# How NOT to trade a speculative miner



## MichaelD (9 March 2007)

I would like to share with you one of the most egregious trading errors I have made in a long time. It is my belief that we learn little from our big wins on the market, but learn much from our errors. It is in this spirit that I present the tale of WMT, Western Metals, a speculative mining company. If you can view the chart as I walk through this, it will help make more sense of things.

A quick note - the system discussed has been designed to behave in a particular manner and has to date in all market conditions it has been tested and traded in demonstrated a very satisfactory positive expectancy with a very smooth equity curve.

*Day 0 - The Initial Trading Signal 5-Mar-2007*
One of the systems I trade is a short term system which uses a breakout as its entry signal. WMT signalled an entry on the 5th March 2007 when it closed at 0.20 on increased volume. This was during the depths of the recent correction, so there were very few bullish signals around at the time, and I was in the process of closing the 3rd loss in a row.

This system utilizes a profit target, so my entry conditions/stop loss were;

Close 0.20
Stop 0.18
Target 0.22
Position size 0.25% risk

*Day 1 - The Initial Entry 6-Mar-2007*
This system calls for an entry on Open the next day, so on 6th March 2007 we lined up at the entry. Unusually large volumes on both the buy and sell side were noted, and the IOpen kept going further and further up. My wife executes our trading signals - the idea is to decrease the risk of trading errors due to emotional factors on my part. I happened to be home before the open, so she called me to the trading screen - the Open was at 0.225, beyond our target price.

This circumstance had arisen once before during system paper trading, and after analyzing that trade we had written into our plan that in such circumstances we would enter the trade on the Open and not enter a sell target, managing the trade merely with an end-of-day trailing stop.

We entered the position at 0.225. We were both excited at this point, and I said "let's day trade this one - trail a stop 2 ticks below the price action". We watched the price rise and then quickly fall back down enough to trigger this 2 tick stop. We exited at 0.23 a few minutes after entry.

Right at the end of the day, WMT saw a surge in price/volume to close the day at 0.27.

*Day 1 - End of Day Scan*
Again WMT came up on our Breakout scans. Quite angry at myself for only taking 1 tick out of the day's action, I again set up WMT for purchase;

Close 0.27
Stop 0.225
Target 0.315
Position size 0.25% risk - the position size was less than 1/2 of yesterday's due to the increased volatility.

*Day 2 - The Second Entry 7-Mar-2007*
Again the opening was a frenzy of activity, with the Open at 0.315. Again I resolved to day trade this with a 2 tick stop as opposed to following my plan.

Entry was at 0.315. It rose to 0.32. It dropped to 0.31. 'Sell' I said, and my wife began to enter the sell order. It ticked up to 0.315. 'Hang on a second' said I. 'Let's hold on and see what happens. I'll take things from here.'

It ticked down....0.31...0.305...0.30. 'I'll trade it like I should have traded yesterday's action' said I and did not close the position.

By the end of the day, it had gone down to 0.25 with a low of 0.24.

I moved the stop up to 0.245.

*Day 3 - Only one direction for this baby 8-Mar-2007*
Market depth showed an overwhelming number of sellers as opposed to buyers, all jumping on the slightest bit of an uptick. It continued to decline, closing at 0.23.

Throughout the day, I was on the verge of buying more WMT thinking that it had reached the bottom. I figured I could rescue this trade gone bad. The temptation was enormous, but so was my internal struggle - I'd realized I'd already violated my trading plan twice, and I was aware of the perils of trying to catch a falling knife. In the end I sucessfully resisted temptation.

*Day 3 - Clearly Violated the Stop*
It took a lot of discipline, but we resolved to exit this on the open the next day rather than make the further mistake of "bottom drawing" it or hoping for a rebound.

*Day 4 - Out with slightly less damage than expected 9-Mar-2007*
Once again bottom pickers were out in force on the Open, allowing us an exit at 0.25. From there, WMT continued south to close the day at 0.22. Loss: 1.75R.

*Discussion*
1. Trading this according to our predefined plan for this circumstance would have seen us enter at 0.225 and exit at 0.25, a win of 1.2R.

2. We violated our plan initially because of greed - 'let's day trade this and make a lot of money'. Intead, we made a little bit of money. We violated our plan a second time before of fear - 'we buggered this one up yesterday, let's not bugger it up again'. We buggered it up again. This is all the more disappointing since we have not made either a trading error or violated our plan in a very long time. This is a perfect example of cutting one's winners short and letting one's losses run, a cardinal trading error.

3. Who's fault was this? WMT had all the hallmarks of a manipulated pump and dump, but the fault lies entirely with me for not following my plan which was thought out away from the immediate stress of the market to account for exactly this circumstance. The recent drawdown in this system probably played a part - the emotion of wanting a big winner to get the system out of drawdown was very strong.

4. My wife and I discussed how this panned out at some length, and concluded that we would continue to trade the signals presented and doubly resolved to follow our trading plan no matter what. We duly entered a trade again today (9-Mar-2007) exactly according to our plan...and were rewarded with a 1.4R win.

5. The one thing that saved us from really catastrophic loss was the very small position size we held on the second entry. Considering the huge sizes of the parcels being trading in this baby (pretty much its entire share registry was being turned over daily), a lot of people will have been sucked in and will have lost substantial amounts of money on this.

6. Emotion has absolutely no place in trading. It will make you buy and sell at the worst possible times.

7. The market has taught us a lesson and we have heeded its teaching.


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## ric371 (9 March 2007)

Mate my story was not fictional but factual, I got set at 19.5 cents on the 5th after seeing my charts but I was pissed off that i did not see the top at 30c but instead my floating stop got me out at 24cents still a handy 20% up on 2 days but could a been 50%

Trade with real money its more fun


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## GreatPig (9 March 2007)

My story with this one is more one of missed opportunity.

I got a buy signal for it back at the start of January. Bought in on the 3rd for 8.6 cents, but then sold on 11th for 7.9 cents, not because I'd got a sell signal, but because the index had started dropping on the 3rd and was consolidating around the 11th, so I decided to take the loss before it broke support and plummeted into the abyss.

However, the lowest close after that, a few days later, was 7.8 cents, after which it started taking off. Even if I was still holding now, I'd be up 250% or more.

