Market Failures VS. Market Wizards

[Vince50 10]

I am hoping this thread will "morph" into one of the most popular tyhreads on the Internet. Why? Because this is a first. It is a place for people to do what they normally never would do. And that is: Show where they messed up in trading, How did they fail, what indicators did they use wrong, what bad habits do they feel they couldnt lick, and basically what got in the way of them succeeding. Now before you click to another thread with another new system or piece of advice, let me ask you all a question. If you wanted to learn to be a champion Professional boxer, who would you go to for coaching-Mike Tyson or Cus D'mato/Kevin Rooney/Teddy Atlas, Mikes trainers and advisors? Would you go to Muhammad Ali or Angelo Dundee to learn boxing. By the way, Angelo and Cus were both horrible boxers I dont think either one won a pro fight or even fought in one. So why did these two "LOSERS", Angelo and Cus, create 2 of the greatest boxers the world has ever seen? I can answer that, but I wont.....not right away. I spent 25 years researching where greatness comes from and whether it is made and molded, genetic or luck....or all 3. Or, none of the above!

 

You see, losers have as much to teach us as winners. But losers don't sell books. Losers can't sell courses on trading.(Unless they just make stuff up). Losers opinions, arent usually highly regarded. And I will tell you,that is the biggest reason why most people never reach their full potential. So, if we all learned so much from reading about the most successful traders in the world "Market Wizards", why arent we all rich like them? Come on now...that books been out for what, 20 years or so now. There are no excuses. So, what could our failure to be a professional trader be caused by? I say, we let the people who went through the war, were the real casualties and tried everything and maybe more than the winners did ,let us hear from them! That means you if you are reading this and cannot make a living trading yet and have been trading or studying for 2 years or more. Talk to us. Right here, right now!

 

. I don't think everyone gets how deep that can really go. You see, we always hear stories about a trader who "unveils" his story to us about how he succeeded. What I want is to hear the stories of guys who blew up 5 trading accounts, lost their house, lost their regular job cause they couldn't stay off the Internet(me!),lost their wife and even lost their perspective OF life. We don't hear from THOSE people....and those people are far, far in the majority. I think if we have a book called Market Wizards, we should have its opposite called Market failures. In fact, I should start a thread here to do just that. Trading is a merciless business. You can put in 40 years and still wind up like Edward Levebre from the "Stock Operator" book and die alone and broke in a hotel room after making millions trading. Those are far more common. We need to hear those stories...not just to pay homage to the "fallen soldiers" who may have been smarter than a Market Wizard" but just not luckier. Or destined to be in the wrong place at the wrong time. Myself: I have never emotionally gotten over buying 500 shares of APPL at 33, watched it go to 35 but set my stop at 33 and said I would get back in as soon as it picked up momentum.Then, I got so involved with day trading in a prop room, I forgot about AAPL it until 3 months later when it was way to high. I will wait for a pullback I said. It then went on to skyrocket past $700 and I wanted to have a position of at least 1000 shares when it went past 50. I can likely never get an opportunity like that again and would have been set for life. Hell, Warren Buffett probably never had that happen to him. So what I'm saying is, brains or not, persistence or not, it is soooo much easier to fail at trading than to succeed. And the real kick in the rump is we never really have control. We can only "hope" that what we do continues to hold its edge or else we might have to start all over again. How many suicides have taken place because of this addicting,exciting profession? Look at Gann, Elliot, Charles Dow and all the forefathers of stock trading. They all were/ became very physically sick. Was it from trading...or just coincidence?

 

So I start this thread, hoping you guys out there who have thus far not made it yet, tell us your biggest mistakes youve made. But tell them in 2 or 3 paragraphs at most so the next guy can be heard. You are welcome to keep coming back once a day and write something fresh. So lets go. Right here. Right now! Who wants to be first to kick this off? And by the way, here is my disclaimer: DISCLAIMER-i HAVE THE RIGHT TO USE ANY MATERIAL PRESENTED HERE ON THIS THREAD IN ANY FORMAT I CHOOSE. I WILL NEVER BE FINANCIALLY RESPONSIBLE TO PAY ANYONE POSTING HERE ANY MONEY REGARDLESS OF WHAT HAPPENS FROM THIS THREAD. I hope helping another trader will be reward enough for you folks.

 

So who wants to go first?

[SIUYA 11]

so do you want stories of individual trades that did not work, or you did not participate in, or that were stuffed up for some reason.....such as your single AAPL trade?

(everyone has plenty of these, even Mr Buffet)

or

do you want stories and an analysis of why people blew up accounts and stopped trading?

