Principles Over Rules

[Predictor 11]

Principles Over Rules: A Topic From The Logic

 

This is the first in what will be a series of lessons that I'm going to be sharing from The Logic. The Logic is a collection of ideas, concepts, psychology, philosophy, and basic mental solutions I've came up with to deal with the roadblocks I've faced as a trader. I disagree with most of the ideas and concepts that are published on trading psychology and many of the efforts undertaken by so called experts and trading coaches are in my opinion misguided. It took me a great deal of effort and many years of work to understand exactly how the common ideas were wrong because they weren't obviously wrong. I owe a great deal to Dr. Steenbarger's work in helping to guide my thoughts on these matters and to help orient me to find my own answers.

 

The approach I will take is a compare and contrast methodology. First, I will take a generally accepted idea, hold it to the light of logic, and then I'll contrast this idea with the new insights that lead to breakthroughs for me. This article will focus on rules and how the rules I created to help me trade actually created a trap and the concepts that eventually led me out of that trap.

 

You see new traders are fascinated by rules. The market is unstructured, chaotic, and very risky. There is an inherent need in people to try to protect themselves and we need to have a sense of security in order to be able to take action. People need structure. And, the common solution to this problem is to focus on rules. And most new traders approach this with a list: I'll only trade after the first 30 minutes. I won't trade overnight. I'll use tight stop losses. I'll quit after 3 losers in a row. And, the list can go on and on.

 

 

There, at least, 4 essential problems with this line of thinking and they are:

 

#1 The rules we like may not make us money.

 

An exaggerated example is that I'd really like to be able to risk only 1 tick per trade. And most people know that trying such a thing would be foolish and would be just throwing money away. And, that's obvious but its no more arbitrary then the trader who says I'll risk 8 ticks per trade because that's all I'm comfortable with risking.

 

Another example in this category is basically traders who are trading a system or a plan that doesn't have any basis in reality. It is not uncommon for the beginner to start trading a "system" that they don't have experience with because they didn't want to trade on the simulator and that they haven't backtested because they didn't do the work. That's a real recipe for disaster in my opinion.

 

So, this first problem is the problem that basically some rules are going to be bad rules, and the rules that we like the most may well be the worst of the bunch.

 

#2 Rules Are Primarily Focused On Avoiding Bad Things Versus Maximizing Opportunity

 

Most traders who do focus on rules are going to focus on rules that are primarily aimed at avoiding loss. Examples are too numerous to list but examples could be trading time restrictions, stop losses, number of losses before quitting, making up new rules to avoid each new loss, and so forth. Starting with such a risk averse approach is already making a mistake because great traders understand that losses are impossible to avoid and that what great traders are really good at is maximizing opportunity. Imagine showing a business plan to a group of investors where everything was about avoiding loss versus making a profit. Of course, investors care about risks but first they want to know that the business can generate profit.

 

#3 Rules Can Be Deceiving

 

One of the biggest problem with rules is that they can be deceiving, and that's kind of the point I made in point #1. But, the trader who creates a rule obviously creates the rule for a purpose. The problem is that the rule may or may not fully serve that purpose. Let's imagine a trader wants to limit his risk and he's decides he'll risk X dollars per trade but he may not have thought further. So, he's trading with a rule that he believes will protect him. Yet, if he has 10 losses in a row then his total losses will be 10x as large has what he may be thinking. Maybe, he's decided to use a stop loss to limit his risk but he's trading an instrument that gaps. He made rules up that he thought would protect him but there is no guarantee that they'll actually be effective.

 

#4 Rules Are Rigid

 

Rules don't allow for taking advantage of exceptional opportunities. In my case, I had a rule early on that that I wouldn't take any overnight trades because, at the time, I was doing much better in my planned trades. Well, one evening I had planned a trade for the next day that actually setup overnight and was ready to be taken. I seen the opportunity and I took the trade. And, then I thought to myself, I've broken my rules and it started to bother me, and so I closed the trade for a small loss, and the trade ripped higher and would have been one of the best trades of the year.

 

And, that's really the trade that made me aware that there was a big problem with my whole psychology. I lost a great opportunity simply because I had a faulty belief system. And this was really when I started to question everything. And from this experience, I came up with my concept: Principles Over Rules.

 

Principles over rules means I operate from first principles and not as much from rules. Principles are more useful then rules because first they don't have the "holes" that rules often have. For example, if I had to create rules to protect my capital then surely I'd need many, many rules and it is likely I'd miss one whereas it is easy to state the principle of "seeking opportunity while managing risk" and operate by it on a daily basis.

 

Principles allow for constant re-evaluation and keeping an open mind while holding central important concepts. Principles help me to avoid the arbitrariness that rules can easily assume. Principles allow me to stay fluid and to adapt and to take advantage of exceptional circumstances without the baggage that would come from a list of rules.

