renko, range, and others like kagi and PnF, all attempt to "hide noise," but they wind up hiding a lot more than that. In hindsight on a static chart they look magical, but in real time it's a different story.

 

Not sure about your experience and there are a lot of Renko Bar types...some are not good. I mention them here because I have about 80 traders using mine and they would not consider using anything else as a main trading chart. Just goes to show that one traders blessing is another's curse.

 

They do tend hide what price did intrabar but I just about have that problem solved so nothing is hidden. Heiken Ashi bars have the same problem. But, as long as the bars are rising, so does price. They do smooth but they don't lie to ya.

[Roger Felton 10]

Yeah I used to like the idea of smoothing things out a bit until I realized ..... I don't want smooth!

 

The more you smooth, the more you lose. Average traders use moving averages kind of thing.

 

I know a lot of traders who use MA's that are far above average. I meet or exceed my daily goal about 90% of the time and, from my experience, that's not exactly average. But you and I probably use a different way to measure "average". I'd love to watch you trade sometime...must be something to behold.

[fast 10]

I do work with R/R ratios because thats a way for me to define a target [...].

 

After reading what you wrote, and since this a thread for sharing tips for better trading, I thought I'd share a small bit about how I do it.

 

You are using R/R to determine your first target, and my tip that I'm sharing with you and other readers is that you might try it the other way around. Instead of using R/R to determine your first target, use your target (along with your stop loss) to calculate your R/R. Base your target on S/R, not R/R. If the R/R is not at least close to a 1:1 ratio (assuming you're scaling out), then let the trade pass. Being triggered into what seems like a good trade with a good technical setup is insufficient reason to enter a trade. Not only do the technical’s need to be acceptable, but the financials need to be acceptable.

[SunTrader 10]

...... Being triggered into what seems like a good trade with a good technical setup is insufficient reason to enter a trade....

Based on probabilities otherwise this too is insufficient.

[fast 10]

Based on probabilities otherwise this too is insufficient.

You’re right. I didn’t mean to suggest otherwise.

[BlueHorseshoe 10]

You don't sound that contrarian... "buy low, sell high" is pretty much what everyone says. And it's correct. But "high" or "low" is relative.

 

What do you mean "where the market should be"? As determined by whom? The market IS where it should be, otherwise it wouldn't be there, it would be somewhere else. If the market is up, and you determine that it should be down, then it is you who should be long, instead of short. The market is always right.

 

If the market is always right, why does it bother moving?

 

Because a minority are wrong.

 

If 50 of 100 traders are bullish, and 50 are bearish, then it only takes one extra trader to become bullish to move the market up. Remember: what moves a market is not buyers or sellers, but the net difference between the two. In this case one trade. 51/49. When the market moves higher in this instance it is not 'because there are more buyers than sellers' (though this is mathematically correct), it is because there is one buyer more than there are sellers. One buyer. Who may be wrong . . . Concern yourself with this one buyer.

 

As traders we need to be concerned with where price is going, not where it is. If the market is going up, and it's because of a small number of buyers who have valued the market incorrectly, then you need to be short, not long.

 

You can always forget about the 50/50 traders - you need to ascertain whether those who constitute the net difference between the two are right or wrong.

 

Sorry if that post reads as rather belligerent - I haven't reviewed it after typing.

 

BlueHorseshoe

[Roger Felton 10]

If the market is always right, why does it bother moving?

 

Because a minority are wrong.

 

If 50 of 100 traders are bullish, and 50 are bearish, then it only takes one extra trader to become bullish to move the market up. Remember: what moves a market is not buyers or sellers, but the net difference between the two. In this case one trade. 51/49. When the market moves higher in this instance it is not 'because there are more buyers than sellers' (though this is mathematically correct), it is because there is one buyer more than there are sellers. One buyer. Who may be wrong . . . Concern yourself with this one buyer.

 

As traders we need to be concerned with where price is going, not where it is. If the market is going up, and it's because of a small number of buyers who have valued the market incorrectly, then you need to be short, not long.

 

You can always forget about the 50/50 traders - you need to ascertain whether those who constitute the net difference between the two are right or wrong.