(these are probably rarer apart from the normal - i could not get it to work for me)

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

do you want stories such as....trading caused me to loose my money, loose my mind and hate my mother.....I almost went postal and grabbed the gun to blame the broker until I found crack and now I am a successful drug dealer.

or

I once was in private equity, rode the leverage boom and thought i knew it all. Until i blew up my account trying to trade, and i figured it was easiest just using other peoples money and charging fees.

or

I had $10,000 to trade, and spent $6,000 on seminars, mentors, and courses, and then was disappointed to find that i was seriously undercapitalised with only $4000 left with which to try and make my millions.

[Vince50 10]

Hi,

 

Just share with us your overall "journey". Were you just making all that stuff up or did trading get you that crazy? And don't tell us w"war stories" you know, like about individual trades unless like me, it broke you in half or blew out your account. I want to hear what you 1-FELT and what you 2-LEARNED. Anything another trader could get something out of or relate to. Anything!!!!! -) Hey, Im over 50 and I am up now at 4:30am trading Forex and I haven't slept regularly in years because of trading. Thats another thing, how did trading affect your habits and lifesstyle. For me, I lost all most of my friends. Because I found they really couldn't give a damn about me succeeding. Never ever asked "How is your trading going" knowing it was life or death for me sometimes

 

V.

[SIUYA 11]

Ok.....if it helps.....I have heaps, and these are all personal and maybe only applicable to me....it could make for some interesting reading as you are right, its often harder to work out the lessons from failures, rather than the glories of success.....especially when trying to pinpoint the lesson.

 

Personal tidbits and lessons from failures or poor processes (turning points from 20 years of trading)

 

I used to get pissed off that I would do 100 trades in a day and make money but feel that I should have made more money. The guys I traded with said I should just be happy with making it, but it fell on deaf ears.....Lesson - this made me realise that I was more interested in getting the process right, doing the smart trades, and this will make the money.

This saved me a lot of pain and problems that others did not get.

 

I waited weeks for a trade to develop one time, (when I was a market maker in equity options), I built a long position, and was ready to go all in on it, and had told my trading mentor/friend/business partner this is it, the trade was on.....late in the afternoon I was asked to quote a favour for a broking friend to sell them a large quantity of calls in the stock for a client. After telling them i was not interested, they begged and pleaded and I finally sold them to them at what was considered a good price for me. Sure enough the next day the stock opened higher, I had sold my position and never chased it. Lesson - dont exercise great patience, anticipation and foresight and then throw it away at the first sign of a profit.

 

I went to lunch once with a large short term equity index position on with no stop, got drunk and never returned. The market took a dive and gapped lower the next day, wiping out three months trading profit.....Lesson - its ok to go to lunch and get drunk, but either do it with a stop or no position. You cant stop living your life and spending all the time at the machine, but have in place provisions to allow for this.

 

I have gone through a few small accounts while testing trading styles and ideas (These are small percentages of the overall book). I like to separate them out for clarity. The higher turnover ones generally blew up, not from losing on the trades but from paying the brokerage.....Lesson, overtrading will kill you even if you are right, and you dont have some edge on spread or really low costs (and I mean really low)

 

I used to live and breathe the markets and was lucky I learnt my skills in the equity markets that closed each day. When one night I woke up and looked at the alarm clock and in a panic thought 'OMG is that the price" - I thought it was funny until I soon hit a patch of making money and then loosing it quickly doing stupid things. I had lost perspective. I knew a breather was required.....Lesson, listen to the other things in your life, otherwise the trading will suffer.

 

I have had periods of loosing before and the first thing to assess is not the market, but if you are doing the things that normally make you money. Usually I find when loosing I have changed something. It might be that I became slack in recording trades, or doing the prep, and having a view, or I got focused elsewhere, or I started reversing orders......Lesson. The markets dont change too much, but you probably have, check there first.

 

'''''''''''''''''''''''

 

Disclaimer - for your book and your rights to use this how ever you like....I could be making this all up and am some lonely 14 year old kid sitting in reform school.

[Security Shinobi 10]

Hahaha why can't anyone spell "losing"

[SIUYA 11]

i never get seperate, pyhscology or weather right either.

 

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

Interesting that no one else has any lessons they have learnt from their failures......or that they care to share them, or maybe its just they dont care.....

[Obsidian 10]

During early years of my trading journey I would pay too much attention to the news, reports, analyses from so called experts. Since I was not into very short term trades, I thought I have somehow follow fundamental stuff. But that made me more confused because people have different point of view and even opposite ideas sound logical at the same time. I would change the direction of my position after I read something more logical. Of course some time later, got my lessons:

-Markets can be wrong but I have to follow the trend to make money. if the market says it is "black" for instance, then black it is...even if it is "white"

-Only trade what is triggered by your system.

