# My Trading System



## kingie_d (5 December 2007)

Hi everyone,
I'm a newbie trader and I've been reading this forum (as well as anything I can get my hands on: books, mags, other forums and all sorts of stuff on the internet) about technical analysis and I thought I would put it all out there for feedback on my system.
I thought I was ready at the end of July to get in and start trading. My first problem was that I didn't have a proper and complete system. I would read something that seemed a great idea, then check out a bunch of charts from over the last year and the majority of times that particular idea/system/indicator would come up good. I'd get all excited and jump in (usually hasitly). Sometimes it worked, sometimes not. Then as I knew I still had alot more learning to do, I'd get the next trading book and go "wow - I should be doing that!!!" and I'd repeat the above recklessness. August obviously wasn't the best time to go long in stocks and I lost a fair bit wondering what I was doing wrong. I turned my outlook around and started shorting and made most of it back. 
Basically without a proper system (just borrowing bits here and there) it was more like gambling than trading so about 3 weeks ago (yeah I know - I was stupid for quite a while before I realised) I sat down and planned out my system that I would use for at least the next 3 - 6 months and along the way refine it and hopefully start making consistently more successful trades than losers. 
So here is my situation and plan - I hope you gurus out there can comment and suggest what improvements I can make:

I have $5000 in a Prime Macquarie Account (Spare cash that I can afford to lose). A Prime account is pretty much a CFD account with so called extra perks (shareownership, dividends etc). Like short term loans.
I am willing to risk more than I should according to the books (2% total equity)
I am trading those shares which have 5 or 10% margins (which are mainly blue chip or top ASX 200 type companies).
I will limit myself to a max of 4 or 5 at one time - each at $5000 worth of stocks (for a total at any one time of around $20000 to $25000)

I am planning to trade short term (couple of days to a couple of weeks) at the moment because of the craziness that is happening in the stockmarket at the moment (It looks crazy to me at the moment compared to if I look at charts from the first half of the year!) I would like to trade for longer time periods (up to 3 -4 months maybe) when the market picks a direction but I think it might be safer to trade shorter time periods with smaller (but hopefully regular) profits. Any feedback on that idea???

OK onto the trading plan:

* If the market (All Ords) is in an uptrend then I'll look to go Long. If its going down I'll look for shorts.
* On weekends I'll visually scan though my available stocks on a daily Metastock chart with the GMMA in the top window (to try to determine the character of the trend) looking for stocks that in the last couple of weeks/months have been trending in the direction I want to trade.
* As I find likely suspects I put them in an Excel spreadsheet I made up as a watchlist which contains Target cost (the most extreme price I'm willing to pay), Stop loss price, Target profit Price and a few columns with varying profit % (5,10,15,20etc)
* After each trading day I come home from work and download the EOD data and check each of the stocks in my list looking for those that are making a retracement into the area between the 10 and 30 day MA.
* I look for those making retracements to turn back to the intended trend (Pivot points I think?) and determine that the trend will continue using candlesticks and confirming candles the next day. 
* I calculate a Stop Loss as approx 2 % above the high or 2 % below the low point. Then calculate the max price payable as 6 % above or below the stop. That way i 'should' only ever lose the 6% plus transaction fees (approx $300 + $20 per trade = $340)
* I filter down to the best trades by looking at the GMMA and past resistance and support to hopefully find the 4 or 5 trades that will go in the direction I am trading for.
* After I have entered my trades, here is where I come to a dilemma. Later if the market starts to settle in a direction (bullish or bearish) I plan to hold these trades for longer and get out when the trend is weakening or ending. But -
At the moment I am thinking it might be better to just take small profits near the price where the trend began its retracement in case the trend doesn't continue due to short term resistance/support at the point.
Therefore I am looking for retracements where I can snatch a quick %5 profit (minus transaction fees which nets to about $200 for a week or two involvement. With 4 to 5 trades at a time it should average to $800 - 1000 in the perfect world)
I have had a few where I was at the 5% then it turned around and instead of snatching $200 - 250 I ended up either breaking even or losing.
Ideally I would like to stay in for the entire run then when I see candlesticks reversing to start another retracement - get out to lock in profits - then possibly get back in when the candles indicate a continuation of the initial trend.
I am pretty sure this is swing trading, although I read varying definitions.
* Also as my capital increases to the next $1000 I plan to up each trade by $1000 (eg when I have $8000 I will be trading 4 or 5 stocks at $8000 each) which should compund my profits while not getting to carried away (if I fall below each $1000 I will reduce the next trades appropriately).

Thats the basics of the Plan anyway. I have looked at and tried all sorts of indicators and come full circle and decided that price (candlesticks) combined with a couple of simple indicators (GMMA and 10 & 30 day MA) will be what I use. 
Cheers to you if you have spent the time reading this thread (thats 5 -10 mins of your life you'll never get back!!!) and I look for to any helpful criticisms (and some nasty ones as long as they are funny). If you have any ideas to help a new guy out then please speak up. I plan to use this system for the next few months accepting that my profits will be small but am using this as a learning process. I tried paper trading  but wasn't "into" it enough and didn't apply it properly. By doing this (small profits/hopefully small losses) I will be giving my broker a nice pay packet (good for him/her) and learning to fine tune my trades by using real money as an incentive. 
Later I'll post my trades so you can laugh or be in awe.

So what do you think? Good, bad or retarded trading plan?
Help me to help you to help me!!!
(Whoa - I need to catch a breath after all that.....)


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## kingie_d (6 December 2007)

OK here's what I've done so far (Including brokerage of $20 per buy or sell)

19Nov07: Shorted BBG x 350 @ $14.20
28Nov07: Closed BBG x 350 @ $14.51
Final Loss: $148.50

19Nov07: Shorted CNP x 750 @ $6.65
26Nov07: Closed CNP x 750 @ $6.40
Final Profit: $147.50
(I got scared and moved the auto stop loss to above the previous days candle high - then the price jumped up stopped me out then continued down!)

19Nov07: Shorted PPX x 2000 @ $2.50
04Dec07: Closed PPX x 2000 @ $2.36
Final Profit: $240

21Nov07: Shorted WAN x 390 @ $12.90
03Dec07: Closed WAN x 390 @ $12.54
Final Profit: $100.40

29Nov07: Shorted MIG x 1700 @ 2.98
29Nov07: Closed MIG x 1700 @ 3.12 (auto stop loss while at work!)
Final Loss: $278

Running P/L: + $61

Currently holding:

Shorts: ABS, SUN
Long: COH

Will update as events unfold....