 

Positive concepts such as focusing on strengths, finding opportunity, and maximizing the best opportunities are more easily stated as principles.

 

Of course, I do have several rules or really procedures I try to follow. But, most of my rules aren't strict rules, and I'm ready to adapt them as needed. My rules are to serve me and not for me to serve the rules. They are always guided by my principles first policy. The only really strict rule that I have is that I do have a maximum amount per day that I can lose. I can risk that on one trade or several. But, I know that if I'm at that limit then its time to shut down.

 

Yet, even when dealing with negatives, I've found that often my principles have been more useful. For example, my principle is to trade when I'm at my best and to shut down when I'm not trading well. It is not uncommon for me to have some losses, take a break/re-evaluate, and come back later to make a profit. I operate from a strong and positive state of self-monitoring and evaluation versus the overly critical and distracting state that trying to follow rules typically produces.

 

Rules are about protecting us from ourselves and once we are ready take responsibility then we don't need the rules. We may need some procedures but we don't need a rule for everything. Ask yourself, why are so many people afraid of heights? I believe one reason is because many are afraid that they will jump. Once we understand that we're not going to jump then heights become a little less scary.

 

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http://themarketpredictor.com

[MightyMouse 12]

Principles Over Rules: A Topic From The Logic

 

Yet, even when dealing with negatives, I've found that often my principles have been more useful. For example, my principle is to trade when I'm at my best and to shut down when I'm not trading well. It is not uncommon for me to have some losses, take a break/re-evaluate, and come back later to make a profit. I operate from a strong and positive state of self-monitoring and evaluation versus the overly critical and distracting state that trying to follow rules typically produces.

 

Rules are about protecting us from ourselves and once we are ready take responsibility then we don't need the rules. We may need some procedures but we don't need a rule for everything. Ask yourself, why are so many people afraid of heights? I believe one reason is because many are afraid that they will jump. Once we understand that we're not going to jump then heights become a little less scary.

 

---

 

Not trading when you are not trading well is a rule not a principal. Similar to the novice that doesn't trade in the first half hour, your rule is more dynamic in that it could be the first half hour or the next, etc. In my opinion, thinking that you should stop when you have losses is flawed thinking; instead, you should make sure you are properly executing your plan ( rules) no matter what the market throws at you. If the right trade presents itself, you have got to take it; otherwise, you are allowing fear to overrule your thinking. Your plan should already prevent you from losing too much throughout the day (rules about max loss per trade). Anyhow, whenever you do A because of B, it is a rule.

 

You will not be able to trade without rules. That is really nonsense. I will say that the rules you trade with evolve as you become proficient at taking money. A novice typically designs rules that are backward looking and designed to avoid pain caused by fear; typically the fear of being wrong or the fear of losing a gain, or the fear of not surviving. A proficient trader designs rules to interpret order flow as it presents itself to maximize returns which means minimizing costs and maximizing profits.

[SIUYA 11]

In Principle I agree with you Predictor - but I think you want to be careful of beating a snake with a stick. It might work, it might also bite you.

 

You need rules to be able to apply principles.

 

I think you are 100% correct - too many new traders try and apply rules rigidly without applicable thought to their principles of what they are trying to achieve AS WELL AS without an adequate philosophy of how the market works, and how how to profit from that.

 

Rules don't allow for taking advantage of exceptional opportunities. In my case, I had a rule early on that that I wouldn't take any overnight trades because, at the time, I was doing much better in my planned trades. Well, one evening I had planned a trade for the next day that actually setup overnight and was ready to be taken. I seen the opportunity and I took the trade. And, then I thought to myself, I've broken my rules and it started to bother me, and so I closed the trade for a small loss, and the trade ripped higher and would have been one of the best trades of the year.

 

And, that's really the trade that made me aware that there was a big problem with my whole psychology. I lost a great opportunity simply because I had a faulty belief system.

And this was really when I started to question everything. And from this experience, I came up with my concept: Principles Over Rules.

 

example - this was not a poor application of the rules - it could be seen as simply having poor rules applied without much regard to anything else. Alternatively you stick to the rules and just accept you will miss opportunities.

What you are saying is you had a faulty belief system - and yet then you want to throw out the rules and focus more on a belief system? In this case didn't you really have a faulty/inadequate (for want of a better word) set of rules?

 

Principles over rules means I operate from first principles and not as much from rules. Principles are more useful then rules because first they don't have the "holes" that rules often have.

 

Principles have more holes than rules.....you apply rules to maximise the benefits of the principles. ie; you need both. Principles are also harder to quantify to see if they work.

 

Principles allow for constant re-evaluation and keeping an open mind while holding central important concepts. Principles help me to avoid the arbitrariness that rules can easily assume. Principles allow me to stay fluid and to adapt and to take advantage of exceptional circumstances without the baggage that would come from a list of rules.