[BlueHorseshoe 10]

This thread doesn't seem very popular (c'mon - surely you can all set your egos aside for five minutes and admit that you've all screwed up at some stage? )

 

Here's my rather dull story . . .

 

My biggest failure was probably my naivety when I started out. I had absolutely no prior experience of anything related to the financial markets and assumed, like most other things, being smart I could just apply myself and learn it all from a few good books. A dumb assumption.

 

I read books like 'Mastering the Trade' and was delighted - here was a successful and profitable trader telling me exactly what he did to make living and how he did it. I had none of the problems with discipline, risk, trade management etc, and followed the "rules" to the letter. Needless to say, I lost about half the account. Then the usual problems started to kick in - grabbing the first little bit of profit, fiddling with stop losses, risking way too much on each position.

 

Somewhere in the middle of this I read a Larry Williams book on swing trading. I remember being very impressed by the fact that he showed backtested results for each strategy, and being suprised by how modest the results were. I started to trade a couple of the methods.

 

After about 7 months I realised that my account was at around breakeven, and that all the profits had come from a handful of good swing trades. Apparently it was easier for me to make money swing trading EOD than daytrading. The main lesson to be learnt was this:

 

I needed to learn how to thoroughly test a strategy's viability before risking real money trading it. Taking someone (anyone) else's word for it simply isn't good enough. Ever.

 

As soon as I started to do this I realised that even the Larry Williams methods I had experienced some success with were only suited to certain markets and conditions, and that I had mostly benefitted from good luck.

 

I took a break from trading. I learnt to program, and to backtest, to a reasonable standard. I arrived at a single EOD method that I felt I could trade with confidence in the ES. I traded it successfully for 9 months. At the end of this time I began to review what I was doing, factoring in what I had learnt since the time I began trading this method, and a few alarm bells began to ring. At the time I was buying a property, and it became necessary to liquidate the account to complete the purchase without a mortgage.

 

Since then (July) I haven't traded, partly because I haven't been able to fund an account, but mostly because I haven't found satisfactory solutions to the issues with the trading method I used, or a good enough alternative. In other words, I have remembered my lesson from that first round of failure, and won't risk real money again until I am confident that I know what I am doing.

 

BlueHorseshoe

Edited November 6, 2012 by BlueHorseshoe

[Vince50 10]

This thread doesn't seem very popular (c'mon - surely you can all set your egos aside for five minutes and admit that you've all screwed up at some stage? )

 

Here's my rather dull story . . .

 

My biggest failure was probably my naivety when I started out. I had absolutely no prior experience of anything related to the financial markets and assumed, like most other things, being smart I could just apply myself and learn it all from a few good books. A dumb assumption.

 

I read books like 'Mastering the Trade' and was delighted - here was a successful and profitable trader telling me exactly what he did to make living and how he did it. I had none of the problems with discipline, risk, trade management etc, and followed the "rules" to the letter. Needless to say, I lost about half the account. Then the usual problems started to kick in - grabbing the first little bit of profit, fiddling with stop losses, risking way too much on each position.

 

Somewhere in the middle of this I read a Larry Williams book on swing trading. I remember being very impressed by the fact that he showed backtested results for each strategy, and being suprised by how modest the results were. I started to trade a couple of the methods.

 

After about 7 months I realised that my account was at around breakeven, and that all the profits had come from a handful of good swing trades. Apparently it was easier for me to make money swing trading EOD than daytrading. The main lesson to be learnt was this:

 

I needed to learn how to thoroughly test a strategy's viability before risking real money trading it. Taking someone (anyone) else's word for it simply isn't good enough. Ever.

 

As soon as I started to do this I realised that even the Larry Williams methods I had experienced some success with were only suited to certain markets and conditions, and that I had mostly benefitted from good luck.

 

I took a break from trading. I learnt to program, and to backtest, to a reasonable standard. I arrived at a single EOD method that I felt I could trade with confidence in the ES. I traded it successfully for 9 months. At the end of this time I began to review what I was doing, factoring in what I had learnt since the time I began trading this method, and a few alarm bells began to ring. At the time I was buying a property, and it became necessary to liquidate the account to complete the purchase without a mortgage.

 

Since then (July) I haven't traded, partly because I haven't been able to fund an account, but mostly because I haven't found satisfactory solutions to the issues with the trading method I used, or a good enough alternative. In other words, I have remembered my lesson from that first round of failure, and won't risk real money again until I am confident that I know what I am doing.