 

Sorry if that post reads as rather belligerent - I haven't reviewed it after typing.

 

BlueHorseshoe

 

Interesting point, Blue, but that one-trader imbalance usually only moves the market a tick or so (pip if you're Forex). Who trades for a tick? Trying to keep track of how many traders are currently active in any market is a daunting task unless you're only looking at a 1-second time span. In the very next second, the scales can have tipped completely the other way...and usually do...and still not necessarily change the market's direction!

 

Trying to determine if the "balance tippers" are right or wrong is highly subjective, in my opinion. NOTE: Subjectivity in trading isn't a bad thing if it works, it's just so damn hard to teach. That's how I always look at things...from a teacher's perspective.

 

However, if you have succeeded in accurately determining when the market direction is "right or wrong", then you are a remarkable trader indeed and I mean that sincerely. If you could explain how you do that in a way that wouldn't take 10 years to grasp, I'd certainly be interested in learning more.

 

Thanks!

[joshdance 10]

If the market is always right, why does it bother moving?

 

Because a minority are wrong.

 

I think I agree with the general thought process of your post BH, but it does not really address my post, to which you replied. I replied to the poster who said that he would "fade the trend where the market should be" -- my reply basically said, the market is where it should be, right now. If he had said, "I'll fade the trend because it will be (in the future) going the other way," then I would recognize that as a valid approach (though not the smartest in most cases). But to say that the market "should be" somewhere makes it sound like it should never have done what it has done to get to where it is right now. In other words, if it's way up from a half hour ago, then had I shorted half an hour ago, I should be in a profitable position right now, but I'm not, so it's the market that is wrong, not me. That is what I specifically have an issue with, though of course anyone is free to say anything he wishes.

 

If 50 of 100 traders are bullish, and 50 are bearish, then it only takes one extra trader to become bullish to move the market up. Remember: what moves a market is not buyers or sellers, but the net difference between the two. In this case one trade. 51/49. When the market moves higher in this instance it is not 'because there are more buyers than sellers' (though this is mathematically correct), it is because there is one buyer more than there are sellers. One buyer. Who may be wrong . . . Concern yourself with this one buyer.

 

I know what you mean, but for the cause of accuracy: there is no net difference between buyers and sellers. In the same vein, there is not "one more buyer." Every transaction has both, thus, they are always, unequivocally, forever, equal--end of story.

 

As traders we need to be concerned with where price is going, not where it is. If the market is going up, and it's because of a small number of buyers who have valued the market incorrectly, then you need to be short, not long.

 

You are using the word "incorrect" to mean that the present market price is not "right," compared with some future price. Okay, and using your above scenario, in some cases I might be happy to sell to the "one buyer" if my guess is that the market will be lower, and for me personally, it must be lower very soon, as I am a day trader. But that does not mean that the market is "wrong" right now, does it? What about a seller who sold a few points lower and is now negative on his position--is he wrong? Well, if he waits and the market heads lower and he turns a profit, then he was right about the market dropping. But he was not "right" enough on the timing to avoid a drawdown. So, right or wrong is not only with respect to where the price will be, but also when it will be there. Those who shorted the market in Q1 because it was "overbought" on weak economic data, minuscule volume the entire quarter, and for any other reason, may have been right, but they probably lost some money in the process, and at the very least got a bad price due to the fact that their estimation of where the market "should be" was early. And this is the heart of my point; thus, it is my contention that the market is where it should be in this moment.

 

Sorry for the length here, and BH, you know you are one of my favorite TL posters and I enjoy your posts greatly, so I hope you read this as a friendly discourse; text is so challenging to navigate sometimes. I did not think your post belligerent at all, and I hope you take this the same way.

[BlueHorseshoe 10]

Interesting point, Blue, but that one-trader imbalance usually only moves the market a tick or so (pip if you're Forex). Who trades for a tick? Trying to keep track of how many traders are currently active in any market is a daunting task unless you're only looking at a 1-second time span. In the very next second, the scales can have tipped completely the other way...and usually do...and still not necessarily change the market's direction!