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

 

Again you need to apply both, otherwise, you will change the rules - and never work out which are the best way to represent your principles. Rules )good ones properly applied) eliminate the arbitrariness that usually kills many accounts

 

Rules are about protecting us from ourselves and once we are ready take responsibility then we don't need the rules.

 

Rules just become ingrained and habitual - they still exist.

 

I understand where you are coming from and agree with you, and yet it sounds a little like, this indicator does not work so i will use this one.

For me you need rules to implement principles.

 

Rules of thumb v rules of law maybe?

(applicable to discretionary v fully automatic systemised systems)

 

Anyway I like the thought process.

 

(Semantics maybe - Today EURUSD I applied a rule based on the principle if its crazy vol, and ECB is talking then trade smaller - I still traded following my rules - bought in the morning sold when my rules told me to get out. I never shorted again (even though if I followed my rules it would have made money) as one of my principals is that I dont trade reversal days well as my previous rules have been shown to not work so well on such days - missed opportunity, but it fits in with my overriding principal of maintaining capital.)

Today they worked well together.

[BlueHorseshoe 10]

In my opinion, thinking that you should stop when you have losses is flawed thinking;

 

Worse - it's flawed maths. If each trade has a positive expectancy and the probability of outcomes are independent then it makes sense to continue trading. Of course, this only applies in so far as a trader is able to continue following the rules from which the positive expectancy is derived . . .

 

I think the 'stop trading after X losses rule' stems from the fact that many traders are unable to handle consecutive losses emotionally, and start breaking the rules, doesn't it?

 

BlueHorseshoe

[tlPadawan 10]

I think your post could have been named "Strategy Over Tactics" which is similar to "Apples Over Oranges".

 

I believe your "Principles" are your Strategy, and your "Rules" are your Tactics. Google for "strategy vs tactics".

 

When you execute, "pull the trigger", you had better believe you are operating by rules. And once you understand the rules you operate by, you can make an automated system (for those who think automation is another impossibility).

[Predictor 11]

Okay, I see your points. This is kinda what I was getting at a rule would be explicitly defined "quit after 3 losses" which is rather arbitrary. But, my principle is to cut back when I'm not trading well (as well as to trade at my best). Yes its all about psychology.. if I feel I am strong and reading the market well then I have the option to get back in. What develops from this style of thinking is that I'm always able to focus on my internal state and my relationship to the market and my read...whereas when I used rules, I was focused on the rules and it was very distracting and hurt my performance.

 

While the trades may not be truly serially correlated, some styles work better for certain market conditions...

[MightyMouse 12]

Okay, I see your points. This is kinda what I was getting at a rule would be explicitly defined "quit after 3 losses" which is rather arbitrary. But, my principle is to cut back when I'm not trading well (as well as to trade at my best). Yes its all about psychology.. if I feel I am strong and reading the market well then I have the option to get back in. What develops from this style of thinking is that I'm always able to focus on my internal state and my relationship to the market and my read...whereas when I used rules, I was focused on the rules and it was very distracting and hurt my performance.

 

While the trades may not be truly serially correlated, some styles work better for certain market conditions...

 

You should take trades that you are supposed to take 1000 out of 1000 times if you have an edge regardless of what happened the last trade or last x trades. If you are not mentally up to following your rules, then you should not trade at all until you are up to it. As the Aussie expat/Man without a country stated, you use your principals to help you build or define your rules.

[steve46 12]

You should take trades that you are supposed to take 1000 out of 1000 times if you have an edge regardless of what happened the last trade or last x trades. If you are not mentally up to following your rules, then you should not trade at all until you are up to it. As the Aussie expat/Man without a country stated, you use your principals to help you build or define your rules.

 

 

Yep, this is basic if you want to last in the business. If you have an edge, take the trades...

 

and yes (again) if you aren't mentally "up to it", either suck it up or get a new job....

 

I guess the final question for me is why does Predictor post this stuff? (I'm on ignore so I can use his handle, lol)

 

If you didn't know this stuff, how can you suggest that you're qualified to teach people...?

 

Oh well, it was a very nice day....hope everyone had a good one..

 

Good luck

[BlueHorseshoe 10]

While the trades may not be truly serially correlated, some styles work better for certain market conditions...

 

Shouldn't these market conditions then become incorporated into the rules/principles?

 

Nevertheless, I see your point - it certainly makes more sense to cease trading based upon a self-awareness of internal psychology rather than some arbitrary '3 losses' cutoff. For example, on a day of three consecutive losses following a prior day of three consecutive losses, one's emotional state would generally tend to be more impacted upon, I imagine.

 

I don't daytrade, so maybe I'm not really qualified to comment.

 

BlueHorseshoe

[steve46 12]

Shouldn't these market conditions then become incorporated into the rules/principles?

 

Nevertheless, I see your point - it certainly makes more sense to cease trading based upon a self-awareness of internal psychology rather than some arbitrary '3 losses' cutoff. For example, on a day of three consecutive losses following a prior day of three consecutive losses, one's emotional state would generally tend to be more impacted upon, I imagine.