 

BlueHorseshoe

 

Come on Blue, dont leave us hanging....what were the alarm bells?????? (smile)

 

marc

[BlueHorseshoe 10]

Come on Blue, dont leave us hanging....what were the alarm bells?????? (smile)

 

marc

 

Oh, just risk management stuff. Nothing you couldn't read about in Market Wizards or a dozen other books. My swing trading approach left me overly exposed to "black swan" type events and suddenly, having actually made some money, I became more averse to losing it.

 

Perhaps in a year or two's time I shall be able to return to this thread and share with you whatever lessons I eventually learn from trying to overcome this current obstacle. In the same way, of course, it would be interesting if Schwager were to revisit the interviewees of his first book - where are they now, and what new lessons have they learnt?

 

BlueHorseshoe

[ed_inacloud 10]

Could be an interesting thread if you can get people out from behind their egos, but my guess is that the result would be more of the BlueHorseshoe stories to which I can certainly relate.

 

I've been in this for four years and have 'invested' a significant sum in the spirit of learning the trade. I trade Eur/$

 

In the early days tried many of the popular indicators, all of which worked when the market conditions met the parameters that the indicator was designed for but every one failed when the conditions changed from trending to ranging or vice versa. Indicators are great at telling what has been but I guess we all know that by now.

 

I also started to write code to develop my own indicators with not surprisingly the same results, but it did enable me to develop a mechanism to track price movement and look at the odds of certain potential outcomes. At any point in time the odds are 50/50 or there abouts, the only way to improve the odds was to change the ratio of S/L to profit in favour of greater stops which resulted in more wins but not enough to offset the increased cost of the losses.

 

The only thing that that makes any sense to me is that news is king, it drives sentiment and the market in an overall direction until the next bit of news offsets it. Most major turning points in the E/$ on the longer timeframes can be attributed to news. If you can swing trade off the back of that then well done. Like all things it's easy to look back and attribute direction changes to events, not so easy in real time.

 

Support and Resistance is something I keep coming back to and looks like it should work based on simple price movement mechanisms, but it too is destroyed by big news events.

 

The things that stand out for me over the years are:

1) There seems to be lots of people who are keen to learn to secrets of successful trading and a few people who will take their money to give advice or a call service. Having spoken to a number that have taken up these services, none have matched the results of the 'mentor'. Also begs the question as to why the mentor spends valuable trading time time where he could be making even more money on his own, and if he really did want to give something back then why is he charging in the 1st place.

 

2) Based on what I've found over the last 4 years I'm not convinced that there are many successful people out there. I used to own a satellite box which relied on clever people breaking the encryption codes and showing how clever they were by publishing them on the internet for others to use. With trading we have lots of people telling us how successful they are but not a single successful strategy, I often wonder why.

 

I like BlueHorseshoe am sitting on the side at the moment. I'm using my software to see if I can find an entry condition that will give reasonable odds in my favour, I'm not hopeful and expect to walk away if I'm honest.

 

Ed

[john263 10]

I very much respect the honesty of the thread, as sometimes, even if just seeing myself, I too can learn from losers. The key being able to learn from my mistakes before I fail.

 

I am an extreme over achiever, and as such have made and kept far more than I have lost. But explaining why I have ever lost, or more importantly why I would continue to keep losing, is certainly important if I care how I am spending my life.

 

Markets change and people change.

 

Most of the documented successes in life, including mine, come from a time when the strategy, or niche, hence the "edge" of the writer matched the market conditions existing at that time. If the markets did not change, then once anyone found "what worked" "for them", would soon own the world. What is a more likely cause of failure is not realizing either how the markets are changing or how I as an individual am changing.

 

In my case, it was a transition between being single with full time market focus to raising a family, and losing my "edge", which was the ability to trade the trending markets of 1970-2000 in no cost mutual funds. The key was the diversification the funds allowed large amounts of money to be traded safely,with smaller percentage returns per trade, and that trends often lasted 11 days rather than 11 hours as might be the case today.

 

Trying to keep up with those changes while being "distracted" with anything else (Miss Market feeds off the temporary success of eventually distracted participants) will soon lead to mistakes, and the repeating of those mistakes generates losses. It is what I do with those losses that lead to temporary success or more losses. (Losses are objective, while most of my activities yield subjective results.)

 

One way to fail is to pay tuition, or worse drive, to any school or guru at which the price of admission is so high as to imply success will follow rather than just learnng. Worse is to do it all on your own thinking you cannot learn from others. Those who can, do, and those who can't teach. I have done both. The key is for how long.