They say you can't pick tops and bottoms, but they're wrong: I pick them with very high accuracy. Tops are just after I buy, bottoms just after I sell...

GP


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## nizar (9 March 2007)

MichaelD said:
			
		

> This system utilizes a profit target, so my entry conditions/stop loss were;
> 
> Close 0.20
> Stop 0.18
> ...




MIchael thanks for sharing that with us.
I too have many such mistakes, and i mean MANY.

Just curious, is it worth taking a trade if the potential return is 1R?
I mean, over the long term, this would mean you have to get >50% winners to make your system profitable, net of brokerage. (do you?)


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## cuttlefish (10 March 2007)

Michael - congratulations for being brave enough to put that up.

Can I ask a few questions?

Why/how would trading according to the pre-defined plan have had you enter at 22.5 and exit at 25?   I thought the plan was enter at 20 and exit at 22 or stop out at .18


In your opinion, what was the biggest mistake in the whole exercise?

Also, of each trading decision (sell, don't sell, don't hit stop, hold etc.) which ones looking back would you do differently?

Do you think you would have behaved differently with a larger ('real money') positon size and if so, in what way?

Was there other non-technical criteria that made you particularly bullish on this stock on the day (e.g. announcement pending, announcement released, report released, news article, fundamental analysis, post on a forum etc.)

Also if I could make one comment - the use of the phrase 'I'll day trade this one' seems to have been an excuse to be irrational - quite the opposite of day trading.


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## MichaelD (10 March 2007)

nizar said:
			
		

> Just curious, is it worth taking a trade if the potential return is 1R?
> I mean, over the long term, this would mean you have to get >50% winners to make your system profitable, net of brokerage. (do you?)



The trailing stop makes the reward:risk worthwhile by aggressively culling non performers. Actual results to date with the system are;

Reward To Risk: 1.4:1
Win %: 60%
Average Days in Trade: 5.5

(although I suspect they will be a bit worse for a little bit once I account for the last week of trading)



			
				ric371 said:
			
		

> Trade with real money its more fun



These are real trades.


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## MichaelD (10 March 2007)

cuttlefish said:
			
		

> Why/how would trading according to the pre-defined plan have had you enter at 22.5 and exit at 25?   I thought the plan was enter at 20 and exit at 22 or stop out at .18



The plan states that if a position opens above its profit target (a rare occurrence) that no target is used and the trade is managed only with a trailing stop, so I would have exited on Open today at 0.25 after the trailing stop got hit yesterday.


			
				cuttlefish said:
			
		

> In your opinion, what was the biggest mistake in the whole exercise?



Allowing emotion to override my trading plan.


			
				cuttlefish said:
			
		

> Also, of each trading decision (sell, don't sell, don't hit stop, hold etc.) which ones looking back would you do differently?



The initial sell as that was the one that commenced the trading plan violation cascade.


			
				cuttlefish said:
			
		

> Do you think you would have behaved differently with a larger ('real money') positon size and if so, in what way?



This *is* my real money position size for this short term system. The size of a 1R loss in this system is at a level where I can cope with it without worrying too much about it. It allows me to make errors like this one whilst learning how this system trades with real money without putting much of a dent in my trading capital which is mainly deployed in a long term trend following system.


			
				cuttlefish said:
			
		

> Was there other non-technical criteria that made you particularly bullish on this stock on the day (e.g. announcement pending, announcement released, report released, news article, fundamental analysis, post on a forum etc.)



Nope, just a greater than usual desire for a winner.


			
				cuttlefish said:
			
		

> Also if I could make one comment - the use of the phrase 'I'll day trade this one' seems to have been an excuse to be irrational - quite the opposite of day trading.



Yep, guilty as charged.

As mentioned, I've made absolutely no trading errors or plan violations for the year to date. The reward has been a steadily increasing equity curve.


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## nizar (10 March 2007)

MichaelD said:
			
		

> Nope, just a greater than usual desire for a winner.




Yeah I've been having the opposite of that lately, which is much more dangerous, and thats the fear off loss.

But can you blame me after coming back from interstate work on the weekend, setting everything up on monday, buying several stocks that met my entry criteria on Tuesday, and then getting the biggest fall in 5 years on the next day   

I mean, what were the chances!   

It really made me lose my confidence - bad. And thats exactly why i hesitated, back in november/december i had a string off 11 losses in a row and i didnt even notice, took the 12th with confidence (and it ended up being a big winner), but these days,


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## robandcoll (10 March 2007)

Michael,
           You may have learnt one lesson but there are many thousands to be learnt. I am not a believer in systems but research. WMT announced the BHP JV when the Indices began to fall after the China fall. WMT was one of the positives on the day. Got in at 17c but already had parcels at 7c and 9c, because I had done my own research. Unfortunately the day traders had picked it up early and by the end of trade on Tuesday it closed at 27c. with  that type of volume bids went in early pre open the next day. Bids at 32c, a week earlier I had it 17c, sell sell sell. It was a bit of a blood bath really. I could have made a few bucks that morning, but I am a long term holder. Alot of people got burnt but the stock could not hold the momentum.

Still a holder though


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## sam111 (10 March 2007)

That was a very informative look at those trades, thanks  Michael.

Your post showed a humility and honesty which is rare on chat forums.

I guess if I had resolved to post every failed trade that was caused by not following the pre-detemined plan then I would have made a few hundred posts by now!


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## MichaelD (10 March 2007)

nizar said:
			
		

> ...buying several stocks that met my entry criteria on Tuesday, and then getting the biggest fall in 5 years on the next day
> 
> I mean, what were the chances!



About 1 in 1,800 by your own figures.    Ah, Analysis Paralysis. This is the major reason we "got back on the horse" so quickly, so as not to lose our rhythm. It was particularly nice that the market rewarded us with one of our best trades in a long time.


			
				robandcoll said:
			
		

> You may have learnt one lesson but there are many thousands to be learnt. I am not a believer in systems but research.



Good on ya, Rob. You keep on researching. I'll keep on trading. (No sarcasm intended.)

I'm not interested in a company's long term prospects or fundamentals. With this system I'm interested in capturing a big enough chunk of short term price fluctuations in a consistent enough manner to provide a regular cash flow.