 

Trying to determine if the "balance tippers" are right or wrong is highly subjective, in my opinion. NOTE: Subjectivity in trading isn't a bad thing if it works, it's just so damn hard to teach. That's how I always look at things...from a teacher's perspective.

 

However, if you have succeeded in accurately determining when the market direction is "right or wrong", then you are a remarkable trader indeed and I mean that sincerely. If you could explain how you do that in a way that wouldn't take 10 years to grasp, I'd certainly be interested in learning more.

 

Thanks!

 

Hi Roger,

 

Sadly I am not able to predict the market on a tick by tick basis, and didn't mean to imply that I could. I was stating the identification of under and over priced markets more as a generic trading goal than listing it as an accomplishment.

 

Here is the logic process that I use to try and identify a mispriced market - I've tried to make this as conceptualised and non-specific as possible:

 

1. Short term price movement is random.

2. Sustained directional movement is an anomaly and cannot be expected to continue.

3. Long term price movement is not random, and market trends can and do persist.

4. Long term trends hold within them a (changing) average price (it changes in the direction of the trend).

5. When a sustained short term price movement occurs counter to the longer term trend, then the market has become mis-priced, and can be expected to revert in the direction of the longer term trend.

 

Determining what constitutes a long term trend, and how sustained short term price movement can be identified, are the challenges that need to be overcome to try and implement this logic.

 

All of the above is, of course, just one way of viewing market behaviour, and says nothing about the validity of other ways, nor does anything to provide its own justification.

 

I hope that's useful in explaining what I meant a bit more clearly.

 

BlueHorseshoe

[BlueHorseshoe 10]

Hi Josh,

 

Thanks for your reply.

 

I'm struggling to work out a satisfactory response.

 

Traders who blame their losses on the market being 'wrong' is something slightly different, I think. I think this is an important distinction: whether the specifics of my model or I are wrong says nothing about the validity of the concept from which they are derived.

 

If a position proves to be a losing one, then this will be because the way in which the market has been modelled is wrong, or inapplicable. This would be the trader's fault, not the market's. The underlying concept from which the model is derived ( a concept which states "sooner or later this market will cease rising and begin to fall, or visa-versa") is still valid.

 

The more that a market exhibits sustained directional movement, the more wrong it becomes. Prior to the 2008 collapse, the market was very wrong indeed, and the crash corrected this (in fact, over-corrected it). Of course, the market could conceivably have continued higher for several more years and then crashed. But it couldn't have continued higher indefinitely - no market ever seems to do that - it's one of those eternal truths that is blatantly obvious but incredibly difficult to harness!

 

That's not very clear. Let's try it another way . . . Price has been closing higher for the past few days. Now you must place a bet about whether it will continue to do this every day for the next two years, or whether it won't. I am sure you would choose to bet on the second option. If you place that bet today, and the market continues to close higher for the next three days, then this may equate to a losing position.

 

Now, did you place the wrong bet?

 

Of course not. You placed the right bet, but the timing was wrong. This says nothing about the validity of the underlying concept (ie. "markets do not rise indefinitely without pause for two years").

 

Another concept is that markets exhibit sustained trending moves. If you get stopped out a dozen times trying to catch such a trend, does this invalidate the underlying concept?

 

I believe that you trade the ES on an intraday basis. Consider this: if you were to buy at the low of the prior 5min bar, and sell short at the high of the prior 5min bar, so that you were always in the market, either long or short, and you could always get a fill at your limit price or better and paid no commissions . . . then you'd make a tremendous amount of money very quickly. In reality you wouldn't be able to overcome commissions and wouldn't always be filled, but as an exercise in data mining this still provides us with some very useful information:

 

The ES is mean reverting. On average, whenever it tries to move away from it's present value, it will revert back to it. The present value of the market is on average the best estimation of its future value. Statistically speaking, any signigicantly higher or lower value is an abberration, and is unlikely to endure. Statistically, it is mis-priced, or 'wrong'.

 

It is acceptable to me to say that 'the market should never have done x'. The market should never really do anything. Encouragingly, over the long run, it never really does do anything. It just goes up and down lots, and seldom seems to get anywhere.