 

The MOST serious losses in my part have been any time that I become so fixated with one side of a trade that I become complacent and do not fully consider the other side. This might involve a too large position, or even leaving the room with unfilled orders in place at some "support levels" below the market.

 

A variation of the same error is not clearly allowing for exactly how much pain might be involved before any gain, and ignoring the volatility inherent in trading around any events that will move markets while I am invested.

 

Another most serious cause of continued losses if NOT working through my diaries of my trades, and analyzing the emotions and feelings that occurred during any large gains or losses. (There should be none.)

 

And finally, since the 90% of traders lose adage is reasonably optimistic, there is the realization that trying to live a "normal" life, and trade, is not going to work. Trading requires attenion proportonate to the time horizon I am trading, and the precision of the trade is just as important on the daily chart as the 30 minute or 1 minute chart. When one can have overnight trading ranges exceeding both sides of the prior days range, it is impossible for most people to think they can turn their back on their "story" and live a full life with other people and succeed at both.

[wmck6167 10]

......tell us your biggest mistakes you've made.

So who wants to go first?

 

Hi, It's nice to see this thread and found your guys are great to be so straightforward in your trading experience. I like to share my biggest mistake I had. I just start my trading recently, but I like to deep thinking. And thanks God, I got good results this year. Hopeful I can keep going in the future. My big mistake is that “I think I can win based on some factors that I can not control.” so later on I realized that what I can control is only how I not be lost more.” Trading indeed gave me a lot of good transforms in my life. I learned I need to keep right daily habits persistently consciously whenever I lost my mind in doing something autopilot wrong since I learned experience that I know I can not keep bad habit to win in trading. I learned how to keep peace in my life (tried to precept the risk before conduct a guessing). I found that it's not easy to learn how to win persistantly, but it's easier to learn how not to loose. Cheers and have a good profit trades.

[Vince50 10]

Could be an interesting thread if you can get people out from behind their egos, but my guess is that the result would be more of the BlueHorseshoe stories to which I can certainly relate.

 

I've been in this for four years and have 'invested' a significant sum in the spirit of learning the trade. I trade Eur/$

 

In the early days tried many of the popular indicators, all of which worked when the market conditions met the parameters that the indicator was designed for but every one failed when the conditions changed from trending to ranging or vice versa. Indicators are great at telling what has been but I guess we all know that by now.

 

I also started to write code to develop my own indicators with not surprisingly the same results, but it did enable me to develop a mechanism to track price movement and look at the odds of certain potential outcomes. At any point in time the odds are 50/50 or there abouts, the only way to improve the odds was to change the ratio of S/L to profit in favour of greater stops which resulted in more wins but not enough to offset the increased cost of the losses.

 

The only thing that that makes any sense to me is that news is king, it drives sentiment and the market in an overall direction until the next bit of news offsets it. Most major turning points in the E/$ on the longer time frames can be attributed to news. If you can swing trade off the back of that then well done. Like all things it's easy to look back and attribute direction changes to events, not so easy in real time.

 

Support and Resistance is something I keep coming back to and looks like it should work based on simple price movement mechanisms, but it too is destroyed by big news events.

 

The things that stand out for me over the years are:

1) There seems to be lots of people who are keen to learn to secrets of successful trading and a few people who will take their money to give advice or a call service. Having spoken to a number that have taken up these services, none have matched the results of the 'mentor'. Also begs the question as to why the mentor spends valuable trading time time where he could be making even more money on his own, and if he really did want to give something back then why is he charging in the 1st place.

 

2) Based on what I've found over the last 4 years I'm not convinced that there are many successful people out there. I used to own a satellite box which relied on clever people breaking the encryption codes and showing how clever they were by publishing them on the internet for others to use. With trading we have lots of people telling us how successful they are but not a single successful strategy, I often wonder why.

 

I like BlueHorseshoe am sitting on the side at the moment. I'm using my software to see if I can find an entry condition that will give reasonable odds in my favor, I'm not hopeful and expect to walk away if I'm honest.

 

 

 

thank you,

Marc

 

ps-And even now, you are waiting, but waiting for what?

 

Ed

 

Ed, what a fabulous story to share with us. Awesome! So let me ask you...you don't feel that certain candlestick patterns or Fibonacci targets or even just shapes like head and shoulders if used with "proper(?) money mgmt where you always are getting 2-1 r/r ratio on every trade you take, you mean its that hard to win more than the 33% needed to break even. I was thinking 40% would be very doable. What seems to be in the way? Also, what about cycles, where in jan this pattern happens more than that pattern. And of course our famous santa claus rally in december. Cant we trade off cyclical patterns as well as chart patterns to get the edge we need?