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## theasxgorilla (10 March 2007)

nizar said:
			
		

> Yeah I've been having the opposite of that lately, which is much more dangerous, and thats the fear off loss.




On the contrary Nizar...this mentality will ensure your survival.

In my philosophy (borrowed heavily from Remeniscences of a Stock Operator), FEAR OF LOSS should be permitted to reign supreme right up until the point in time where you enter the trade.  This should ensure that you apply prudent money management and understand (in advance) where a worst case scenario outcome will leave you.  Max loss of $$$ in other words.


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## tech/a (10 March 2007)

Michael.

I'm from a long background of Systems analysis and background as you know.

But for what its worth and DIRECTLY related to the topic,its my view that the crowds that trade smalls are changing so rapidly and diversely that to have them satisfy criteria---such as that stipulated in a system--- is a big ask as most programable technical indicators are behind the crowd action to a point of being to slow.

UNLESS the system was in a much lower timeframe such as 5 or say 15 min bars.

Id be interested and suprised if you didnt have significantly better results systemising smaller timeframes.
OR heaven forbid trading in a discretionary manner with a heightened ability to read crowd behaviour in small cps.---but thats not you.

PS ROB

Once you get your head around price movement being crowd behaviour and the study of it is profitable--the need to pour over fundamentals disappears.
As does the question---do others see what I see in these fundamentals?

Rather than waiting for the crowd or infact disagreeing with it--- you can actually know when to join it or when to leave it.

Very long term of course crowd behaviour is not as important.


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## cuttlefish (10 March 2007)

cheers for the responses Michael.  From my independant observer standpoint, of all the mistakes you made the biggest one to my mind was not adhering to the stop on day 2.  It seems that the stop was just ignored. At the very minimum it should have been widened not just ignored.  In a day trading situation a discretionary decision to widen the stop could have been "justified" by some factor such as visible support on the intraday chart or some aspect of price/volume/time action etc.   

But to my mind that is the point where you risked significant loss - and protection of capital is the first priority.

I also disagree with viewing the first day as a failure even though you only made a small profit. 

Its likely the late rise to .27 just before the close was deliberate manipulation designed to pull in people for the dump on the next days open. It would be interesting to look at vwap on the day (and vwap can also be a useful guide as to how well you went on the day in terms of your own buy and sell prices). 

Any sharp intraday move well away from vwap with no new information should probably be viewed with some suspicion - particularly if it comes out of nowhere when things have quietened down. (could of course be a sign of news to come but more often than not seems to be manipulation).


(and yes I know everything is obvious in hindsight so hats off to you again for putting it up there.).


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## motorway (10 March 2007)

tech/a said:
			
		

> Very long term of course crowd behaviour is not as important.




Over the long term The % variation in returns washes out and narrow to the average

Like a large cone narrowing the further along ..

However the variation in the dollars that We end up with is totally the opposite..

This is like a cone which continues to widen the further along in time We hold.

So For maximum dollars gained the crowds behavior is still important because We still have to make an entry at some time and those times will have a huge
effect on the dollars gained at the end of the day..

The price you pay determines your future return 
esp in long term positions..

If you are going to buy and HOLD something
When you buy that something is the only thing you have control of.
The longer you hold it your % returns approach everyone else's.. 
BUT The number of $$$ that you hold will be hugely significantly different.

Off topic to the thread .. But pertinent to Techs comment..

Or does the crowd.. hence timing .. ever not matter..



motorway


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## barney (10 March 2007)

Hi Michael, This trade obviously annoyed you because you stepped outside your trade "boundaries", but your willingness to share your "wrong doings" is admirable .............. Bottom line; You are obviously an extremely disciplined trader (I take my hat off to you).  You can afford to share this misfortune because the multitude of your trades are carried out with a concrete plan (which obviously works) ............... I think what you are trying to teach us here is .......... a) Find a plan that works ..... and b) Stick to it, cause if you don't, you may get burned ................... Congratulations and thanks for your ongoing good advice, Barney.


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## tech/a (10 March 2007)

> Or does the crowd.. hence timing .. ever not matter..




In view of your question I think it appropriate to adjust my statement to.

Short term crowd behaviour is of little importance to very long term crowd behaviour.

Meaning that to crowd behaviour displayed 3 yrs ago is of little importance today.Todays behaviour is of course relevent to today.

In other words I feel that a specific time point in judging/analysing/reacting to,taking action based upon--- crowd behaviour has an expiry date.

*However*
I think crowd behavior can also be predicted if the same crowd behaviour is displayed.

(1) Time and again in the short term
(2) Or as seen in like events in past history.
(3) Or as a consequence of a chain of events.


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## MichaelD (10 March 2007)

tech/a said:
			
		

> Id be interested and suprised if you didnt have significantly better results systemising smaller timeframes...
> 
> ---but thats not you.



Totally agree. I do not desire to engage the market in real time yet - I don't have the absolute confidence in the system yet that is needed to take this next step. 

Once I'm satisfied that this system performs as expected in all markets as an EOD system, I will then turn my focus to improving the entry/exit mechanism to try and improve the reward/risk ratio. This will most likely require engaging the market intraday in some form. In fact, a CFD variant of this system manages to stretch out the reward:risk ratio very nicely whilst still keeping all decisions and orders EOD.

However, I digress, as this isn't really about the specifics of the system being traded.


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## tech/a (10 March 2007)

True you do digress.
However on the topic of how not to trade a speculative Miner still pertinent.

I would argue that systematic trading of a spectulative miner is one way NOT TO.


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## moses (10 March 2007)

tech/a said:
			
		

> I would argue that systematic trading of a spectulative miner is one way NOT TO.



Now that I understand.


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## MichaelD (10 March 2007)

tech/a said:
			
		

> I would argue that systematic trading of a spectulative miner is one way NOT TO.



I'll be sure and let my backtested, paper traded and traded with real money positive expectancy system know that it actually doesn't work.    :


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## tech/a (11 March 2007)

MichaelD said:
			
		

> I'll be sure and let my backtested, paper traded and traded with real money positive expectancy system know that it actually doesn't work.    :




Michael 

Actually upon reflection you make a good point.
You have something that you KNOW has a positive expectancy.So you know within the data presented that if you stick with the blueprint you'll make a profit.Unlike those of us who believe we can out perform it without a blueprint (well a complete blueprint,mines a work in progress) of performance.