 

I wasn't very clear in my original post when talking about buyers and sellers. There is no net difference between actual buyers and sellers, as they have to be matched. I was meaning interested potential buyers and sellers. There is usually a net difference between these. I don't mean to imply that simple numbers of buyers and sellers are the sole cause of price movement either; obviously it is a question of how desperate each party is to trade.

 

Hope that I didn't labour the point too much, and look forward to hearing your thoughts.

 

BlueHorseshoe

Edited June 18, 2012 by BlueHorseshoe

[Roger Felton 10]

Hi Josh,

 

Thanks for your reply.

 

I'm struggling to work out a satisfactory response.

 

Traders who blame their losses on the market being 'wrong' is something slightly different, I think. I think this is an important distinction: whether the specifics of my model or I are wrong says nothing about the validity of the concept from which they are derived.

 

If a position proves to be a losing one, then this will be because the way in which the market has been modelled is wrong, or inapplicable. This would be the trader's fault, not the market's. The underlying concept from which the model is derived ( a concept which states "sooner or later this market will cease rising and begin to fall, or visa-versa") is still valid.

 

The more that a market exhibits sustained directional movement, the more wrong it becomes. Prior to the 2008 collapse, the market was very wrong indeed, and the crash corrected this (in fact, over-corrected it). Of course, the market could conceivably have continued higher for several more years and then crashed. But it couldn't have continued higher indefinitely - no market ever seems to do that - it's one of those eternal truths that is blatantly obvious but incredibly difficult to harness!

 

That's not very clear. Let's try it another way . . . Price has been closing higher for the past few days. Now you must place a bet about whether it will continue to do this every day for the next two years, or whether it won't. I am sure you would choose to bet on the second option. If you place that bet today, and the market continues to close higher for the next three days, then this may equate to a losing position.

 

Now, did you place the wrong bet?

 

Of course not. You placed the right bet, but the timing was wrong. This says nothing about the validity of the underlying concept (ie. "markets do not rise indefinitely without pause for two years").

 

Another concept is that markets exhibit sustained trending moves. If you get stopped out a dozen times trying to catch such a trend, does this invalidate the underlying concept?

 

I believe that you trade the ES on an intraday basis. Consider this: if you were to buy at the low of the prior 5min bar, and sell short at the high of the prior 5min bar, so that you were always in the market, either long or short, and you could always get a fill at your limit price or better and paid no commissions . . . then you'd make a tremendous amount of money very quickly. In reality you wouldn't be able to overcome commissions and wouldn't always be filled, but as an exercise in data mining this still provides us with some very useful information:

 

The ES is mean reverting. On average, whenever it tries to move away from it's present value, it will revert back to it. The present value of the market is on average the best estimation of its future value. Statistically speaking, any signigicantly higher or lower value is an abberration, and is unlikely to endure. Statistically, it is mis-priced, or 'wrong'.

 

It is acceptable to me to say that 'the market should never have done x'. The market should never really do anything. Encouragingly, over the long run, it never really does do anything. It just goes up and down lots, and seldom seems to get anywhere.

 

I wasn't very clear in my original post when talking about buyers and sellers. There is no net difference between actual buyers and sellers, as they have to be matched. I was meaning interested potential buyers and sellers. There is usually a net difference between these. I don't mean to imply that simple numbers of buyers and sellers are the sole cause of price movement either; obviously it is a question of how desperate each party is to trade.

 

Hope that I didn't labour the point too much, and look forward to hearing your thoughts.

 

BlueHorseshoe

 

Yeah, explained quite well. I kinda had to chuckle as it reminded me of the hell I went thru years ago trying to analyze all that crap.

 

If you bought the lowest price of the ES on a 5-minute bar and sold at the highest price of that bar on every bar, commissions would be a non-issue since you would be making profit from the very first tick...unless you were paying one heck of a commission, of course. Commissions would not be the problem...that you'd rarely get filled would be the problem. That plus the fact that, unless you were psychic, picking the bar hi and bar low would be impossible to do on any consistent basis. It's a mental exercise in futility.