 

thank you,

Marc

[ed_inacloud 10]

Marc,

 

If patterns work for you then great. Patterns are clearly there in all timeframes and I looked long at hard at some of the popular ones such as wedges and H&S. I could spot them easily after the event but to trade a developing pattern didn't work for me. I gave up when I developed a spreadsheet to generate four interlinked random numbers to give high, low, open and close and then linked them to the following row using another random number. I managed to generate most trading patterns in a very short time.

 

As I said earlier I've traded E/$ since late 2008, it tends to track indicies based on $ weakness = index strength. I've hear about the santa rally but in that time the only one I've seen is in 2008 and to go long at that time based on a pattern would have been brave. Looking back it looks they did occur from 2000 to 05 and there have been 6 in the last 12 years, so 50/50?

 

I am trying to program my indicator to look at fibs but am struggling to get the basic zigzag pattern programmed and need that to set start points etc.

 

As outlined previously S&R does make some sense to me, certainly on the smaller timeframes where order flow seems to support the patterns, however I dont get S&R over long time periods when the financial markets are as turbulent as they are today.

 

I keep coming back to a conversation I had with a guy at LSE, I was trying to understand why the markets moved so as to determine how they moved, I was also talking to a couple of people at Euronext/Liffe. The guy at LSE said they would never release the algorithm. Algorithm what algorithm I thought it was all order driven? Everyone I was speaking to shut down when I pressed that question, maybe 'cos they think I'm a mad fool. Does that account for the same patterns seen over all time frames....who knows.

 

Another question I asked but never got a sensible answer to was the interlinking of indicies and their base shares. The index is derived from the value of the base shares and there is a direct link between the two which is based on fair values, the index is then also traded independantly but there is apparently no feedback of index movement back into the share prices. Anybody with any engineering experience at all (especially electronic) will see that cant be true, else people buying shares could drive the index in one direction and those selling the index could drive it the other way. So either the Index Futures aren't really traded as a separate entity (as LIFFE claims it is) or there is a feedback loop, possibly The Algorithm.....

 

Not wishing to rain on anyones parade, and I'm desparately trying to prove my own findings wrong, but it seems to be a very well controlled random environment we seem to be working in.

 

I'm off to take my pills and lay down :-)

 

Ed

[BlueHorseshoe 10]

 

I gave up when I developed a spreadsheet to generate four interlinked random numbers to give high, low, open and close and then linked them to the following row using another random number. I managed to generate most trading patterns in a very short time.

 

 

This is impressively smart, and just the sort of thing that I try and do myself.

 

However . . . Just because something is random doesn't mean it's unpredictable. Usually it's quite the opposite. Consider a coin toss - whether you get heads or tails on the next flip is perfectly random or 50/50. Because the outcomes from consecutive coin flips are probabilistically independent, the chances of flipping, say, ten consecutive heads, are very small. You can bet against that occurrence with reasonable confidence. You can plot the relative probability of each occurrence and get a bell curve or 'gaussian distribution', and bet against outliers. In simplistic terms, this could be something like fading any instance where ten consecutive down bars occur - the probability of an eleventh down bar should be very small.

 

Most people think that instances of price behaviour are not independent of one another (ie current price is affected by what has happened before), and are causally linked; however, if you believe that they are not and that price behaviour is truly random then you should look at mean-reversion type strategies that exploit this assumption. It's how many of the quant funds were trading before 2008.

 

In actual fact you can quite easily prove to yourself that price movement isn't random. Perversely, this makes it far less predictable.

 

I personally believe that price behaviour in the short term is inherently more random than price behaviour in the long term. This means that I expect price to continue in the direction that it is going in the long term (more consecutive heads or tails), and to revert to the mean in the short term (if the last tosses were consecutive heads the next should be a tail).

 

This amounts to buying short term pullbacks when the long term trend is up, and selling short term rallies when the long term trend is down. If you can find a way to quantify what constitutes a pullback/rally and can define what constitutes the long term trend, all you need to do is throw in risk management and position sizing and you've got yourself a trading system.

 

BlueHorseshoe

 

ps The convergence of Index futures and the cash market is guaranteed by arbitrage - not a secret algorithm at the LSE! The two can and do diverge, and there are studies that show that even in liquid currency pairs and their respective futures, these divergences can last several minutes even in today's HFT world.