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## Nick Radge (7 December 2007)

kingie_d,
Congratulations on thinking out a trading plan. There are a few area's that need some comment, but I don't have time at present but will add over the coming days.

The first point is your understanding of the 2% rule. This rule dictates that you risk a small portion of your account on each trade. It does NOT dictate that you place your stop 2% away from entry. The reason is because each and every stock operates on different levels of volatility. Some stocks swing 5% in a day, other rarely move 1/2%. By using a fixed 2% stop from entry across all stocks will leave you within the markets 'noise' or dilute your gains when you get it right.

Money management is not part of the entry/exit mechanism. Its an overlay that is added AFTER the entry/exit mechanism has been determined. Therefore, you must decide where you will enter and where you will place the protective stop. This level is best determined by a technical level, say support or resistance or pivots etc. 

Once you determine the protective stop level, you THEN quantify how many shares to buy. Now you have mentioned leverage, so we need to use some common sense.

You have $5k of your OWN money. That's it! Risk 1% or 2% of that amount. Forget the leveraging altogether.

Here is how it works:-

Buy signal= $1.00
Protective stop = $0.95
Risk = $0.05
Capital = $5,000
Risk = 2%

Therefore,
.02 x $5,000 = $100

$100/.05 = 2000 shares

Cost of purchase = $2,000

You are applying the fixed fractional rule to your own capital. You are using the leverage to help fund the positions which can't be done without using leverage.

Now, you would naturally have numerous positions as per above. Let's say you have 8. Without leveraging you can't fund 8 positions (unless they're all penny stocks). With leveraging you can now fund all positions AND retain the risk management of your OWN capital. 


_This post may contain advice that has been prepared by Reef Capital Coaching ABN 24 092 309 978 (“RCC”) and is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice you should therefore consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision._


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## julius (7 December 2007)

KINGIE,

I think medium term swing trading is a decent place to start.

firstly though - are you using any form of trading software ?


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## kingie_d (7 December 2007)

Nick,
Cheers for the comments. Thats the best explanation of the 2% rule I've seen so far. It makes much more sense now and I'm gonna have to think about using it properly.
What I figured was that as I only have a small capital base to start with, I'll have to up my risk per trade to 5 or 6 % due to transaction fees per completed trade being nearly 1 % of my total cash. 

Therefore, as I plan to risk say 6% I would work out where my stop will be, which on the attachment of WAN is 2 % above the high point ($13.26) of the rally as, I think, that high should provide resistance (lower lows and lower highs in a downtrend) and I will allow the 2 % above it for volatility. 
Initial stop loss @ $13.52.
Then I want to risk 6 % so I calculate 6% below the stop loss to get the lowest price I will pay to get into the trade.
Max Entry $: 12.71
Hopefully I will get in at a better price than that and therefor have less on the line to lose but if thats my entry (based on opening price for the next day (Day B)) and it all goes horribly wrong then I'll only lose the 6 %.
That is how I plan to set stops and entry prices but using the proper 2 % rule might be a better money management plan (even if I bump the % to 5 or 6 and then apply the rule as you described it)

I am worried about the reliabilty of trends at the present time due to the market doing whatever crazy things the US market is doing and I think short term trades might be safer (balancing out the lower returns).
Thats why, if my max entry $ is 12.71 and the next support price is @11.94 (C on the attachment) then I should be able to "safely" lock in 6.4 % but I'd settle for 5%.
I don't know if this is smart to settle for small profits by being "defensive" in a volatile market or if it is stupid to risk 6% for a return of 5 or 6%


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## kingie_d (7 December 2007)

Julius,
Im using Metastock now which is much better than using free internet charts from SMH (which I did at first before I coughed up for MS). At least now I can play with indicators and trend lines properly.

What do you class as medium term? Up to a couple of weeks? 

If I was to stay in trades past the 5% (or whatever the point C of WAN is) then what do you guys recommend as a trailing stop? I've been reading a few Daryl Guppy books lately and the 3 Countback Line looks promising.


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## Temjin (7 December 2007)

You still do not have a clear concept of position sizings and the difference between money management and actual stops. 

I would suggest you go and read the book, "Trade your way to Financial Freedom", by Van Tharp, before proceed further with actual trading.

The general fixed percentage position sizing rule is not to risk more than 1% of your account equity per trade. How far you place your stop as a percentage from the "stock" price is a completely different matter. Position sizing is "HOW MUCH TO BUY", and *NOT *"HOW FAR SHOULD I SET MY STOP". 

In theory, I could buy a penny stock at a price of $1.00, set a stop where i would exit the trade if the stock drop by 25%. Thus, I would risk 0.25 cents per stock.

If I had an account size of $10,000, and I would like to risk no more than 1% of that equity per trade, I would buy $100 / $0.25 = 400 of that stock at a total price of $400.00. You will see that if your commission is extremely high, like $29.95 per trade, it would limit your ability to practice your position size strategies. 

In practice, an account size of $5,000 with an average trading commission of $30.00 is impossible to "trade" with any reasonable position size strategies.

What can you do? 

1.) Try a different broker like interactiver brokers for USD $1 commission on US shares, or AUD $6 for local shares. 
2.) Increase your capital before trading.
3.) Trade leveraged vehicles only, such as forex using mini-lots as starters. (not recommended for you at all as you have not grasped the essential of position sizing) 
4.) Don't trade at all, just invest.  

Hope this helps.


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## >Apocalypto< (7 December 2007)

Temjin said:


> You still do not have a clear concept of position sizings and the difference between money management and actual stops.
> 
> I would suggest you go and read the book, "Trade your way to Financial Freedom", by Van Tharp, before proceed further with actual trading.
> 
> ...





Temjin,

you trading your own money in the market yet??


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## nizar (7 December 2007)

Temjin said:


> You still do not have a clear concept of position sizings and the difference between money management and actual stops.
> 
> I would suggest you go and read the book, "Trade your way to Financial Freedom", by Van Tharp, before proceed further with actual trading.
> 
> ...




Great post.

I was going to post my views but I realise no need when I saw what you wrote.