 

I don't daytrade, so maybe I'm not really qualified to comment.

 

BlueHorseshoe

 

You've said some things that are important to me...and if you don't mind I would like to comment

 

I think it makes sense to stop trading if you are exposed to significant stress in your personal life or you are ill for example. The rule in my office is don't even come in if you are ill...

 

On the other side, those of us who have some background with statistics (and I think you have that BH) know that even with an edge, there are going to be strings of consecutive wins and losses....If the laws of statistics hold, then this is true no matter what time frame you trade. Those of us who do this on a regular basis know (in general terms) how our systems perform and if at some point during the year we see an unusual run of losses, we take the time to figure it out.....there are statistical measures that a professional can use to determine whether their edge is holding up or not...

 

and finally (to repeat) if you have a significant edge, and you don't take the trades...you're wasting your money....because you are introducing a randomizing element into your overall results.

 

I realize I am critical of the guy (the OP) but really shouldn't you know this if you are claiming professional status and offering to teach folks....?

[Patuca 13]

in the markets the goal is "to make money" (some may also have as part of their goal...enjoy the ride)

 

IMO Rules are (or should be) derived from principles. for instance: show kindness is a principle. i may have the following rules that will help me implement that principle:

 

1) speak to people when i enter a room

2) open a door for the ladies and elderly

3) let a driver in my lane where traffic is backed up

4) don't cuss out the neighbor because his dog came over in my yard and took a crap.

 

etc...etc...etc

 

in trading an example of a principle, at least to me, is something like "only trade with the larger trend"

 

rules would be "entry" "exits" SL, Profit targets, etc ......etc

i.e. I would design rules that help me accomplish trading with the trend so that i can make money with that principle.

 

it is much like strategies and tactics. there is always strategical and tactical elements to any endeavor. that is, "what" are we going to do or accomplish and "how" are we going to do it.

 

now we can be wrong strategically or tactically. We have to be able to determine in which area the error was in and make adjustment. there is logic to the markets but they are also chaotic. that really complicates matters because on one day a tactic based upon a principle works just fine and a nice profit is made. on another the day the same almost exact situation presents itself..the same tactic is employed... based on the same principle... but one loses money instead of making money. that is why stop losses are employed. because of the chaotic nature of the markets. if the markets were entirely logical all we would have to do is figure out that logic and presto....

 

however, in general, IMO.... good, sound principles..coupled with logical rules..in the long run will probally work out...depending on the trader. because we have the markets and they are logical and chaotic and we have the trader who is also logical and also chaotic. so bottom line we are dealing with logic and we are dealing with chaos...some would even say there is indeed a logic to what appears to be chaotic. and there is chaos to what appears to be logical..

 

we do the best we can with what we have to work with. in general my philosophy is simply to try and observe the ebb and flows of the market and attempt to go with what the market appears to be doing because the market generally continues doing what it is doing until there is a reversal or reason for change.... i know that sounds simplistic..probally is...i observe what it is doing and try to anticipate what it may do...if it doesn't in fact to what i thought it may do then that is what my stop losses are for. the old saying.."the trend is your friend...until the trend ends".

[Predictor 11]

Some comments were posted I wanted to address. Most of this article applies to my discretionary trading but it also applies to my systems. I have my discretionary trades which is where I am applying highly discretionary trading, and I have systems with strong edges. Unlike some other system traders, I do not trade my systems mechanically nor do I believe I have to take every trade. Why would I want to throw out my years of experience and superior market read just because I've program something that was profitable?

 

I make both adjustments to the trades and make a decision on whether I will take every trade and how I will manage the trade. I, also, don't always follow the system rules once in the trade. I give myself a degree of discretion to adapt the system based on my read of the current market conditions. For my system trading, I view my discretion as critical. It is like a "guiding hand" principle or "captain of the ship". I trade my systems. My systems don't trade me. Now some times, the system will think something will happen and I will think something else will happen. The results can be interesting as I've found often we're both right. Sometimes I view my systems as traders, I can put up to "bat" when I'm tired of trading.

 

For most my systems, I have "groups of systems" which are variations of a concept that have similar return histories and similar programmed logic. I monitor the performance across the variations and make decisions on which variations to run. I've found that in some cases, a variation will break down as the market becomes more efficient but with adaptation it can remain profitable.

 

I know some mechanical traders who beat themselves up when they don't take every trade and then they try to take every trade and end up losing even though they felt like they shouldn't. I don't trade that way. I don't operate that way. I am not operating from a "critical mindset". I am not operating from just a "looking back" perspective but from a "looking forward" perspective. For me, my adjustments are part of a process.. part of a flow. Overall, I believe my adjustments boost my performance but in some cases I find that my adjustments aren't effective. I focus on what I'm best at. I don't beat myself up when the adjustments weren't useful because for me the operation of the system is an active process. I will over time cut out those adjustments that aren't effective and focus on the adjustments where I feel I add value.