Wether knowingly or subconciously,most find small caps a facsinating lure.
The moves which bring 50/100% and beyond in a few days is a temptation which few resist.

On a personal level my fascination is here.
My funds---in volume---are else where.

In my on going research and challenge with these little goldmines,its been my experience that 

*systematic trading of a spectulative miner is possibly not the most profitable way to go.*

So I'll re phrase the statement.


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## ducati916 (11 March 2007)

*tech/a*

An interesting dichotomy.
You advocate a systematic methodology for risk management in one timeframe, and a discretionary methodology to manage risk in a different timeframe.

To what variables do you ascribe the lack of correlation?

jog on
d998


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## tech/a (11 March 2007)

ducati916 said:
			
		

> *tech/a*
> 
> An interesting dichotomy.
> You advocate a systematic methodology for risk management in one timeframe, and a discretionary methodology to manage risk in a different timeframe.
> ...





Ducster.

Cant see where Ive mentioned risk?

Let me put it this way.

System trading simply has a set of entry exit and stop rules when applied return X positive expectancy if traded. The X will vary from portfolio to portfolio but will not (In my experience) deviste too much from the mean average of expectancy.--It wont swing widley from 5% to 50% as an example.

Again in my experience finding a system which does as Michaels does ------
100% profitable over 1000s of portfolio tests is in itself extremely difficult.
I havent found one with a meaningful return myself yet. It is of course possible as Michael seems to have one.


By nature systems tend to give back a lot at the point of exit due to the speed in which exits trigger.The balance of time Holding winning trades (To gain a higher R/R ) and price exiting losing trades quickly (Keeping it tight to decrease loss) is very difficult.

Again in my experience---it is pretty easy in a discretionary sence to identify a small cap whos crowd is swelling with anticipation-- reasonably early at least early enough to join in. Knowing crowd behaviour its also pretty easy to see when the new  members no longer wish to participate and leave as fast as they come. Something Ive not been able to replicate in a trading system.

So MY VEIW is that its more profitable to trade these in a discretionary way.
Michael may well have a method which returns excellent profit. If I had one which returned 80% a year or 10-15 x R Id use it.---I dont---and I dont know what Michaels returns.


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## It's Snake Pliskin (11 March 2007)

tech/a said:
			
		

> Ducster.
> 
> Cant see where Ive mentioned risk?
> 
> ...




Tech,

It is a bit like crossing roads in perfect theory. In reality there are flies bussing around distracting you and sounds, the wind, rain etc. How do our senses react to these pests? We deal with them in a natural sense picking the easiest way to achieve. That is the essence of the discretionary way. 

Acceptance of our risk is paramount. Knowing this allows you to know the lie of the land or what it has for you.

"I'm heading for a $200 loss. What can I do to reverse that"?

Discretionary in the short term makes sense.


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## BBand (11 March 2007)

Hi Michael,
This is my first post, so -----
Excellent topic, and very relevant at this stage of market activity.

WMT was very volatile at the time of your trades and I know the "excitement" that I would have experienced if I had been making your decisions.

When we become involved in fast moving markets it has been my experience that the probability of over-riding our trading plan is more likely as we watch the bid/ask line fluctuate wildely, as the stock is plummeting.

Just as we are about to hit the sell button - missed! and again.

The buy side is OK, we enter on the pre market auction - but how do you handle the sell? to get the best price.

We are all human, and most of us will continue to make the odd (hopefully) trading error.

Forever the amateur.
Peter

Patience is a virtue.


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## ducati916 (12 March 2007)

tech/a said:
			
		

> Ducster.
> 
> Cant see where Ive mentioned risk?
> 
> ...





Your referral to risk was on the risk thread, where you eulogised on the merits of a mechanical measure of risk;



> So then to quantify RISK is in every single case subjective so to over come the problem allocate RISK.
> 
> This then places a bottom on the RISK that we take on any one trade.
> We have control of that risk.
> ...




Therefore in essence your *discretionary* methodology would seem to be violating your *risk management*.

The reason foe this violation would seemingly be;



> So MY VEIW is that its more profitable to trade these in a discretionary way.
> Michael may well have a method which returns excellent profit. If I had one which returned 80% a year or 10-15 x R Id use it.---I dont---and I dont know what Michaels returns




Viz. You do not have a profitable mechanical methodology; but, you are getting greedy watching these big 100%+ daily moves in the speccies and want some of the action.

Again;



> Again in my experience---it is pretty easy in a discretionary sence to identify a small cap whos crowd is swelling with anticipation-- reasonably early at least early enough to join in. Knowing crowd behaviour its also pretty easy to see when the new  members no longer wish to participate and leave as fast as they come. Something Ive not been able to replicate in a trading system.




*Experience. A very subjective position.
*Knowing crowd behaviour; again subjective
*Not able to replicate; does this not suggest that it is not quantitative, but subjective [based on your ability]?

It would seem based on the above evidence that the Bullmarket has worked it's magic on you, distorting, and diminishing your risk management, taking you away from what made you profitable, into the dangerous ground of flying by the seat of your pants mode.

jog on
d998


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## tech/a (12 March 2007)

ducati916 said:
			
		

> Your referral to risk was on the risk thread, where you eulogised on the merits of a mechanical measure of risk.
> 
> Therefore in essence your *discretionary* methodology would seem to be violating your *risk management*.
> 
> ...




Most Risk principals can be employed when trading in a dsicretionary manner.
Didnt and dont see it as a problem




> Again;
> 
> *Experience. A very subjective position.




*Duscster I hope you never need the services of a specialist. Your stress on finding an "experienced on would be detrimental to your health!

*


> *Knowing crowd behaviour; again subjective.




*No its predicatable,and with the help of the power of computers can be measured and implemented into trading.Mechanical/Systems traders can also measure its performance and some of us have that performance on the nett.
Infact so do you Duc on your thread.*


> *Not able to replicate; does this not suggest that it is not quantitative, but subjective [based on your ability]?




*No its based on my poor ability to be able to code it!!!!*




> It would seem based on the above evidence that the Bullmarket has worked it's magic on you, distorting, and diminishing your risk management, taking you away from what made you profitable, into the dangerous ground of flying by the seat of your pants mode.