 

Buyers & sellers, market true value, is the market "wrong" or is it "right"? If the market goes up steadily for 3 days and you were long, you made out like a bandit but you were "wrong" because the market was wrong and didn't continue up for the next 3 years....boggles the mind.

 

I think sometimes traders get too wrapped up in useless mush. We live in a totally insane world. Millions of people are trying to wipe millions of other people off the earth, governments (especially the US) that couldn't tell the truth or do the right thing if their lives depended on it...because it does and they don't. Trying to predict where a market might be beyond the end of the day is like playing Russian Roulette with 6 bullets in the gun. It's just a matter of time, IMHO.

 

So I trade intraday...always flat before the sun goes down. Market exposure is kept to a minimum. I find scalping to be more rewarding than anything I've ever done in trading. No research, no concern about where the market is going or why, and whether the market is right or wrong makes for a good chuckle. Complex fundamentals are pointless and I get to sleep at night.

 

Simplicity feels terrific!

[joshdance 10]

Of course not. You placed the right bet, but the timing was wrong. This says nothing about the validity of the underlying concept (ie. "markets do not rise indefinitely without pause for two years").

 

Another concept is that markets exhibit sustained trending moves. If you get stopped out a dozen times trying to catch such a trend, does this invalidate the underlying concept?

 

Actually BH, I'd have to say that it does invalidate the underlying concept, practically speaking anyway. Markets do not always return to prior values; just ask anyone in Japan who was buying when the Nikkei was at 30K -- it will probably never come back to that price in their lifetime.

 

I believe that you trade the ES on an intraday basis. Consider this: if you were to buy at the low of the prior 5min bar, and sell short at the high of the prior 5min bar, so that you were always in the market, either long or short, and you could always get a fill at your limit price or better and paid no commissions . . . then you'd make a tremendous amount of money very quickly. In reality you wouldn't be able to overcome commissions and wouldn't always be filled, but as an exercise in data mining this still provides us with some very useful information:

 

The ES is mean reverting. On average, whenever it tries to move away from it's present value, it will revert back to it. The present value of the market is on average the best estimation of its future value. Statistically speaking, any signigicantly higher or lower value is an abberration, and is unlikely to endure. Statistically, it is mis-priced, or 'wrong'.

 

Sorry BH, I just don't get or accept that "the present value of the market is on average the best estimation of its future value"; even for a futures market, it just doesn't work that way IMO. That sounds like a recursive function from hell to me; so, all prior prices will be revisited? So, I should be able to sell a new all time high and be guaranteed that the market will revert to lower prices at some point? Something tells me we will not see 100s in the S&P any time soon, and even if we do, that's a hell of a long wait (30+ years) to revert to that mean.

 

Maybe I'm just really misunderstanding what you're saying. You talk about a "significantly" higher or lower value ... that's the key isn't it, and very subjective.

 

Sorry if I'm incoherent; I'm quite tired and thinking about all this really complicates life for me as a day trader more than is necessary.

[SIUYA 11]

"the present value of the market is on average the best estimation of its future value"

could be said another way......

if you had to predict where the market is going to be in the future, then where is is now is just as good a guess as saying it will be up X points or down X points.

 

(Also Blue have you read the Soros book about reflexivity....markets can be wrong and once they reach a tipping point so to speak they then the market behaviour influences the fundamentals of the market. Its an interesting conceptual read. Does not necessarily become a tip for better day trading )

[Roger Felton 10]

"the present value of the market is on average the best estimation of its future value"

could be said another way......

if you had to predict where the market is going to be in the future, then where is is now is just as good a guess as saying it will be up X points or down X points.

 

(Also Blue have you read the Soros book about reflexivity....markets can be wrong and once they reach a tipping point so to speak they then the market behaviour influences the fundamentals of the market. Its an interesting conceptual read. Does not necessarily become a tip for better day trading )

 

Now that supports my theory that, in trading, I have been right all along and that it's astounding how many times during the day the markets were wrong!....LOL

[BlueHorseshoe 10]

Yeah, explained quite well. I kinda had to chuckle as it reminded me of the hell I went thru years ago trying to analyze all that crap.