 

I don't regret the hypothetical.

Edited August 2, 2012 by Predictor

[MightyMouse 12]

in the markets the goal is "to make money" (some may also have as part of their goal...enjoy the ride)

 

IMO Rules are (or should be) derived from principles. for instance: show kindness is a principle. i may have the following rules that will help me implement that principle:

 

1) speak to people when i enter a room

2) open a door for the ladies and elderly

3) let a driver in my lane where traffic is backed up

4) don't cuss out the neighbor because his dog came over in my yard and took a crap.

 

etc...etc...etc

 

in trading an example of a principle, at least to me, is something like "only trade with the larger trend"

 

rules would be "entry" "exits" SL, Profit targets, etc ......etc

i.e. I would design rules that help me accomplish trading with the trend so that i can make money with that principle.

 

it is much like strategies and tactics. there is always strategical and tactical elements to any endeavor. that is, "what" are we going to do or accomplish and "how" are we going to do it.

 

now we can be wrong strategically or tactically. We have to be able to determine in which area the error was in and make adjustment. there is logic to the markets but they are also chaotic. that really complicates matters because on one day a tactic based upon a principle works just fine and a nice profit is made. on another the day the same almost exact situation presents itself..the same tactic is employed... based on the same principle... but one loses money instead of making money. that is why stop losses are employed. because of the chaotic nature of the markets. if the markets were entirely logical all we would have to do is figure out that logic and presto....

 

however, in general, IMO.... good, sound principles..coupled with logical rules..in the long run will probally work out...depending on the trader. because we have the markets and they are logical and chaotic and we have the trader who is also logical and also chaotic. so bottom line we are dealing with logic and we are dealing with chaos...some would even say there is indeed a logic to what appears to be chaotic. and there is chaos to what appears to be logical..

 

we do the best we can with what we have to work with. in general my philosophy is simply to try and observe the ebb and flows of the market and attempt to go with what the market appears to be doing because the market generally continues doing what it is doing until there is a reversal or reason for change.... i know that sounds simplistic..probally is...i observe what it is doing and try to anticipate what it may do...if it doesn't in fact to what i thought it may do then that is what my stop losses are for. the old saying.."the trend is your friend...until the trend ends".

 

 

Some good trading principals are:Humility, Confidence, Patience, and Discipline. These parallel good principals that you may want to live your life by outside of trading.

 

Other principals which are important to trading are Greed, Selfishness, Ruthlessness. Can you make a lot of money without practicing these principals? I don't think so.

[Patuca 13]

you are trading pullbacks in trends. this is your edge.

 

1) intermediate trend for the day is up. there is a pullback. then trend continues up breaking out of the pullback. it does so with gusto. fairly fast paced...got some zip and swoosh to it.

 

2) now intermediate trend is up another pullback. looks almost identical in terms of points and the look of the candles. however, it was made in a different way...lazy...no punch..drifting...lazy walk on a summer day..just ain't got the move

 

so.....since you are trading pullbacks in a defined intermediate trend do you trade EVERY pullback that has a breakout regardless of how that pullback was made?

 

or do you cherry pick your pullbacks?

 

all or none?

 

none or all?

 

if you know from experience that that the second kind of price action usually doesn't go far then do you still take the trade to be statistically correct and not cherry pick or do you in fact make judgement on each and every pullback?

 

i walked in a store yesterday. they had a sign up at the register on their policy for selling tobacco: "All must present an ID without exception" i quizzed the cashier..."if an 80 year old, bent over man, walking with a cane came in here and bought a pack of cigs would you ask to see his ID?" she promptly responded YES. I said "that defies common sense" She said "I know". i left the store and went to another store. they had basically the same sign at the register but for alcohol. i asked this cashier the same question.....80 year old bent over" man walking with cane...da...da..She promptly responded: Yes I would ID him. I said that defies common sense. She then said "we don't make the laws we just obey them". That says something about the dipsticks that made the laws.

 

I don't know about you guys but I ain't taking no BS trade when my common sense and experiece tells me that this pullback will probally not work. Just because my rules tell me to trade breakouts from pullback doesn't mean I have to take every stinking trade. i have been know to adjust my SL if i think the situation warrants it..

 

now I may have to get on motorcyle and ride out of here. I am not going to be no slave to no rules. rules are made to be kept. they are also made to be broken... circumstances tell which one....they can fire my ass or throw me in jail but i ain't gonna ask no 80 year old man bent over and leaning on a cane for his ID. that is STUPID STUPID STUPID

 

bye

[koyasan 10]

Predictor...thank you.......enjoyed your post..years of experience has obviously given you an intuitive feel for the ebb and flow of the market as your style of trading goes beyond a pure rules based approach. In the end a consistently profitable system is a valid system. However by definition experience is acquired over time and intuition cannot be taught so I presume you teach a profitable version of non discretionary/mechanical trading?