*No its simply an area which fascinates me and I wish to investigate further.*


jog on
d998[/QUOTE]


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## BBand (12 March 2007)

Personally, I do not see why a small cap cannot be traded systematically, it may mean that you cannot use your normal trade size due to possible liquidity or volatility concerns, but if it has been properly tested, which Michael's appears to have been - then I do not see a problem

Most of us probably do not have deep enough pockets to consider system trading anyway, (supposing we wanted to).

Discretionary methods work - how else did our system traders build their trading capital?

In any case discretional trading is much more interesting and you do not have to be a zombie to trade successfully 

Just my belief

Peter


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## nizar (12 March 2007)

BBand said:
			
		

> Personally, I do not see why a small cap cannot be traded systematically, it may mean that you cannot use your normal trade size due to possible liquidity or volatility concerns, but if it has been properly tested, which Michael's appears to have been - then I do not see a problem
> 
> Most of us probably do not have deep enough pockets to consider system trading anyway, (supposing we wanted to).
> 
> ...




Hi Peter,

Iv been thinking about systems trading and backtesting for the last few days, and my conclusion is, its the best way to trade. Its not by all means the only way to trade profitably in the markets, but its the only way you can trade confidently in my opinion, and ill explain why.

For new traders like myself, the last 2-3 have been a dream. We all have a trading plan, and we think our plan works, but every fool and his dog has been making money the last few years, and some bullmarket champions like to think its because of their fundamental research, or because they can read charts, or because of their method. But when you have 80% of the mining sector going up, its not really that hard to make money. Throwing darts, ini-mini-miney-mo, whatever you did the last 3 years, it probably worked. 

The only way to know if your method ie. your plan, is profitable over the long term, if to backtest it and especially to backtest it through previous less than ideal conditions. And you can only backtest trading systems that are systematic.

Discretionary backtesting yes you can do it but it will introduce alot of biases into your results - because you can see the right hand side of the chart.

So once you have backtested your systematic plan over a certain universe going back through bear markets, and sideways markets as well as bearmarkets, and its profitable with acceptable drawdowns and standard deviations (and montecarlo analysis gives 100%), and has a positive expectancy that you are happy with, you can trade with confidence knowing that if you stick to the blue print, you will succeed.

Also Michael - getting a bit off topic here but do you use a time stop or profit taking stop, and if not why?

Thanks.


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## Out Too Soon (12 March 2007)

robandcoll said:
			
		

> Michael,
> --- WMT announced the BHP JV when the Indices began to fall after the China fall.  -----




Having berated everyone about using stop-losses & sticking to a plan no matter what I'm surprised at you Michael.
With a little study of T/A it's obvious that T/A is very useful for guessing what the crowds going to do, all the same it's like trading with one eye closed when you don't know why the sheep are running the way they are. Of cause fundamentals bring in emotional bias & there-in lies the difference between traders & the way they trade. Personally the way I trade I very rarely use stops but I like to know why the crowd is moving, not just how many & how much. :


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## tech/a (12 March 2007)

> The only way to know if your method ie. your plan, is profitable over the long term, if to backtest it and especially to backtest it through previous less than ideal conditions.




Almost impossible in stocks due to surviviourship.



> So once you have backtested your systematic plan over a certain universe going back through bear markets, and sideways markets as well as bearmarkets




A common error. Attempting to design ONE FITS ALL.
Also see above.



> and its profitable with acceptable drawdowns and standard deviations (and montecarlo analysis gives 100%), and has a positive expectancy that you are happy with, you can trade with confidence knowing that if you stick to the blue print, you will succeed.




Now where'd you get that from?


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## nizar (12 March 2007)

Haha, yeh from you tech, mostly you, and some from Michael.

What i plan to do, and this will take some time, is to construct a system that can trade long term trends, one for uptrends, and one for downtrends.
And then trade discretionary breakouts on the side.

By the way, did you see APG today?
Reminds me of WMT last week on the 5th.


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## Kauri (12 March 2007)

tech/a said:
			
		

> Now where'd you get that from?




  Crowd behaviour???


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## tech/a (12 March 2007)

Well I guess if it talks like a duck and walks like a duck-----.

I cant talk I got a lot of the positive expectancy stuff from other sources.
Got the same comment as Nizar myself!


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## MichaelD (12 March 2007)

nizar said:
			
		

> Also Michael - getting a bit off topic here but do you use a time stop or profit taking stop, and if not why?



Profit Stop: Yes for the short term system, No for the long term system.

Time Stop: Not for either system, however, once I'm up to 100 or so trades with the short term system I intend to go back and analyze if a time stop would be of benefit - the one stat which I'm a little concerned about with the system at present is that the losers seem to be being held longer than the winners. i.e. when they win they win quickly, but when they lose they linger. It may benefit the system from an opportunity cost viewpoint to cull stocks that don't immediately perform as desired.


			
				Tech/A said:
			
		

> Almost impossible in stocks due to survivorship.



Just a lot of work to construct a prior version of a universe. I've done it and found the effort well worth it.


			
				Out Too Soon said:
			
		

> Personally the way I trade I very rarely use stops.



Buy and hope it's only a correction if the price goes down (the 'it's a good company' strategy) is not a particularly efficient trading strategy. Sooner or later some of the corrections will turn into catastrophic losses.


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## tech/a (12 March 2007)

> Just a lot of work to construct a prior version of a universe.




Michael.
Ive never been able to find the constituents for say the ASX 200 say 10 yrs ago---let alone the data.
Where do you get that information?


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## BBand (12 March 2007)

Hi Nizar,
I am a discretional trader by default - and I love it. I could never become a systems trader - they have to take every trade their system throws up, otherwise they may miss the big trade(s) that account for their having a profitable year

Backtesting - Again I am not a great believer in automated backtesting over a period covering all market conditions - and "tweaking" to optimise results.

Sure doing this will tell you if or not your system has a positive expectancy  - and provide you with many opportunities to trade - the more the better, and the bigger the profit at the end of the year.

BUT included in the results is probably a lot of debris ie trades associated with exdivi dates, abnormal conditions which may never happen again etc, etc.

Being a discrectional trader, I am just interested in if my setups are working in the present market conditions.