Edited November 8, 2012 by BlueHorseshoe

[SIUYA 11]

I keep coming back to a conversation I had with a guy at LSE, I was trying to understand why the markets moved so as to determine how they moved, I was also talking to a couple of people at Euronext/Liffe. The guy at LSE said they would never release the algorithm. Algorithm what algorithm I thought it was all order driven? Everyone I was speaking to shut down when I pressed that question, maybe 'cos they think I'm a mad fool. Does that account for the same patterns seen over all time frames....who knows.

 

There are still algorithms required to process data and the auction process.....given exchanges compete with each other they are unlikely to release these algorithms....or I hope you are not thinking the whole thing is some global conspiracy

 

Another question I asked but never got a sensible answer to was the interlinking of indicies and their base shares. The index is derived from the value of the base shares and there is a direct link between the two which is based on fair values, the index is then also traded independantly but there is apparently no feedback of index movement back into the share prices. Anybody with any engineering experience at all (especially electronic) will see that cant be true, else people buying shares could drive the index in one direction and those selling the index could drive it the other way. So either the Index Futures aren't really traded as a separate entity (as LIFFE claims it is) or there is a feedback loop, possibly The Algorithm.....

 

Ed....that feedback loop is the arbitragers. They both buy and sell depending on where the index is relative to the fair value. To do so they both buy and sell the index and the shares.....(it reads as if you are confusing the three different things.....the index made up of the basket of stocks, the futures contract based on future delivery (or cash settlement) of that basket of stocks (the index) and the fair value of that futures contract (v the actual trading price)

 

so if a large purchaser in the futures pushes the futures up above fair value. The index will likely follow up as the arbitragers buy shares, and sell the futures.

 

If a large seller of shares sells individual shares down, resulting in the index decreasing, the arbs will then sell the futures above the fair value and buy shares representing the index.

Same result different starting points......there is the feedback loop

[ed_inacloud 10]

BlueHorseshoe, I appreciate your views ....it's good to get some balance to arguements that I try to make to myself in this lonely vacuum we choose to work in.

 

I've looked at random strategies and would agree that outcomes of consecutive coin flips are probabilistically independent, although I would disagree that the chance of flipping a tenth head after nine previous are small, it's 50/50. The coin doesn't remember whats gone before. There's been a couple of good science programs here in the uk in recent years that supports that. The problem with waiting to trade an outlier in a bell curve is that it takes for ever for the opportunity to arrive but it does it's still 50/50.

 

I had a eureka moment a few years ago when I litterally woke up one morning and thought 'don't try to predict the market, it's either going to go up or down just be on the right side whatever'. Seemed so obvious and simple. Idea was to set a line whenever you start trading and if price crosses over it then buy, if it crosses under then sell. soon found it can't be done in a retail environment with the spreads and order restriction we have. Price can cross 30/40 times in each direction so guaranteeing being on the right side at the right time is impossible. So I set my own spread of 10 pips and to offset any loss of an incorrect direction call then the next trade was set 10 pips away in the opposite direction and doubled. As soon as it moved in any direction outside the spread by 10 pips then I would be in profit. The average number oscillations between two points 10 pips apart is 2.7 times, I started at £1 per point and doubled up all the way to £128/ point before I lost my nerve and gave up on the trade. If I'd held on then I would have been successful, but fear got the better of me. I started to believe that someone was trading directly against me... but even I can understand that the global value of the dollar isn't going to be determined by someone trying to take a few thousand pounds from little 'ole me. Another mistake shared :-)

 

Interestly if I halve the spread I get twice as many oscillations, if I double it then I get half as many.

 

Turns out the strategy is already widely used in the casinos, it's called the martingale strategy. It too can be easily simulated on a spreadsheet, It's not long before a simple 50/50 strategy will wipe out the average account.

 

I do trade a pullback strategy now and is why I'm trying to develop my own zigzag indicator so I can look at optimum entry points for various timeframes (and fib points). On average there is more movement in a pullback than there is in the extension to new highs or lows, so if you dont take advantage of the pullback then you will likely be put under psychological pressure of a negative position very quickly. However trading against the current move in the expectation that the real move is in your direction is also tough psychologically.

 

Something for readers to ponder, I looked at relationships between bars on 1m, 10m, 1Hr, Daily and Weekly. Measuring O-C, H-L, O-H, O-L on each bar and Overlap between two consecutive bars. The ratios between each of the average measurements stayed fairly consistant over all of the timeframes (and the best place to be is in the o/lap).

 

My gut says that there is a fractal based pseudo random algorithm which is why common patterns appear across all time frames, and it's designed to put us under psychological pressure where either fear or greed will take your money.