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## Nick Radge (8 December 2007)

> I am willing to risk more than I should according to the books (2% total equity)



Now there is a reason books and people like me tell you to trade at 2%. Similar to the reason there are speed limited through school area's. I appreciate the dilemma you and so many other new traders face - there is so much crap out there you don't know if you're Arthur or Martha. But, out of the fluff, there is this 2% rule that should be adhered to. The only thing you can control is the amount of money you're willing to lose. You cannot control any other aspect of the trading equation. The 2% rule (or fixed fractional position sizing) will do that for you.



> I have $5000 in a Prime Macquarie Account



As has been pointed out, this is not enough capital to take a good go at being successful at trading. The ratio of comm's to possible returns is simply not a plausible business model. Trading US stocks at 1c per share would obviously help, but you just can't get those kinds of rates in Australia (yet). This dilemma will also be exacerbated as you intend to trade shorter term. Shorter term = more comm's and less possible gains to outweigh. You have also mentioned volatility as a factor. The way you can overcome both of these is to trade longer term trend following. These types of things work in your favour; less comm's, overnight or day to day volatility don't impact, larger prices swings are caught, increased expectancy, lower stress, slippage is almost a non-event, you will receive dividends etc etc. On the flip side you will be paying interest on the carry. However, if you size the positions (as per my first post) correctly you will find that the interest charges will be greatly reduced compared to your original 'equal dollar' allocation.  


_This post may contain advice that has been prepared by Reef Capital Coaching ABN 24 092 309 978 (“RCC”) and is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice you should therefore consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision._


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## Temjin (8 December 2007)

Trade_It said:


> Temjin,
> 
> you trading your own money in the market yet??




Yes if you meant do I have money in the market, but it's a family portfolio and limited trading involved. (medium term trading)

No if you meant if I am trading my own personal system (short term) which is still under development. 



> I am willing to risk more than I should according to the books (2% total equity)




In addition to Nick's comment, you may "FEEL" that you can trade 2% of your total equity now because 2% of $5000 is only $40, and psychologically, most people can handle such a lost. However, you need to detach yourself from that value and exam the risk from a whole portfolio perspective.

Anyone who develop mechanical systems here and backtest them with drawdown values will be able to tell you anything more than 2% is extremely risky and lead to a high chance of risk of ruin and extremely high drawdown. 

In my opinion, you are over-estimating your probability of getting winning trades and under-estimating your chances of getting a series of losing trades. (I think this one is the outcome bias right? need to check...)

Anyway, a lost of 10+ trades in a row is not uncommon for mechanical/discretionary traders. (emphasised in lots of books) But if you risk more than 5% per trade, you are looking at 50%+ drawdown by simple multiplication.


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## kingie_d (9 December 2007)

Cheers to everyone for the advice. 
I never realised that the money management / position sizing was such an important part of a trading plan (because its usually covered last in books and I figured it was more important to people with a large amount of cash). It obviously is very important as this is the first and main issue that you guys have brought up. My focus was more on possible profits rather than risk per trade. (In retrospect that is more of a "get rich quick" mentality - which is not the best thinking for a new trader)
I will adjust my trading plan to take into account the correct use of the 2 % rule, which also answers my other dilema by default. If I'm going to use the 2 % rule then my total $ per trade will probably be less than the $5000 which I originally intended, so I won't be able to snatch quick 5 percenters over short terms. I will have to change my time periods to medium term instead of jumping in too deep with fast and furious short term trades.
Should I still use the swing trading techniques to time my entries into trends?
What are your opinions on the GMMA and ADX for determining character of trends?


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## tcoates (9 December 2007)

kingie_d said:


> What are your opinions on the GMMA and ADX for determining character of trends?




There is nothing wrong with those indicators... it is the knowing or application of the indicators which you use that makes the difference. 

If the GMMA indicates the difference between the short-term and long-time players and you use it in that way, then OK. 

But, using an indicator simply for the sake of an indicator will not help you. Know why you are using an indicator and using it to the best on your ability (hopefully) will keep you right side.

Tim

PS. Check out http://tradermike.net/2004/05/another_look_at_multiple_moving_averages/ for some stuff on GMMA.


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## kingie_d (10 December 2007)

tccoaates, 
I checked out that site - theres some good stuff there - not just the GMMA but also other stuff. Do you use the GMMA in your trading?

Temjin,
I went out and got that book today too. Van Tharp is one of the authors I've read alot about, but never one of his books. 

I've been reading up alot on position sizing - definiately going to be a MUST in my future trading....


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## Temjin (10 December 2007)

Temjin said:


> In addition to Nick's comment, you may "FEEL" that you can trade 2% of your total equity now because *2% of $5000 is only $40*, and psychologically, most people can handle such a lost.




heheh I just realise I made such a stupid mistake here.  My apologies. haha  (where the hell did I pull that $40 number anyway????!! hah)



			
				kingie_d said:
			
		

> Temjin,
> I went out and got that book today too. Van Tharp is one of the authors I've read alot about, but never one of his books.
> 
> I've been reading up alot on position sizing - definiately going to be a MUST in my future trading....




That's great! I suggest you finish reading the book first before going back into trading. Dr Van Tharp's material has gave me a lot of inspirations and a core framework to start from. 

Feel free to ask questions here as you read the book. There are quite a lot of knowledgeable people here with far more trading experience than I do.


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## tcoates (10 December 2007)

kingie_d said:


> I checked out that site - theres some good stuff there - not just the GMMA but also other stuff. Do you use the GMMA in your trading?




ACtually, I don't use the GMMA. I have a few of Guppy's book which is why I know a bit about that indicator. The problem that I had with GMMA was using it effectively. But here you have to go back to the mid 90's when scans (in my view) were a but cumbersome and I was a bit green also.

But if you like the GMMA stick with it.