Initially I manually backtested a cross section of my trading candidates over a three month period, I logged all trades and their individual returns. I then checked out the trades that produced the highest returns to find out what they had in common (checking against my standard chart setup).

The outcome is I have a preferred set of conditions that I look for in my setups

I only trade from the long side (approx 10years). I basically trade breakouts from stage 1, breakouts from stage 3, trend continuation following a correction and trend reversals. I do not trade trend reversals in a bull market. Even in a bear market I find plenty of the above trades to keep me satisfied

I have manually checked all setups over all market conditions - they all work, the only difference is that depending on the type of market, one particular setup becomes more dominant.

I have the setups coded into my nightly scans - no problem

Sometimes I am quite content just to stand aside and wait for trading conditions to settle down (like now) before getting back into the action.

Trading is all about probabilities, if we can stack as many of what we interpretate as pluses on our side , so much the better - thats our so called edge.

The only problem is, when we trade, the person we trade with has exactly the opposite view to us!! who's right?

We are all individuals with our own views, thank goodness, otherwise there would be no market

Nizar, I hope the outcome of your testing proves to be profitable.

May your profits continue.

Peter

Patience is a virtue


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## MichaelD (12 March 2007)

tech/a said:
			
		

> Michael.
> Ive never been able to find the constituents for say the ASX 200 say 10 yrs ago---let alone the data.
> Where do you get that information?



The indexes aren't quite 10 years old yet, but buried within the ASX site and very hard to find with a search (or it was when I found it) is this gem;

http://www.asx.com.au/about/pdf/CompanyIndex.pdf

Of course, that's only the beginning of the hard work...


			
				BBand said:
			
		

> I basically trade breakouts from stage 1, breakouts from stage 3, trend continuation following a correction and trend reversals. I do not trade trend reversals in a bull market. Even in a bear market I find plenty of the above trades to keep me satisfied



These are very interesting comments considering that I pick exactly these setups as well when going through my short term trading signals and have found them to have an edge over simply taking all breakout signals.

Weinstein was obviously onto something - perhaps not many people are keen on it because it's so simple.

What do you use for an exit?


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## tech/a (12 March 2007)

Peter

Sorry but!! I just dont agree with much of your writings.



			
				BBand said:
			
		

> Hi Nizar,
> I am a discretional trader by default - and I love it. I could never become a systems trader - they have to take every trade their system throws up, otherwise they may miss the big trade(s) that account for their having a profitable year




Absolute nonsense and a complete misnomer. You should learn more before you comment.



> Backtesting - Again I am not a great believer in automated backtesting over a period covering all market conditions - and "tweaking" to optimise results.




Again not necessary.Niether michael or I do this with our systems---mind you trading a singular instrument could well be worth optimising---again do more research.



> Sure doing this will tell you if or not your system has a positive expectancy  - and provide you with many opportunities to trade - *the more the better, and the bigger the profit at the end of the year*.




Wow 3 in a row!!



> BUT included in the results is probably a lot of debris ie trades associated with exdivi dates, abnormal conditions which may never happen again etc, etc.




All possible conditions found during a test period should be included wether you think they may not ever happen again or not.



> Being a discrectional trader, I am just interested in if my setups are working in the present market conditions.
> 
> Initially I manually backtested a cross section of my trading candidates over a three month period, I logged all trades and their individual returns. I then checked out the trades that produced the highest returns to find out what they had in common (checking against my standard chart setup).
> 
> The outcome is I have a preferred set of conditions that I look for in my setups




A common error for most traders where they believe entry and "setups" are the most important factors when in fact they are the least.



> I only trade from the long side (approx 10years). I basically trade breakouts from stage 1, breakouts from stage 3, trend continuation following a correction and trend reversals. I do not trade trend reversals in a bull market. Even in a bear market I find plenty of the above trades to keep me satisfied




Probably the most common of trading setup/triggers used by traders.
Works well for many---I see your a Weinstien fan.



> I have manually checked all setups over all market conditions - they all work, the only difference is that depending on the type of market, one particular setup becomes more dominant.




Again a common error in manual eyeball testing.All setups will appear to work as they will ofcourse be seen in hindsite.



> Trading is all about probabilities, if we can stack as many of what we interpretate as pluses on our side , so much the better - thats our so called edge.




*Well no its not*.I can show you how you can be right 85% of the time and still be a nett loser.
I can also show you how you can be right 35% of the time and be a huge winner.



> The only problem is, when we trade, the person we trade with has exactly the opposite view to us!! who's right?




Hmm the Efficient Market theory---ever thought that the guy on the other side of the trade maybe taking a 200% profit and still agree with you by leaving stock un sold?

[/QUOTE]


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## clowboy (12 March 2007)

BBand said:
			
		

> I basically trade breakouts from stage 1, breakouts from stage 3,





Can someone explain Stage breakouts?

Or perhaps a link / example

Thanx


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## nizar (12 March 2007)

clowboy said:
			
		

> Can someone explain Stage breakouts?
> 
> Or perhaps a link / example
> 
> Thanx




Ill give you an example that Weinstein wouldve put in his book.
TRO. 
Simply outstanding.


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## theasxgorilla (12 March 2007)

(IMO) Both automated systems and discretionary work across the entire spectrum of tradable timeframes.  I must admit, MichaelD, my tendency was similar to Tech/a...I would not think that trading micro-cap miners with a system was prudent...but I'm not saying, NO, or DON'T or CAN'T...I'm wondering HOW?  I'll continue keeping an eye out for your posts, please keep going 

In anycase, if systems trading doesn't work, how does one explain Ed Seykota?  Yes, I've heard the one about needing a minimum bank to trade a system profitably.  I'll defer to the great man himself on that one:

"Good money management is equity invariant."

The ASX Gorilla.


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## clowboy (12 March 2007)

Thanx nizar,

Basically,
1 = new high
2= uptrending a bit + new high
3= New high lots of volume, outstanding breakout.

Might have to hunt down a book from this guy, is it interesting reading?


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## clowboy (12 March 2007)

Nizar,

Incidentley did you trade TRO?


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## MichaelD (12 March 2007)

clowboy said:
			
		

> Can someone explain Stage breakouts?



Weinstein described shares as having 4 Stages;

Stage 1: Nothing much happening. Price bumbling along in a trading range.

Stage 2: Price in uptrend.