 

If you bought the lowest price of the ES on a 5-minute bar and sold at the highest price of that bar on every bar, commissions would be a non-issue since you would be making profit from the very first tick...unless you were paying one heck of a commission, of course. Commissions would not be the problem...that you'd rarely get filled would be the problem. That plus the fact that, unless you were psychic, picking the bar hi and bar low would be impossible to do on any consistent basis. It's a mental exercise in futility.

 

Buyers & sellers, market true value, is the market "wrong" or is it "right"? If the market goes up steadily for 3 days and you were long, you made out like a bandit but you were "wrong" because the market was wrong and didn't continue up for the next 3 years....boggles the mind.

 

I think sometimes traders get too wrapped up in useless mush. We live in a totally insane world. Millions of people are trying to wipe millions of other people off the earth, governments (especially the US) that couldn't tell the truth or do the right thing if their lives depended on it...because it does and they don't. Trying to predict where a market might be beyond the end of the day is like playing Russian Roulette with 6 bullets in the gun. It's just a matter of time, IMHO.

 

So I trade intraday...always flat before the sun goes down. Market exposure is kept to a minimum. I find scalping to be more rewarding than anything I've ever done in trading. No research, no concern about where the market is going or why, and whether the market is right or wrong makes for a good chuckle. Complex fundamentals are pointless and I get to sleep at night.

 

Simplicity feels terrific!

 

Hi Roger,

 

I maybe didn't explain the trading approach I was hypothesizing about very well . . .

 

I didn't mean to say "if you were able to pick the high or the low of the current bar before it occurs", which is how I think you've maybe interpreted it?

 

I meant that if you were to place a buy limit at the low of the previous bar (a price which is obviously known by the current bar), and a sell limit at the high of the previous bar. For example, if today's high was 200, and today's low was 180, then tomorrow you would sell short at 200 and buy at 180.

 

I hope that my other post makes a bit more sense now?

 

As for how all of the conceptualising above can be applied in real trading . . . I am also a massive fan of simplicity. I like to keep things very simple indeed.

 

Bluehorsehoe

[BlueHorseshoe 10]

Actually BH, I'd have to say that it does invalidate the underlying concept, practically speaking anyway. Markets do not always return to prior values; just ask anyone in Japan who was buying when the Nikkei was at 30K -- it will probably never come back to that price in their lifetime.

 

 

 

Sorry BH, I just don't get or accept that "the present value of the market is on average the best estimation of its future value"; even for a futures market, it just doesn't work that way IMO. That sounds like a recursive function from hell to me; so, all prior prices will be revisited? So, I should be able to sell a new all time high and be guaranteed that the market will revert to lower prices at some point? Something tells me we will not see 100s in the S&P any time soon, and even if we do, that's a hell of a long wait (30+ years) to revert to that mean.

 

Maybe I'm just really misunderstanding what you're saying. You talk about a "significantly" higher or lower value ... that's the key isn't it, and very subjective.

 

Sorry if I'm incoherent; I'm quite tired and thinking about all this really complicates life for me as a day trader more than is necessary.

 

Hi Josh,

 

Maybe I'm overstating my case somewhat, and giving rather extreme examples. To say that all prices will be revisited is very extreme, but most price will be (and indeed are) revisited. Otherwise the market would exhibit a far greater degree of "trendiness" than it does.

 

In the case of the S&Ps - well of course they'll see 100 again - one day they won't be there at all anymore, and nor will America as we know it (in my case, through lots of great HBO shows). If you wanted to make bets on where the S&Ps will be trading at a century from now, 100 doesn't seem an especially unrealistic estimate, in the same way that 6 ticks away from where it is now doesn't seem an unrealistic estimate of where it will be in ten minutes time; the magnitude of the price change is scaleable through time.

 

" You talk about a "significantly" higher or lower value ... that's the key isn't it, and very subjective. "

 

Yes, that is both key and very subjective. If it wasn't subjective then I would be very rich, and I'm not. But I only need to be right slightly more than I am wrong (after costs), and it's worth all worthwhile - I don't make it my livelihood, so if I'm breakeven in ten years then I'll have had far more fun and spent far less money than I would have on, say, a hobby such as golfing (no offence, golfers!).