Tim


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## Zentrader (10 December 2007)

Hey guys,
glad you are having this very important discussion. But i think there are many things to consider when developing a trading system that Kingie is bringing to light, as are the more experienced. 
Firstly, i agree with those that comment that having enough 'trading captial' is important to realize. i say. realize, because when we start out we often really want to believe that being under-capitalised is something " I will overcome with sheer talent!". It is not until years have passed trying different un substantiated theories and paying some of our salary back into out dwindiling  trading account balances , kidding ourselves by saying things like," that was a hard lesson, i will do this now......, I will make it back fast etc".....and pretending that only NOW are we really starting to TRADE, and forgetting how much we have really lost by massaging the trading results in a O Trader software etc etc.....and lying to our friends and family how much we are making 9 actually losing...). "so close to giving up our day job right??.........Believe me i am not being cynical but are EGo's are one of the hardest things to conquer in this game.....we just can't accept the hard work it actually takes to be rigorous and painstaking in the research necessary....to be really successful....
I am now at  a fairly new stage....i have given up on pure technical analysis which i have found to be just a derivation of price data anyway.....and I am looking at hard evidence thru backtesting in a systematic way via Tradesim...
I admit after much time floundering in some rather uncontrolled manner and being stressed out by some discretionary rubbish methods.....that a very business like and scientific approach is best for my personality...and that's really the key...to find out what gives you confidence to trade whatever method you choose, and following your rules.......personally, i am aiming to save about 50 K for my own style of trading......most businesses start with much more so why should trading be any different? My current system back-tests over ten years with an rate of return of 50% per annum on a random walk top 200 share basis. it is also robust, in that it works for many other stock exchanges. The system is derived purely from price, not derived indicators.....it has minor draw-downs less than 5% of total capital, it follows 1.5% risk per trade and has an average win/loss ratio of 3:1.....it is a trend following system i adopted from Turtles trading methods.....
 It works from daily charts, with an ATR based stop system., accuracy 65% wins...........there are many other aspects i understand about my system and it is purely mechanical.....even so......I have yet to forward test it for at least 6 months before committing serious capital.....
The point is, i realise there are not many real short-cuts in developing your own trading style and sytem.......I would say only risk minor capital on untried systems.....we all want to trade today, but i think it takes courage to admit our failings and learn enough to move onto something that will actually deliver that we wish for.......


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## nizar (11 December 2007)

Zentrader said:


> I am now at  a fairly new stage....i have given up on pure technical analysis which i have found to be just a derivation of price data anyway.....and I am looking at hard *evidence thru backtesting in a systematic way* via Tradesim...
> I admit after much time floundering in some rather uncontrolled manner and being stressed out by some discretionary rubbish methods.....that a very business like and scientific approach is best for my personality...and that's really the key...to find out *what gives you confidence to trade whatever method you choose*, and following your rules.......




Good stuff bro, I agree wholly.
In fact, it could have easily been me who said that what is quoted above.

Late in my discretionary days I just stopped trading. I just couldn't do it anymore because I realised I had no clue what i was doing (even though I was making money, Hey its a bullmarket). How and why should I stick to some set of rules without even knowing if the system I used was even a profitable one?


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## professor_frink (11 December 2007)

Hi kingie_d,

PDF on the GMMA attached. You can find some more info on the guppytraders site- have a look at the following link

http://www.guppytraders.com/gup329.shtml

There are some great links at the bottom of that page to some more information


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## kingie_d (21 January 2008)

Hi guys,
I thought I would get back onto this thread for an update. I have taken alot of your opinions (not allowed to say advice) seriously. I finished the book "Trade your way to Financial Freedom", by Van Tharp a while ago and I think it has to be one of the best - if not THE best that I've read so far. It has info on system creation for yourself rather than most of the other books which tell you THEIR system and show charts which display how great THEIR system of entries is. I now understand that entries is NOT the be all and end all of good trading.
I have altered my system which has now proved to be more successful in both returns and confidence. I still use the pivot points as stops but now use proper position sizing - although I use 3% of my capital (which will probably cop a barrage of "too much!"). The use of position sizing has put me into some trades where the price move was quite good but my return was only say 2R or 3R. Those ones I thought to myself "Oh I could have made so much more if I have a larger amount of shares" - BUT - kicking yourself over could ofs and would ofs is a bad mistake so I don't do it any more. Correct position sizing has also put me into trades where I lost - but kept my loss to my 3% target which has also made me see the real value of position sizing - risk management to be able to stay in the game and ride out losing streaks.
While my entries are still basically the same and I have incorporated position sizing as my final filter, I am still tossing up over exits. 
I am using the pivot point as an initial stop then using a 2 x ATR as a trailing stop. But, I have included ATR bands to try to determine if a stock is running away to quickly. If it closes a couple of days outside the bands then I will tighten my stop to 1 ATR to protect profits with the intention that if I get stopped out then I will look for another entry into the stock when it continues the trend. This has effectively made my system fairly short term and as I have a small capital base the transaction fees are quite a significant factor. I have considered changing to a longer time frame but one thing I read in Van Tharp is that you need a system that suits YOU so I wont change my timeframe. One of the suggestions you guys made is to increase capital to make transaction costs less significant. This makes sense to me. Later in the year I will be deployed back to the Middle East so I'll be coming back with a nice amount in my bank account. Therefor if I continue with my small capital base now - which should give me a years worth of trading experiences, then by the time i can increase my capital then I should at least not be a total newb. 
I think my system and the way I think about trading has changed (hopefully for the better) and will continue to read and learn and adjust as i see neccessary. Cheers for the helpful feedback - look forward to more


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## Zentrader (21 January 2008)

Hi,
As I said in an earlier post, I am forward testing my mechanical system since early January with an account size 1/10th of that I intend. The system cuts out when there is anything greater than a 10% loss in account. unfortunately, that happened already, have been stopped out of first 7 trades, which is too much for my system....but given that the XJO has also lost 10% in the same period and it looks like things have gone a bit panicky and bearish....I may have entered a period when my system would show a draw down given it is a turtle style trend following system. Not that surprising when looking at the Big picture. This has certainly been informative for me. One good thing i am happy with is that with my CFD provider, all of my stops were honoured, and I kept tight money management. So it showed I can faithfully follow my system despite the mounting losses. Now I intend to continue paper trading the system until I get a trigger to enter with minor capital again. that is recover above 10% underwater equity curve. My system only risks 1.5% so happy with that kind of risk. I only wished I'd developed a shorting strategy too he he. But there you have it, we have to trade our system...and ride through its negative points.


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## nizar (21 January 2008)

Zentrader said:


> My system only risks 1.5% so happy with that kind of risk.




Only?
I use 1.5% fixed percent risk and I thought it was aggressive!