Stage 3: Price has stopped going up and is now bumbling along again in a trading range, not sure if it is going to go up or down.

Stage 4: Price in downtrend.


A big component of his trading methodology was figuring out what stage a share was in and trading it accordingly - he very much liked an entry on the first or second breakout from stage 1 to stage 2. i.e. nothing happening for a long time, and then something starts happening.

I've got to say that I'm also quite enamoured of his teachings, and have managed to prove that at least staging is of benefit on entry. I'm not yet convinced of the use of another of his pet likes, Relative Strength Comparison.

Weinstein's methods and Jesse Livermore's methods are extremely interesting and enlightening to study - the basic principles of trading would indeed appear to be timeless.



Tech,

I must say that I strongly disagree with your attack on BBand. Anyone who has been at this game for 10 years is likely to have something valuable to contribute - I'm interested in hearing about it.


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## CanOz (12 March 2007)

MichaelD said:
			
		

> Anyone who has been at this game for 10 years is likely to have something valuable to contribute - I'm interested in hearing about it.




Great thread and discussion here guys. Agree with Michael, and i'm surprised too T/A that you don't have more time for Discret. traders. I think allot is said for a person who trades by feel. Curious as to the risk management at work here though. Also curious as to why you don't short? 

Cheers,


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## BBand (12 March 2007)

Hi Michael (and Techa),
Michael, the only thing that I picked up from Weinstein was his definition of stage analysis.

My breakout systems were derived from my attraction to Bollinger Bands - I use the std dev to amplify their action.

Exits: I'm only in the trade for the initial move,if it does not perform from square one, I tend to exit and look for a stronger stock.

My trade exits: I use a 14 period ADX together with the parabolic SAR, when the ADX turns down and the SAR changes over thats it- out, if only one is actioned I stay with the trade

I may exit earlier if the MACD-H gives a bearish diversion - depending on the state of the general market.

I'm experimenting just now with the RSI and it looks very promising

Most people say that momentum indicators do not work in a trending market - that is definately not the case (no doubt Mr Know it all will say differently)

Michael, try experimenting with a 7 period RSI.
You will find certain levels correspond to an uptrend, a sideways market and a downtrend (the sideways levels being common to both the uptrend and downtrend)

You might find the rising levels of 40,and 60 of interest as entries and the falling levels of 40, 60 and 80 of interest as exits

Tech a: Your a legend in your own mind. LEAVE IT AT THAT - I wont even bother to reply!!
This is my last post


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## CanOz (12 March 2007)

BBand said:
			
		

> This is my last post




That would be a shame.

Cheers,


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## MichaelD (12 March 2007)

CanOz said:
			
		

> Also curious as to why you don't short?



Not sure if this query is for me or for Tech/A. My short term system goes both long and short.


Here's some food for everyone's thought;

Diversified Buy and Hold (truthfully but glibly referred to as Buy and Pray) is a positive expectancy trading system. It has the characteristics required for positive expectancy, viz;

1. It lets the winners run
2. It cuts the losers short

The losers cannot go below zero.
The winners can go up infinitely.

If you have a compelling need to be right rather than particularly profitable, then buy and hold will suffice.

(Personally, I'd rather be profitable than right.)


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## CanOz (12 March 2007)

MichaelD said:
			
		

> Not sure if this query is for me or for Tech/A. My short term system goes both long and short.




It was actually for Bband.

Cheers,


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## theasxgorilla (12 March 2007)

BBand said:
			
		

> This is my last post




Thats a shame Peter.  Butting of heads will occur from time to time.  Chances are you would have gone on and made a further 1000 posts without a drama.


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## CanOz (12 March 2007)

theasxgorilla said:
			
		

> Thats a shame Peter.  Butting of heads will occur from time to time.  Chances are you would have gone on and made a further 1000 posts without a drama.




Agree so much here....its these exchanges that keep this forum so addictive.

Keep in mind too, that some may have other things on thier mind at times. Acidic tones could be reflecting a lack of tolerence at times for opposite opinions, for whatever reasons. 

Like 'market depth', they're are still plenty of us off screen watching and listening, waiting for the next post.

Cheers,


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## stoxclimber (13 March 2007)

I wonder if you would still have made the post if you didnt lose money.


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## theasxgorilla (13 March 2007)

stoxclimber said:
			
		

> I wonder if you would still have made the post if you didnt lose money.




LOL!    Guess we'll never know.


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## CanOz (13 March 2007)

stoxclimber said:
			
		

> I wonder if you would still have made the post if you didnt lose money.




Just exactly what is that supoosed to mean?


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## nizar (13 March 2007)

clowboy said:
			
		

> Nizar,
> 
> Incidentley did you trade TRO?




Unfortunately No   

Is there a scanner that scans the market for stage 1 stocks?


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## stoxclimber (13 March 2007)

CanOz said:
			
		

> Just exactly what is that supoosed to mean?




Well he has posted this thread because he made some mistakes, and, as a result, lost money. I wonder if he would still have called it a mistake if he made money. Just food for thought.


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## tech/a (13 March 2007)

Peter.

Your comments on systems trading were/are in most part purely wrong.
I havent attacked your way of trading, or you personally.

Perhaps its time for me to stop posting for a while.


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## BBand (13 March 2007)

HiTech A and Michael,
Techa - please do not stop posting, this is not my scene anyway

In the past I have seldom looked at Aussie forum sites, as I trade the ASX and did not want any outside influences to affect my analysis. What I do I take complete resposibility for (another well bandied around phrase)

I can scan the whole ASX for stocks that are of interest and it only takes a few minutes

I do not know the protocol for posting - it was all new to me - but one thing is for sure - I'll never put myself in that position again - I'm long past that confrontational stuff. I lasted two days-not much of a stayer!

The market has been good to me in the past and for the last few yearsI have been trading just as a hobby - no pressure, lifes pretty cool.

The golf course is a bit dried up just now, you can hardly tell the fairway from the bunkers - so the only good thing about that now is the 19th hole!!

So I have some spare time on my hands and thought I could possibly help some of our newer traders find their place in the pecking order and in that way give back a little of what the market has given me

Tech maybe there is blame on both sides - some of your comments were completely out of line and in my mind false or half truths - anybody with a modicom of trading knowledge would recognise that also - but thats all water below the bridge now - no hard feelings!