 

Your thoughts aren't incoherent, Josh, and mine aren't worth dwelling on any more than you feel benefits you. I think far more important than any of the specifics we've discussed is the need for a broad, general framework in which to structure market behaviour and inform trading practices. A trend follower would make precisely the opposite argument to the one I have made - there are plenty of trend followers who have made excellent returns for decades.

 

BlueHorseshoe

[BlueHorseshoe 10]

"the present value of the market is on average the best estimation of its future value"

could be said another way......

if you had to predict where the market is going to be in the future, then where is is now is just as good a guess as saying it will be up X points or down X points.

 

(Also Blue have you read the Soros book about reflexivity....markets can be wrong and once they reach a tipping point so to speak they then the market behaviour influences the fundamentals of the market. Its an interesting conceptual read. Does not necessarily become a tip for better day trading )

 

Hi SIUYA,

 

I'm perfectly comfortable with your re-definition.

 

I haven't read the Soros book - I'll go and look for it. 'Reflexivity' is a concept I know only from literary theory, but the idea of a 'tipping point' at which market fundamentals become distorted immediately reminds me of Taleb's theory of stochastic distributions interrupted by 'jump processes'.

 

Thanks,

 

BlueHorseshoe

[gosu 10]

* * *

The ES is mean reverting. On average, whenever it tries to move away from it's present value, it will revert back to it. The present value of the market is on average the best estimation of its future value. Statistically speaking, any signigicantly higher or lower value is an abberration, and is unlikely to endure. Statistically, it is mis-priced, or 'wrong'.

* * *

 

I do not trade mechanically and I haven't read all the posts in this current discussion, but if I were to build a mechanical "system" to trade based on mean reversion, I would start from the following:

 

Stick a 5 period EMA on the daily ES (EDIT: perhaps SPY or even the SPX itself would be a better proxy). Price always reverts to this mean value. When price gets too far "stretched" from this mean value, fade it for a "snap back" move to the EMA.

 

I would use statistics to get an overall frequency distribution on past "stretch" levels, as well as distributions based on an additional variable or two such as seasonality, volume, bar volatility, etc. A basic system could then use the distributions to determine the statistically favorable entry for a snap back move as well as the stop loss placement.

Edited June 19, 2012 by gosu

[fast 10]

QUOTE=BlueHorseshoe;152758]The more that a market exhibits sustained directional movement, the more wrong it becomes.

 

The more overextended a trend becomes, the less chance there is that it will continue. An overextended trend has a lesser probability of continuing than an average trend. Of course, there are mega trends, but even still, with each successive wave, the odds continue to drop that the 'sustained directional movement' will continue. There are certainly less mega trends than there are average trends.

 

To say that the market is wrong sounds as if it's being personified. There are those that hold the view that the market is the people, but the price bars we see on charts are not people but rather a function of the commitments people make. The movement you speak of isn't the movement of people but rather the movement of price, so even if the market is the people (as viewed by some), never is it the case that price can be wrong--or even the sustained directional movement of it), for that is what logicians call a category error--a bit like saying the color seven ate my thoughts.

 

You mentioned that the market "couldn't have continued higher indefinitely - no market ever seems to do that." What can or cannot happen is a separate issue from what will or won't happen. You're right, it won't happen; hence, the market prices will not continue indefinitely, but that has no bearing on the issue of whether or not it can. If something will happen, then it can happen, but the inverse is not true, as can be inferred from the fact that not all things that could have happened did happen.

 

Of course not. You placed the right bet, but the timing was wrong. This says nothing about the validity of the underlying concept (ie. "markets do not rise indefinitely without pause for two years").

Just because there are significantly greater odds that market prices will increase over the next three days than over the next two years does not imply that I must (or even will) take the bet.

 

Another concept is that markets exhibit sustained trending moves. If you get stopped out a dozen times trying to catch such a trend, does this invalidate the underlying concept?

Are you talking about prices, or are you talking about price trends?