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## kingie_d (22 January 2008)

Zentrader,
That turtles system you are testing, is that where you get into stocks when they make a new high of so many days? I think I read somewhere about it where they were using 100 days, which was all good at their time, but some other people more recently did it with 50 days or something like that, which in more modern times turned out to be better. If this is the system I am thinking of (basically a channel breakout I think) then can't you (and didn't they) also use new lows for shorting?
I think we are in the same boat when it comes to using a small amount of capital for testing for a certain amount of time before putting more capital into trading that system. I think that paper trading might be good for some people but they won't get the psychological experience that using real money gives. For me, I could paper trade for years and come out full of beans thinking that my system was great, but until I had learnt to contol my emotions while watching my account diminish thru a losing streak, then I wouldn't have learnt what I'm learning now.


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## kingie_d (22 January 2008)

I've just done some calculations of my expectancy so far. I've only completed 23 trades with this system so it is probably a bit early to do this but I did it out of curiosity. This includes a couple 1.5R and a nearly 2R losses.
Remember that my starting capital was only $5000 so transaction costs are significant (and this proves it)(23 trades = 23 x $40 = $920 OMG nearly 20% of my starting account!)

Expectancy: 1.057

Expectancy without transaction fees: 1.56

I think I have just proven the point you guys were making about the size of a trading account! Wow, I didn't think it was _that _significant!


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## Wysiwyg (22 January 2008)

nizar said:


> Good stuff bro, I agree wholly.
> In fact, it could have easily been me who said that what is quoted above.
> 
> Late in my discretionary days I just stopped trading. I just couldn't do it anymore because I realised I had no clue what i was doing (even though I was making money, Hey its a bullmarket). How and why should I stick to some set of rules without even knowing if the system I used was even a profitable one?




Okay, i was thinking about how a comparison would be as you  develop a `system` to trade stocks.I plan to remain discretionary and adopt a keep it simple approach.I`ll continue with basic fundamentals/charts/patterns decision making.The outcome in 5 years would be an interesting comparison.Who knows, either may get lucky. Time will tell.


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## kingie_d (22 January 2008)

I just realised i did the wrong calculations for expectancy. What i did was:

(#wins * Avg Win)/(#losses * Avg Loss)

Just went and checked it and the correct calculation is:

Expectancy = (Probability of Win * Average Win) - (Probability of Loss * Average Loss) according to: http://tradermike.net/2004/05/trading_101_expectancy/

In Van Tharps books it is:

(Total wins - total losses - transaction costs) / # of trades

Both come to the same figures:

Expectancy: 5.96
Expectancy without transaction fees: 46.621

These numbers seem a bit crazy. They will probably look more "normal" after another 70 or 80 trades....


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## AndrewM123 (22 January 2008)

Good Thread and some great inputs.  
When I first started with a small a/c ($5,000) a few years ago, I also found the commissions a drain, along with poor decisions !! I switched to forex and only traded with currencies with low spreads e.g AUDUSD  2 pips.and no commissions.  I also follow the 2% "rule" and now ALWAYS set a stop and will trail it to lock in a profit. Initially I Hated the thought of 'losing' and would stay in a trade far too long as if it were some form of personal attack.  However after getting some good Money Management and systems in place things improved dramatically. You seem to be well on the way..

Good fortunes in your trading


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## MS+Tradesim (22 January 2008)

kingie_d said:


> These numbers seem a bit crazy. They will probably look more "normal" after another 70 or 80 trades....




It's like flipping a coin. Winning or losing streaks early in the piece skew the picture. The more trades available, it will smooth out to long-term probability. Over time the expectancy will smooth out with the winning/losing trades %.

Example:


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## hems13 (19 May 2008)

Thanks for sharing. Most of the traders and even educators and reluctant to give out any technique.
Thanks


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## kingie_d (6 August 2008)

Hello to everyone,
Just an update and a few new questions.
Reading back on my original posts in this thread I laugh at some of my early perceptions about trading. One of my big problems ever the last year of learning was inconsistency and impatience. I have since fine tuned my method but it still has a long way to go before I will use a larger account. Firstly, to obey the 2% position sizing rule, I was getting slaughtered in commisions by using such a small account - a point which I believe some of you guys stated when I first started. I am slightly down now in my trading account (compared to when I started with $5000) but I am fairly happy with the result (and knowledge/experience I've gained so far) considering that since I started I have paid over $4000 in commisions!
Someone mentioned Forex and I started reading all I could find about the Forex market. I got onto Oanda, on which I could use a demo account and paper trade new ideas. I can also trade in units which means I can position size for my small account without the fees (in the form of pip value of spread) being so high, relative to my account size. 
I have now been trading using 1% postion sizing instead of 2% as I consider I am still learning and want to trade defensivley while I gain more experience. 
I originally toyed with the idea of trading longer term in order to offset the (relatively) high commisions I was paying before, but as most of the gurus say, you have to find a style that suits you, not what suits others. And my preference/style is shorter term. 
I have read about and studied nearly every indicator around thinking that I could find the "Holy Grail" but now I have overcome that part of my evolution as a trader. I have dropped all indicators and come to understand that they are just derivatives of price action anyway and are all lagging. 
I now only have the long term/investor part of the Guppy MMAs (35 to 60) on my charts and only use them as a rough picture of what the market is doing. I am still looking for retracements in the longer term trends (the GMMA), and use them as entries for short term swings, but now I trade using price action "now" rather than indicator entries/exits.

One part of my trading that I would like to improve on possibly is the money management part of the trade as in scaling in/out of trades.
What are your general opinions on scaling in or out of trades. Is scaling into a winning trade better than scaling out and taking profits.

For example: (not real figures, just a generalisation)
If your trading system produced:
25% 1R losers,
25% losers less than 1R,
25% winners less than 1R,
25% winners greater than 1R,

and used 2% for total money (1R) risked.

Would it be better to either:
* Use the whole 2% as one trade, enter and exit with the whole lot,
* Use a smaller amount on initial entry (say 1%) then scale into a winning position with the other 1% if the trade goes your way, exiting with both trades at your systems exit point, (thereby reducing your overall R lost in a trade that goes against you),
* Use the whole 2% on entry and scale out (take profit) on 1% at a specified amount (1R, 2R, 3R or whatever) and let the remaining 1% run for the big winners.

This is just a quick generalisation, but is another part of money management which I am looking into as a way to improve Expectancy (Wins and winning amount compared to losses and loss amounts). 

What are you opinions?...