 

Why would I want to throw out my years of experience and superior market read just because I've program something that was profitable?.

 

I think the answer is in your question......perhaps because it is profitable?

 

I, also, don't always follow the system rules once in the trade. I give myself a degree of discretion to adapt the system based on my read of the current market conditions.

 

Which rules do you not follow, how much discretion do you use, how much adaptation do you employ and what information are you referencing in order to 'read' the market?. I accept that this works for you but going back to my earlier point this is not something you can teach or indeed is helpful to a novice/intermediate trader.

 

I know some mechanical traders who beat themselves up when they don't take every trade and then they try to take every trade and end up losing even though they felt like they shouldn't. I don't trade that way. .

 

I would hope nobody trades this way. I would suggest that the mechanical trader in your example is a wannabee trader without a viable strategy and hardly a useful comparison to your own style. On the other hand I am more of a mechanical trader. I view the market as a technical challenge, the goal of which is to achieve profits with the least expenditure of capital and mental/emotional energy. I follow my rule based system developed from the only information which I have, which is what has gone before. My system evolves as tomorrows data becomes yesterdays. I take every trade I see and I end up winning more than I lose.

 

There certainly is no right or wrong about your approach or mine.....profit is all that matters.

[MightyMouse 12]

you are trading pullbacks in trends. this is your edge.

 

1) intermediate trend for the day is up. there is a pullback. then trend continues up breaking out of the pullback. it does so with gusto. fairly fast paced...got some zip and swoosh to it.

 

2) now intermediate trend is up another pullback. looks almost identical in terms of points and the look of the candles. however, it was made in a different way...lazy...no punch..drifting...lazy walk on a summer day..just ain't got the move

 

so.....since you are trading pullbacks in a defined intermediate trend do you trade EVERY pullback that has a breakout regardless of how that pullback was made?

 

or do you cherry pick your pullbacks?

 

all or none?

 

none or all?

 

if you know from experience that that the second kind of price action usually doesn't go far then do you still take the trade to be statistically correct and not cherry pick or do you in fact make judgement on each and every pullback?

 

i walked in a store yesterday. they had a sign up at the register on their policy for selling tobacco: "All must present an ID without exception" i quizzed the cashier..."if an 80 year old, bent over man, walking with a cane came in here and bought a pack of cigs would you ask to see his ID?" she promptly responded YES. I said "that defies common sense" She said "I know". i left the store and went to another store. they had basically the same sign at the register but for alcohol. i asked this cashier the same question.....80 year old bent over" man walking with cane...da...da..She promptly responded: Yes I would ID him. I said that defies common sense. She then said "we don't make the laws we just obey them". That says something about the dipsticks that made the laws.

 

I don't know about you guys but I ain't taking no BS trade when my common sense and experiece tells me that this pullback will probally not work. Just because my rules tell me to trade breakouts from pullback doesn't mean I have to take every stinking trade. i have been know to adjust my SL if i think the situation warrants it..

 

now I may have to get on motorcyle and ride out of here. I am not going to be no slave to no rules. rules are made to be kept. they are also made to be broken... circumstances tell which one....they can fire my ass or throw me in jail but i ain't gonna ask no 80 year old man bent over and leaning on a cane for his ID. that is STUPID STUPID STUPID

 

bye

 

If your pullback will not work as obviously as your 80 year old man who should not get carded, then by all means don't take the trade nor should card the old man. However, nothing is as obvious as your old man in the market.

[4EverMaAT 10]

Yep, this is basic if you want to last in the business. If you have an edge, take the trades...

 

and yes (again) if you aren't mentally "up to it", either suck it up or get a new job....

 

I guess the final question for me is why does Predictor post this stuff? (I'm on ignore so I can use his handle, lol)

 

If you didn't know this stuff, how can you suggest that you're qualified to teach people...?

 

Oh well, it was a very nice day....hope everyone had a good one..

 

Good luck

 

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

and finally (to repeat) if you have a significant edge, and you don't take the trades...you're wasting your money....because you are introducing a randomizing element into your overall results.

 

I realize I am critical of the guy (the OP) but really shouldn't you know this if you are claiming professional status and offering to teach folks....?

 

At least he is taking some action and doing his best. That does count for something.

 

Such is the reality of the trading business. As one of the original turtles once said [paraphrasing]: "...Those of us who actually trade for a living know the names of many "famous traders" who are famous as "traders," but that don't make money as traders ....Most of these so-called 'experts' can't trade and don't trade the systems that they [tell others about]...." I read many of these recent articles and wonder: "Ok, so what exactly was your point?" or more specifically "How do I apply this [non-sense] in an actual trading situation?" I guess I'm one of those people who just don't "get it".