 

Prices always (or at least most always) revert back to their moving averages, but prices do not always revert back to their original IPO price.

 

It is acceptable to me to say that 'the market should never have done x'. The market should never really do anything. Encouragingly, over the long run, it never really does do anything. It just goes up and down lots, and seldom seems to get anywhere.

Be careful with the word, "do." The teacher asked Little Johnny, "what did you do today?" He replied, "I fell down." There are things we do, but falling isn't one of them. It's not something we do. It's something that happens to us.

 

Prices rise. Prices do rise. People fall. People do fall. All four propositions expressed by those declarative sentences are true, but just as falling isn't something we do, neither is rising something that prices do, for the price of a stock to do something requires intentionality. That cannot and will not happen. People can intentionally fall (like a stuntman performing a stunt), and when they perform their stunt, they do fall, and it's not something that is happening to them

 

To say that the market should have or should not have done something presupposes the notion that it can do something at all. Recall, you mentioned markets earlier, but what you were really talking about are the prices of underlying securities, and in fact, you said, "sustained directional movement." Yes, prices do rise, but prices are without conscious and cannot act on intentions.

 

There is another sense of the word, "should" as in, "the parking brake was off and out of gear, so on the steep incline, the car should have rolled." If you are saying that market prices should increase or decrease in that sense, you'd have a reasonable basis for saying that a stocks price should decrease following an announcement of bankruptcy, but then again, you said, "the market should never really do anything."

 

At anyrate, I think I'm starting to ramble. I don't know if this even remotely comes close to helping, but for what it's worth ... .

[samuel23 10]

We can learn many thing in this Thread. So much tips and ideas that we have shared along each other and so many discussion and debates. I just hope that we all can benefit from it.

[BlueHorseshoe 10]

I do not trade mechanically and I haven't read all the posts in this current discussion, but if I were to build a mechanical "system" to trade based on mean reversion, I would start from the following:

 

Stick a 5 period EMA on the daily ES (EDIT: perhaps SPY or even the SPX itself would be a better proxy). Price always reverts to this mean value. When price gets too far "stretched" from this mean value, fade it for a "snap back" move to the EMA.

 

I would use statistics to get an overall frequency distribution on past "stretch" levels, as well as distributions based on an additional variable or two such as seasonality, volume, bar volatility, etc. A basic system could then use the distributions to determine the statistically favorable entry for a snap back move as well as the stop loss placement.

 

Perhaps you should trade mechanically Gosu - pretty much any variation on what you suggest would have worked very well in the ES/SPY over the last decade.

 

What would possibly suprise you would be when you came to examine bar volatility as you suggest above - the more volatile the move (away from the average price), the better the probabilities for mean reversion - completely counter to many trader's instincts, and the reason why 'volatility breakout' type strategies aren't really viable for trading these instruments.

 

Cheers for your post - it got me thinking about a few things.

 

Bluehorseshoe

[BlueHorseshoe 10]

A Data Mining Exercise

 

At the risk of completely monopolising this thread, I have tried to put together a simple demonstration of the inherently mean-reverting nature of the ES.

 

Looking at daily bars, here's what would have happened over the last ten years selling at the prior day's high and buying at the prior day's low (ie fading any break outside of the prior day's range):

 

 

Here's the equity curve if we take the same approach, but only initiate new long positions when the 100SMA is sloping upwards, and short positions when it is sloping downwards:

 

 

Finally, only entering short positions following an down day, and long positions following an up day:

 

 

This tendency runs through all timeframes in the ES - here is the same effect on a 5min chart, using only the simplest of the three rule sets above:

 

 

With only $13 profit per trade this would never make money in a 5min timeframe, but I'm not suggesting this as a viable strategy - I'm just trying to expose an underlying tendency in the way this market behaves.

 

Hope that helps.

 

BlueHorseshoe

Edited June 21, 2012 by BlueHorseshoe

[joshdance 10]

Looking at daily bars, here's what would have happened over the last ten years selling at the prior day's high and buying at the prior day's low (ie fading any break outside of the prior day's range):

 

When did you close the trade in your backtest?