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## kingie_d (6 August 2008)

The idea with scaling in or out of trades would be to improve a systems expectancy.
For instance, the scaling out (as in the above post) would mean capturing half (1% or the 0.5R component) of your trade at say 2R (or whatever your target is) before it pulls back, exiting the other half at "less than 1R". I know this is just a generalisation, but this would theoretically improve your expectancy right??? Because your winning amounts should go up. (Although, if prices keep going up you would miss out on half of your potential profits by exiting early which could have the opposite result)
With the scaling out, you would only lose 0.5R in a "bad" trade which, again should make your expectancy improve as the amount lost in your losers would reduce.
I hope you guys/gals understand the question I'm asking, I'm not talking specifics, just in general. But then maybe with this sort of question you need specifics?!? I might have to get the algebra out and think back to high school maths...


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## traderc (28 February 2009)

I think a lot of people place too much importance on position sizing realistically. 

Fair enough it IS important and I'm sure I'll get lots of head shakes to say I'm giving the wrong message from this but most new traders don't invest enough capital to effectively position size or use systems such as scaling into and out of positions even though they SHOULD be aware at least of the concept and how it works. 

With brokerage fees often working out to about the same as a 2% position size unless of course you're trading penny stocks, until you build up a few winning trades, position sizing is irrelevant and I think it's far more important to teach about HOW TO TRADE rather than HOW MUCH MONEY TO TRADE.

Realistically I think more impetus should be placed on learning about what indicators do, how to apply them and showing someone that is new to trading the characteristics of the markets and stocks, explaining your reasoning behind why you believe which stocks are the most likely candidates to trade successfully (i.e. what characteristics they display to potentially earn the trader money) and why particular indicators are good to use.

Baffling a newcomer with ideas that can't be used immediately is a waste of time.

I know most of you will probably have heard of Aussie Rob and despite the fact that he wants to simplify everything to one indicator, a lot of information can be gleaned from this mentality. K.I.S.S. principal I think is the key and by looking at some of the formulas people create, the simpler the better, especially for new traders.

I think trading at the moment is very similar to how computer systems used to be (I'm a computer system administrator by trade) in that "the geeks" used to hide behind the veil of being "all-knowing" and charge ridiculous prices for their services, even if they didn't know what the hell they were really talking about.

This is the way I see a lot of traders as well; they try to impart knowledge of systems they really know nothing about which can really cause the "newbie trader" to get into strife pretty quickly.

I think the most important factors in trading are:


Not listening to hot tips from anyone
If you get a tip, analyse it via your trading system
Trade shares that are highly liquid
Trade cheap shares (if you have a small amount of capital to invest)
Ensure the share or instrument you're trading is trading consistently (we don't want too many flat-spots to affect our indicators)
Learn how/where to place a stop loss
Find shares that are volatile and follow a nice up/down consistent pattern
Diversify your portfolio - e.g. $10,000 = 10 x $1000 or 20 x $500 parcels

Trading is a gamble; yes it's an educated one and you can "guess" what is going to happen from previous historical data by saying, I've seen this happen 110 times before so I can say next time "I think it will happen" but the reality is, it might not.

Whilst many people these days in the stock trading markets seem to want to hide behind their knowledge or baffle newcomers to the stock markets with BS or to rephrase that, too much information that a new stock trader is not yet ready to understand, it's really just overwhelming for the individual and doesn't help any.

I think the list I've created will help any new trader in sifting the wheat from the chaffe and help them understand the underlying fundamentals to technical trading or at least provide an idea of the DOs and DO NOTs to at least create a foundation of a trading mentality.

Maybe when someone comes up with an idea and says "I'm a beginning stock trader" it should be said that instead of treating them like a child, a simple explanation of methodology or an idea of the concepts is far more preferable than chewing down to the bone on one specific area that really, for a beginning trader, until they get some money in their kitty, is irrelevant.

I'm sure we've all been there and felt like an idiot at some point when learning something new and especially with stock trading, there is so much information to take in on different aspects of the markets that we know can be a steep, difficult and costly learning curve.


Regards,


Christian


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## tech/a (28 February 2009)

Indicators are purely a derivative of price.

A combination of either
Open
Close
High
Low
Range
Volume
Open interest.

With all of the above available why on earth would you trade indicator based?



> Trading is a gamble; yes it's an educated one and you can "guess" what is going to happen from previous historical data by saying, I've seen this happen 110 times before so I can say next time "I think it will happen" but the reality is, it might not.




Its only a gamble if you dont have an answer to how do you manage the trade if it goes your way and how do you manage the trade when it doesnt.



> Realistically I think more impetus should be placed on learning about what indicators do, how to apply them and showing someone that is new to trading the characteristics of the markets and stocks, explaining your reasoning behind why you believe which stocks are the most likely candidates to trade successfully (i.e. what characteristics they display to potentially earn the trader money) and why particular indicators are good to use.




If you really believe that this is where the edge is found then you will choose this path. Once you find its not here then you'll choose the path of expectancy.

Have a long look at those traders you KNOW are profitable and tell me what they have in common. I'll bet its NOT a secret indicator or combination of indicators.




> I think the list I've created will help any new trader in sifting the wheat from the chaffe and help them understand the underlying fundamentals to technical trading or at least provide an idea of the DOs and DO NOTs to at least create a foundation of a trading mentality.




All good.
But unless you know that the method of trading your applying to the above is profitable you'll risk ruin just as easily as someone who has never seen your list. You wont know when its failing,your likely to cease trading it when it is still well within its parameters (if proven profitable). Many a profitable trading method has been discarded whilst in drawdown---without knowledge of what an acceptable drawdown for it actually is.

Here are the test results for a system which doesnt use an indicator other than an M/A the rest is price only. These are the Montecarlo results for 20,000 portfolio simulations. The edge is clear but its NOT in the Buy or sell INDICATOR/S

*The EDGE is in the very LAST table.*


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## johenmo (28 February 2009)

tech/a said:


> Indicators are purely a derivative of price.
> 
> A combination of either
> Open
> ...




Never thought of it this way before but they are, aren't they?



tech/a said:


> With all of the above available why on earth would you trade indicator based?




Tech - is this because it's "conventional thinking"?  You responded to my first attempt to build a system 6 months ago and told me it was too complicated.  It really was.  What I'm playing with at the moment uses indicators and is OK - I think my filters (stock selection) needs more work before I can work on entry/exit stuff.