 

I was just recently watching magic's greatest secrets finally revealed. Don't underestimate the power of illusion. The majority of tricks they showed had nothing to do with camera tricks, but classic misdirection of the person's attention or hidden devices/compartments in a clever arrangement.

[steve46 12]

I'm sure this will seem harsh but "doing your best" is fine if you're at home playing cards with your friends....or at the bowling alley with your buddies, or at the county fair throwing baseballs at a target trying to win a stuffed animal....theres a time and a place for that sentiment.....no doubt...however....when you are competing with some of the best and brightest for your livelihood....and significant amounts of money are at stake.....then frankly "doing your best" might not be enough....that seems to me to be one of the unfortunate truths we all have to face from time to time (are we "good enough"....or not). My best guess is that the difference between success and failure is often not about how "good" (skilled) you are, but how well prepared you are....

 

As to your second point....statistics (and my comments were all about BASIC statistics)...is the language that professionals use....people may not believe it, or want to learn it, but thats how THIS game is played and if you don't have a basic understanding (and someone else does) then THEY have an edge over YOU....

 

Finally, I have been teaching professionals, not retail traders....the reason I do that is that when I tell them something, they listen, they focus on what you say, BUT, then they go and test what you told them, to make sure it works...unfortunately retail traders tend to throw money at "systems", indicators, mentorships and the like without having any done the homework themselves....just because a person talks a good game.......oh well its almost 11pm here and the DAX is going to open....back to work

 

Best of luck to everyone.

Edited August 3, 2012 by steve46

[SIUYA 11]

i walked in a store yesterday. they had a sign up at the register on their policy for selling tobacco: "All must present an ID without exception" i quizzed the cashier..."if an 80 year old, bent over man, walking with a cane came in here and bought a pack of cigs would you ask to see his ID?" she promptly responded YES. I said "that defies common sense" She said "I know". i left the store and went to another store. they had basically the same sign at the register but for alcohol. i asked this cashier the same question.....80 year old bent over" man walking with cane...da...da..She promptly responded: Yes I would ID him. I said that defies common sense. She then said "we don't make the laws we just obey them". That says something about the dipsticks that made the laws.

 

slightly off topic - they are actually trading well -regardless of common sense.

While the rules may be a little rough, for the the store keeper there is no upside in not following the rules. Hence if they have to ask or risk a large fine for not asking once then they will always ask - there is no benefit in not asking - until shoppers go elsewhere because of the hassles. (one of the reasons pure prohibition does not always work - there comes a point whereby its profitable to break the rules)

 

The story resonated with me when I was asked for my ID for beers in a bowling alley in Tennessee as they were the rules - the funny part was she had no idea what a passport was, no idea where Australia was as a state of the USA, and when I assured her that if the authorities came in and checked she would not get into trouble she gave me the beers....but until that assurance she was not prepared to serve me as they were the rules - strange but true.

 

Back to trading - as a discretionary trader I would love to automate the trading with rules a computer could follow - I would have to be happy to follow through the drawdowns and dumb trades and be a true believer (one of the problems) - it is slowly happening and a lot has to do with mind set and assurances (a few backtests will not wipe 20 years of ingrained discretionary trading) and it is the trade off between recognising a rules based system while getting every winner will also take some of the "obvious" losers as well. - maybe thats part of the 'rules of the universe' associated with the trade off....plus its the feeling of control - maybe I feel like I want to make my own silly mistakes as opposed the programmed ones.

Point being - rules are cultural and fit one person and not another - societies rules have to by their nature be a little different - no matter how crazy. A comedian the other day made a good comment - the difference between Australian and the UK when it comes to rules.(try the accents)

"The Brits love to make rules, and are very proud of following the rules - except when it comes to actually following them then its "oh those rules are for others to follow", the Australians on the other hand are very laid back and casually say "-nah rules who cares - --- so long as you follow the rules."

[Patuca 13]

trading is as much an art as a science. actually, probally more art than science. Statistics can be useful but they aren't the holy grail of trading. algos fail and it is supposed they are better at handling statistics than humans. for a more recent example just talk to Knight. back to art ...there are many ways to paint the same scene.

[steve46 12]

trading is as much an art as a science. actually, probally more art than science. Statistics can be useful but they aren't holy grail of trading. algos fail and it is supposed they are better at handling statistics than humans. for a more recent example just talk to Knight. back to art ...there are many ways to paint the same scene.

 

Until someone finds something better I'll put my eggs in that basket....and for the record, Knight's problem wasn't related to statistics, but to a problem with software....

 

Good luck

[BlueHorseshoe 10]

maybe I feel like I want to make my own silly mistakes as opposed the programmed ones.

 

Didn't you quote Ed Seykota in another thread - "everybody gets what they want out of the market"?

 

I think one of the difficulties here is that discretionary input tends to fall into one of three categories:

 

1. Pure 'instinct' or gut-feeling.
   
2. Decisions based upon a set of rules that the trader is unable to formulate consciously, but exists within the neural structures of the brain in an objective way.
   