 

I realise it all may sound off the wall and not what someone wanting to trade wants to hear, but it's four years of studying the markets from many angles. I think I'm reasonably intelligent, logical left brained and with qualifications in Electronic engineering. I'm just sharing for people to either use or ignor.

 

If you have a way of proving it's not random then I'm keen to learn. I have considered using FFT analysis where random white noise patterns can be identified, but my programming skills aren't up to that. I also believe the the findings I have through other means show the same patterns that FFT analysis would give.

 

Cheers

 

Ed

 

PS My understanding is that arbitrage is a trading opportunity rather than linkage between two derivatives. FTSE cash is directly derived from the values and weighting of the underlying shares, FTSE cash cant be traded as far as I'm aware and anything claiming to be is actually derived from and hedged in the futures market. FTSE Futures is FTSE cash + Fair Value and am advised the link is updated through the trading day. What I cant get explaination to is how market driven moves in the FTSE Futures feed back to FTSE cash value (as they claim there is no feedback link) and if there was a link how any changes in the FTSE cash is distributed back down to the underlying shares.

[BlueHorseshoe 10]

Same result different starting points......there is the feedback loop

 

Of course, it's slightly more complicated in that the arbitrage will also be against related ETFs, Options, and any other conceivable derivative of the underlying. Like Feedback Soup . . .

 

BlueHorseshoe

[ed_inacloud 10]

siuya, I'm familar with arbitrage but didn't appreciate that it might be carried out between the index and it's underlying shares. Spotting opportunity between two tracking entities is supposed to be hard enough, trading 101 shares with varying weighting that are moving in all directions in order to bring them back in line with a moving FTSE Futures contract would be tough for a single entity. Having multiple entites in the mix and holding a tight relationship sounds impossible?

 

I assume these entites are not liable for SDRT when they trade FTSE shares, that 0.5% would be a killer in that environment. I'm really not sure who is and isn't liable but just know I hated paying it before moving to CFD's and then SB.

 

Do I think it's a global consipiracy? I thought it was a well documented conspiracy at the exchanges by the Specialists / MarketMakers

 

Anyway I've hogged this thread enough, seems to be only 3 or 4 of us failures in the world, so much for 97%

[BlueHorseshoe 10]

I've looked at random strategies and would agree that outcomes of consecutive coin flips are probabilistically independent, although I would disagree that the chance of flipping a tenth head after nine previous are small, it's 50/50. The coin doesn't remember whats gone before. There's been a couple of good science programs here in the uk in recent years that supports that.

 

Hi ED,

 

I'm in the UK also, although I don't watch much TV part froom the cookery programs.

 

I may have explained myself poorly with the probability thing. The probability of the next coin flip being a head or a tail is indeed 50/50. But the probability of flipping eleven consecutive heads or tails are (0.5*0.5*0.5*0.5*0.5*0.5*0.5*0.5*0.5*0.5*0.5). In other words, the probability of an extended run of heads or tails (an outlier move) is very small. You can prove this to yourself very easily with a coin, and there's masses of academic literature to support what I am saying.

 

 

If you have a way of proving it's not random then I'm keen to learn.

 

 

The market regularly undergoes excursions that resist definition as a normal distribution. Moves in excess of two standard deviations are far more frequent than a gaussian model would predict.

 

I have considered using FFT analysis where random white noise patterns can be identified, but my programming skills aren't up to that.

 

If you're interested in that kind of thing then the free articles by John Ehlers at the MESA software website might interest you.

 

BlueHorseshoe

[MightyMouse 12]

I've looked at random strategies and would agree that outcomes of consecutive coin flips are probabilistically independent, although I would disagree that the chance of flipping a tenth head after nine previous are small, it's 50/50. The coin doesn't remember whats gone before. There's been a couple of good science programs here in the uk in recent years that supports that. The problem with waiting to trade an outlier in a bell curve is that it takes for ever for the opportunity to arrive but it does it's still 50/50.

 

 

In the spring I will be conducting a coin flipping training course titled, " Coin Flipping for Retail Coin Flippers". Send me your resume and I will let you know if you are qualified to participate.

[BlueHorseshoe 10]

In the spring I will be conducting a coin flipping training course titled, " Coin Flipping for Retail Coin Flippers". Send me your resume and I will let you know if you are qualified to participate.

 

Do we get to keep the coins once we've flipped 'em?

 

BlueHorseshoe

[MightyMouse 12]

Do we get to keep the coins once we've flipped 'em?

 

BlueHorseshoe

 

Tiger, if you feel the need to keep the coins, them so be it.

[SIUYA 11]

is there a prize for flipping a tenth head only after flipping 9 in a row ---- I only ask as such a run is only a 50/50 chance....right?