But I'm failing to grasp what one would use if one didn't indicators.  I'm guessing the reply is something like "price action".  How do you define/explain price action?


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## Chorlton (28 February 2009)

johenmo said:


> But I'm failing to grasp what one would use if one didn't indicators.  I'm guessing the reply is something like "price action".  How do you define/explain price action?




I would suggest "Price Action" is simply how price moves in relation to past price. In addition the use of Volume is used to confirm the likelihood of a particular price move. The analysis of combining Price & Volume is known to many as VSA. I believe this is what Tech/A is referring to.

Although all indicators are derived from price (O,H,L,C) and/or Volume, I do believe there is some merit in using them IF (and only IF) you understand how the indicator is derived and what the indicator is actually showing you on the chart.

If you want to achieve a particular output and an indicator can do that easily then I see no harm in using it. For example, although a trend can be defined by price action (higher lows, higher highs, etc, etc) it is sometimes a lot easier to use a Moving Average. Nothing wrong with that.

However, in contrast if you have simply added a few random indicators to your charts (RSI, Stochs, etc, etc) and then decided on a way to find reliable trading signals from using them, then this is probably the wrong approach....


Just my 2cents,

Chorlton


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## wabbit (28 February 2009)

kingie_d said:


> I just realised i did the wrong calculations for expectancy. What i did was:
> 
> (#wins * Avg Win)/(#losses * Avg Loss)
> 
> ...




I have been writing some applications which model expectancy and have been researching some of the different ways people have computed expectancy in the past; none of them is perfect IMHO but it does highlight the need the for the expectancy result to have a common unit of measurement, i.e. expected return for each unit of currency invested.

e.g.

Lets pretend you invest $25,000 in each trade
P(Win) = 0.417
P(Loss) = 0.583
Avg(Win) = $745
Avg(Loss) = $235
(I got these numbers from one of Nick's seminar notes)

If you just use the formula as it is written in many books with little or no further explanation:
E = P(Win)*Avg(Win) - P(Loss)*Avg(Loss)

E = (0.417*745) - (0.583*235)
E = 310.66 - 137.00
E = 173.66

What does this value represent?  You will often see numbers like this bandied around by system-sellers when they "demonstrate" their system expectancy.

If we use the values at Trader Mike's site:
As an example let’s say that a trader has a system that produces winning trades 30% of the time. That trader’s average winning trade nets 10% while losing trades lose 3%. So if he were trading $10,000 positions his expectancy would be:
P(Win) = 0.3
P(Loss) = 0.7
Avg(Win) = $1000
Avg(Loss) = $300

E = (0.3 * $1,000) - (0.7 * $300)
E = 90

So is this system about only half as good as Nick's system?

These "extreme" values of E are showing not the expectancy for each $1 invested, but for each $25,000 and $10,000 invested!  To return a more meaningful, important and usable value for E, divide the result by the investment:

For Nick's system
E = 173.66 / 25000
E = 0.00695

i.e. The expected return by this system on $1 invested is 6.95cents.

For Mike's system:
E = 90 / 10,000
E = 0.009

i.e. The expected return by this system on $1 invested is 9.00cents.

The alternative method to arrive at the same value for E is to divide the Avg(win) and Avg(Loss) values by the investment value before entering them into the equation.  I believe a better notation for the expectancy formula is:

E($) = P(Win)*Avg(Win per $ invested) - P(Loss)*Avg(Loss per $ invested)

Mike would have been better to leave his formula using the percentage returns.

E = (0.3 * 0.10) - (0.7 * 0.03)
E = 0.03 - 0.021
E = 0.009

If I had a system with a natural E of $5.96, I'd be ecstatic, regardless of how much commission I was paying!



Hope this helps.


wabbit 


P.S. Another discussion could be had about changing the expectancy formula to:
E($) = P(Win)*Avg(Win per $ RISKED) - P(Loss)*Avg(Loss per $ RISKED)
where the amount RISKED is brought into play, but this requires a loooong lunch with many beers and wines!


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## tech/a (1 March 2009)

Wabbit
Some interesting and valid points.
I'll have to look into how Tradesim calculates Expectancy and ask David his thoughts. Perhaps its a matter of having various expectancy formulas at our disposal.

[/quote]Tech - is this because it's "conventional thinking"? You responded to my first attempt to build a system 6 months ago and told me it was too complicated. It really was. What I'm playing with at the moment uses indicators and is OK - I think my filters (stock selection) needs more work before I can work on entry/exit stuff.[/quote]

Firstly you can have a profitable indicator based system,Ive seen them.
But I dont use fully indicator based trading methods.
If you test your system against Random entry often you'll find that the results for random entry give a higher return than your own entry criteria.

So clearly the success of the system DOESNT lie in the entry conditions.
If you disect most of the conventional indicators you'll find that they are simply a graphical representation of a combination of the components mentioned above over a period of time. The problem is is that they wont conform to the same behavior often enough at POINTS of time after their period of calculated time.

As an example.
A close greater than a 14 day ema.
There are closes above 14 day ema's all he time but not enough of them continue above that 14 day ema to be reliable as a sure fire indicator of what price will do.

The other important question in system design is HOW LONG do you want an instrument to be in a positive position to make a profit.
A day
A week
A month
A year.

How important are your entry conditions going to be in a year. Id say of no value. So all your really doing is hopping on MOMENTUM ---positive or negative. In todays market expecting momentum to last for a year in a positive direction is un realistic.



> But I'm failing to grasp what one would use if one didn't indicators. I'm guessing the reply is something like "price action". How do you define/explain price action?




VSA type setups can play a part. But there are countless others.
Pivot point reversals,Highest value for X bars,Bars since X occured,Gaps.
Fillig of gaps,Retracement % coupled with price and volume action,All the Candlestick setups,Hooks,Inside days. The list really does go on.

I found myself in a situation just reciently.
Since the boom finished I have been trading in a discretionary manner.
Results have been good and not so good. Hardly worth the time devoted to trading. After a chat to Nick and without Nick saying as much,it is obvious that a return to basics.(system developement and a proven trading methodology is what I personally need for these times) My time and inclination isnt suited to discretionary trading. Good money can be made trading in a discretionary manner but my view is that you need screen time---something I dont have and something I dont wish to make time for.