3. Decisions based upon a set of rules that the trader is consciously aware of, but is unable to formulate with sufficient (in)accuracy to describe them to a computer.
   

 

The first category is a bit like gambling, and where anybody is consistently successful with it in a way that defies statistical probability, one has to assume that their decision making falls into one of the other two categories.

 

The second category is, I imagine, very frustrating - it's a bit like the trader being their own black box and unable to peer inside their own head. Not knowing, in spite of profitability, is not something that many people find terribly comfortable.

 

The third category is the most interesting. It stems from the fact that the human brain is able to recognise what Wittgenstein called 'family resemblances'. Getting a computer to do this is not easy, but is probably a neccessity if a trader wants to remove human discretionary input altogether.

 

Hope that's a useful way to think about this.

 

BlueHorseshoe

[zdo 20]

...what Wittgenstein called 'family resemblances'...

 

Anyone in here studied up on that more?

... from the perspective of other disciplines, etc. ?

References? Links?

Thx.

[Patuca 13]

Until someone finds something better I'll put my eggs in that basket....and for the record, Knight's problem wasn't related to statistics, but to a problem with software....

 

Good luck

statistics...software glitches...whatever was the problem we may never really know but either way these best and brightest at Knight apparently screwed up big time. maybe they ain't so bright after all to put at risk the existence of their entire company in 45minutes? electronic trading with algos..HFT...then all the dark pools...etc ..well we have created a monster. i am sure that in time they will sort thru it all. at least one hopes so. but things will first heat up even more. there will be more meltdowns and bigger meltdowns.

 

Artificial Intelligence slavishly obeys the rules it has been given. this will lead to more meltdowns. then you get more and more algos that feed off other algo's and discover loopholes which they exploit. each one adds more complexity...which adds more problems...by the time the problems are solved the algos are irrelevant so new ones have to be designed and employed.

 

I could be wrong but in my thinking the individual trader cannot compete on the same footing as these HFT's. however, algo's... HFT..dark pools...but....whatever else comes along if one sticks with the basics they should be able to make money. the structure and DNA of the market is the same as 50 years ago. to make money the market has to move. It can move up or down or sideways. there has to be trends and ranges. always has been that way and always will be...at least in the forseeable future. "how" each of those are made will change as time goes by and technology changes. its a matter of adapting tactically to the way in which these moves are made. but the moves will be there.

 

some think the moves may in fact become more precise because it is supposed that Artifical Intelligence handles statistics better and more efficient than humans. if that is the case then the human mind can also learn to read the moves (without seeing the statistics)...just as one used to outsmart a MM or the specialist...because all things have to have some sort of structure. Algos which are designed by humans will create a structure and in fact have already done so, since much of the trading done now is done this way. where there is structure there will be patterns. where there is patterns they can be exploited. I suppose that in a way backs up your argument.

 

however, since most of us cannot compete on the micro level in this nano second world of statistics it sees to me we will be forced to observe and learn (and much of that visually) "how" the patterns are formed that lead into trends and ranges..etc. then adapt tactically.

 

i am always amazed how computers make people more stupid when it comes to common sense. Just try to buy something in a store when the computers are down. Do we really want a world that computers and machines dictate to us what we can and can't do and when we can do it? I know that is already here but do we really want to relinquish ALL of our endeavors and the control of our lives over to artificial intelligence.

 

I think the human spirit will rise about all this BS. but it may be the next generation that does this. in the meantime we have to quit leaning on the shovel handle and start digging the ditch, if we ever hope to get anywhere. there are different ways to dig but the ditch has to get dug.

 

So...lets lift our glasses to Knight and cheer them on. perhaps their best and brightest will figure a way out of this mess they may have created. in the meantime i am sure a few heads will roll and I am quite confident we will really never know exactly what happened. Knight themselves may never really know...maybe another algo ate their algo? at any rate their breakfast..lunch..and supper was eaten. they are left with a midnight snack.

 

time for a motorcycle ride with the wind blowing in my face and the smell of freshly cut green grass filling my nostrils.....good day

[Patuca 13]

However, nothing is as obvious as your old man in the market.

 

really? ALL trends will have pullbacks. most pullbacks are small trading ranges. then either the trend will resume in the original same direction (this happens most of the time in strong trends) or there will be a larger trading range that will begin to form. Or price will break out of the small trading range (i.e. the pullback) in the opposite direction. One of three things.

 

How do we know an old man from a young one? color of hair?..no teeth? bent over? shuffling feet?...crackling of voice? ...wrinkled face?...shaking hands?...passing gas while in line?...combination?

 

Point is we look and observe and interpret and come to a conclusion.

 

I always say observe the obvious and have the will to go with it. but just in case you interpreted wrong or the old man was faking all of the above then you have stop losses.