I do not know who you are, but obviously you are well known, going by the number of posts against your name - so you have a recognised track record, me, I do not even know how to post a chart.

It seems the in statement being bandied around just now is that the most important requirement to be a successful trader is psychology, which is peddled around by quess who - our psychological gurus, they must have something new to help sell their books. It used to be expectancy and money management - oh sorry, I believe its now called position sizing - what will the catch phrase be next year?

Dont get me wrong, I totally agree that psychology is very important - just not that important compared to having a good trading plan

If you want to read the best that I have come across regarding psychology, try reading Van Tharps "Peak Performance Course", it only costs around $1200 and well worth the money - have a look at his website



Michael,
Before signing off, I forgot to mention as an exit from my breakout trades, I also use a protect capital stop to trail price action - to ensure I do not give back too much profit if I am fortunate enough to encounter unsustainable price action

Also Michael - I try to capitalise on good trades by switching over to manage the trade on the weekly time frame if conditions on the weekly are right

If you check out the origin of the good strong trends on the weekly, then go to the corresponding point on the daily you'll see what I  mean. Putting Bollinger Bands around price action first will help

By the way I think the most important part of a breakout is the actual lead up to it, the breakout simply confirms this action - and you can enter the trade while price is still "quiet", before it explodes out of the bands

I hope you all have a good day in the market

Now back to business - where did I put that golf bag

Sock it to them Tech A !


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## MichaelD (13 March 2007)

stoxclimber said:
			
		

> I wonder if he would still have called it a mistake if he made money.



Absolutely. I posted in a thread elsewhere on ASF that I was going to discuss my WMT trade at its conclusion whether it made or lost money. Regardless of whether it made or lost money, it was a bad trade.


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## MichaelD (13 March 2007)

BBand said:
			
		

> It seems the in statement being bandied around just now is that the most important requirement to be a successful trader is psychology, which is peddled around by quess who - our psychological gurus, they must have something new to help sell their books. It used to be expectancy and money management - oh sorry, I believe its now called position sizing - what will the catch phrase be next year?
> 
> Dont get me wrong, I totally agree that psychology is very important - just not that important compared to having a good trading plan



I have come to the conclusion that in fact psychology IS the most important part of trading - hence my reasons for posting the WMT trade.

Having said that, it's no use whatsoever having the correct mindset if you have a negative expectancy, since you'll confidently trade yourself to oblivion.

But also having said that, it's also no use whatsoever if you have a good positive expectancy trading plan and you continually violate the plan rules, losing money.


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## cuttlefish (13 March 2007)

I think everyone should have a go at discretionary trading a spec miner breakout with a small amount of capital - it gives great insight into how your emotions get involved in the process and affect your decisions - which in turn gives insight into how a lot of the rest of the crowd is feeling in those situations as well. 

It is also a good way to start to learn the discipline required to keep the emotions at bay and unemotionally trade profitably.  (can still be a positive emotional experience but in a different way - satisfaction about sticking to your decisions etc.).

I'm not a trader by back ground and still only enter a trade if comfortable with the fundamentals, but I've had some fun and learnt a truckload with trying out trading over the past year or so - some of it in these breakouts.

I think different factors have more or less importance at different stages of the market cycle - strong bull market - psychology, crowd behaviour etc. are key drivers.  Depths of a bear market - fundamentals rule. (I'm still a strong believer in fundamentals as a factor in any situation though and never ignore them).


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## stoxclimber (13 March 2007)

MichaelD said:
			
		

> Absolutely. I posted in a thread elsewhere on ASF that I was going to discuss my WMT trade at its conclusion whether it made or lost money. Regardless of whether it made or lost money, it was a bad trade.




Have to praise you for that.


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## tech/a (13 March 2007)

> Having said that, it's no use whatsoever having the correct mindset if you have a negative expectancy, since you'll confidently trade yourself to oblivion.




The importance of a blueprint,more important than the expectancy in my view,as market conditions almost certainly will trade outside those from which a system was/is developed. The Turtles may have failed due to this---I dont know but suspect that to be the case.



> But also having said that, it's also no use whatsoever if you have a good positive expectancy trading plan and you continually violate the plan rules, losing money.




Thats why its developed in the first place. Doing anything else is just reverting to discretionary trading or your trading rules.


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## It's Snake Pliskin (13 March 2007)

nizar,



> Iv been thinking about systems trading and backtesting for the last few days, and my conclusion is, its the best way to trade. Its not by all means the only way to trade profitably in the markets, but its the only way you can trade confidently in my opinion, and ill explain why.
> 
> For new traders like myself, the last 2-3 have been a dream. We all have a trading plan, and we think our plan works, but every fool and his dog has been making money the last few years, and some bullmarket champions like to think its because of their fundamental research, or because they can read charts, or because of their method. But when you have 80% of the mining sector going up, its not really that hard to make money. Throwing darts, ini-mini-miney-mo, whatever you did the last 3 years, it probably worked.




Don't confuse all for being beginner champions. Some actually have the psychological fortitude to do well regardless of experience. 



> So once you have backtested your systematic plan over a certain universe going back through bear markets, and sideways markets as well as bearmarkets, and its profitable with acceptable drawdowns and standard deviations (and montecarlo analysis gives 100%), and has a positive expectancy that you are happy with, you can trade with confidence knowing that if you stick to the blue print, you will succeed.




If your emotions don't get the better of you. The only way it is different to discretionary trading is if a robot or the computer does it all for you. Sure it is different in applicationa dn theory but emotions stilllllll get involved and second guessing is always present no matter how much you try to block it out. It's the survival instinct in us all!

There are some systems/indicators that can be used for all markets but are beyond most here and not freely available. Maybe Michael has found one or IT.
Cheers
Snake


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## frugal.rock (18 August 2020)

A great thread, very much worthy of revival, especially in the current climate. 
Well @barney, you really are one of the forum fossils...   
I never knew....


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## barney (18 August 2020)

frugal.rock said:


> A great thread, very much worthy of revival, especially in the current climate.
> Well @barney, you really are one of the forum fossils...
> I never knew....




Indeed FR.  I am getting old in the tooth

I'm not sure whether Michael D is still a member but he was a valuable contributor for many years


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