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## Trembling Hand (1 March 2009)

tech/a said:


> I found myself in a situation just reciently.
> Since the boom finished I have been trading in a discretionary manner.
> Results have been good and not so good. Hardly worth the time devoted to trading. After a chat to Nick and without Nick saying as much,it is obvious that a return to basics.(system developement and a proven trading methodology is what I personally need for these times) My time and inclination isnt suited to discretionary trading. Good money can be made trading in a discretionary manner but my view is that you need screen time---something I dont have and something I dont wish to make time for.




So can I as what you are trading? or how?


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## tech/a (1 March 2009)

Trading in frequently.
SPI
and the Odd stock.
Problem is for instance.
I'll have a position on, expecting only a day trade.
I'll be called out to site having to leave the screen for 2-3 hrs.
I close the trade.
Or I'll be late in due to appointments and I will have missed a trade or 2.
Or be in a meeting and both situations above occur.

If my situation were different then I would have the screen time required to trade this way it is profitable but not "Profitable enough".
As my trading isn't and is unlikely to ever make the returns my Company is my focus is primarily business in time allocation.


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## motorway (1 March 2009)

johenmo said:


> Never thought of it this way before but they are, aren't they?
> 
> 
> 
> ...






johenmo said:


> Never thought of it this way before but they are, aren't they?
> 
> 
> 
> ...




A pure expression of *realprice action *
is a Point and Figure chart

A chart that by it's nature is a trading system 
As mechanical or discretionary as you want it to be

You can not but be systematic with a Point and Figure chart

motorway

eg


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## motorway (1 March 2009)

and again

this time simple sells ( they are only an example they are not necessarily optimal , but they are certainly simple and mechanical )

( hint the real trend is more important than any signal )

motorway


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## tech/a (1 March 2009)

Motorway 
Being on the right side of any primary trend is very important but just trading in the predominant direction of the market doesn't guarantee that you'll trade profitably.

There have been plenty who failed to turn a profit in the latest bull market and I doubt many have taken full advantage of this bear market.


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## nunthewiser (1 March 2009)

tech/a said:


> Trading in frequently.
> SPI
> and the Odd stock.
> Problem is for instance.
> ...




simple really ..... um dont trade 

the market will still be here at another time when you can devote the time for scalps OR IF you can time the longer term swings ( which there are plenty off ) 

suggest you change your trade stategies if you want to change your trade timeframes

only my opinion of course . take from it what you will 

i havent done any trading courses , so what would i know 

p.s when i am away from screen for reasons unplanned for i often use conditional orders OR SMS alerts for various vols /price/news occasions . right next to my brokerage on speed dial . anyways not here too tell you how to suck eggs


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## nunthewiser (1 March 2009)

pps........ seeing as you a "TA " trader ./ why not trade something else outside of business hours ? ie forex / futures / gold/ oil etc etc etc etc?


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## Trembling Hand (1 March 2009)

nunthewiser said:


> pps........ seeing as you a "TA " trader ./ why not trade something else outside of business hours ? ie forex / futures / gold/ oil etc etc etc etc?




LOL. the question should never be how can I work MORE to earn more but How can I Earn more at what I do now.


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## nunthewiser (1 March 2009)

Trembling Hand said:


> LOL. the question should never be how can I work MORE to earn more but How can I Earn more at what I do now.




nah .he obviosly wants to trade BUT the markets he trading NOT fitting in with his commitments . all im saying is why not trade OTHER markets which do

OR as to my other post . change strategies


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## motorway (1 March 2009)

tech/a said:


> Motorway
> Being on the right side of any primary trend is very important but just trading in the predominant direction of the market doesn't guarantee that you'll trade profitably.
> 
> There have been plenty who failed to turn a profit in the latest bull market and I doubt many have taken full advantage of this bear market.




Yes of course

But the Question was

_But I'm failing to grasp what one would use if one didn't indicators. I'm guessing the reply is something like "price action". How do you define/explain price action?_

Price action defines itself
and is it's own interpretation



Price  goes up & down 
So it can go  upwards  downwards or sideways

attracting buyers and sellers

or else it goes nowhere

To focus just on price action
is to focus on  this  up & downing

motorway


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## Trembling Hand (1 March 2009)

nunthewiser said:


> change strategies




Thats the problem I guess. Different strategies take different time. intraday takes a lot of time. Running a mech system once sorted I would think will be able to be easily fitted around your normal 9 - 5er.


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## motorway (1 March 2009)

And it is not the _type of chart_

But the principles that matter

*But some types of charts are pure representations of principles*

Take a two stock universe

RIO & TLS

again simple  buy signals

only take the ones with trend

A superior system
will have superior timing
of entry and exit
relative to all other possible
entry and exits

TLS

not much up & downing
few signals
hardly a long to be seen

The stock has been  retarded ( Though it is not dead )
This does not  urge one to get on board

There is 10 years displayed here
10 years !!


lets make it a three stock universe
while we were waiting for TLS

All available capital
would be at work with CSL and RIO

_available as in what your
position rules allow to be available_

*Timing is most important*
If you have poor tools & poor timing 
_all you have is stop loss_

A good method will have superior timing

To have superior timing is to measure the speed and acceleration  of trends

one glance 

on these charts and suddenly

_momentum is not just an empty word_

nor in TLS case inertia

motorway


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## johenmo (2 March 2009)

Thanks everyone.  Good comments all round for me.  I just started looking at the 2 or 3 indicators I've been using to understand what they really mean.  And to help with setup conditions, I guess.

Certainly not very long - I have to agree that current conditions don't suit longer term.  Am looking days/few weeks - can't do intraday.

Point n figure - looked at these months ago & didn't quite make sense.  Know more now so will look at that.

Cheers


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## tech/a (2 March 2009)

> Price goes up & down
> So it can go upwards downwards or sideways
> 
> attracting buyers and sellers
> ...




*M/W*

Very true and a very good point to make.
Some trade the up and downing and it can be traded,albiet it time and mind taxing.

But for traders like myself without the time and inclination hopping on momentum in the direction of the trend is the solution to those who are time poor---or as I would like to think----time prioritised.


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## MRC & Co (29 March 2009)

motorway said:


> *Timing is most important*
> If you have poor tools & poor timing
> _all you have is stop loss_
> 
> ...




Thx for this post motorway, particularly that last sentence.

I have put this in my small, one page, notes to remember while I trade.


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