# The Contents of a Bar



## ducati916 (27 May 2017)

It was this [partial] post that got me thinking, as there are a number [lots?] of systems traders out there:

_I don't think I curve fit and use price action patterns as a basis for all my code , the majority of my indicators are custom written by myself ( why I will not divulge or discuss ) and represent tangible price action events . Median reversion is the basis of my systems and I filter what I see as important aspects of price action . The counts used in charts here are only a part of the process but they do measure trend and reversals and are integral part of what I do on every time frame ._

So my question is: is every bar created equal?

The answer [to my mind] is clearly no.

Some bars contain nothing but trading noise, whereas other bars contain important information.

Will the market [the sum of all participants of a given bar] treat the same information in the same way as they did previously?

Again, my answer would be clearly no. The participants could, and likely would be, completely different, with the commensurate difference in subjective views. That is just one example, there are hundreds of reasons why the reaction could be different.

Therefore, building a trading system/methodology, based on historical data is prone to randomness, exactly what you are trying to eliminate.

Is this a futile undertaking?

jog on
duc


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## Triathlete (27 May 2017)

ducati916 said:


> It was this [partial] post that got me thinking, as there are a number [lots?] of systems traders out there:
> 
> _I don't think I curve fit and use price action patterns as a basis for all my code , the majority of my indicators are custom written by myself ( why I will not divulge or discuss ) and represent tangible price action events . Median reversion is the basis of my systems and I filter what I see as important aspects of price action . The counts used in charts here are only a part of the process but they do measure trend and reversals and are integral part of what I do on every time frame ._
> 
> ...




You bring up some very good points and I also think along those lines..

 I am a totally discretionary trader and have no experience with systems.

My thinking around systems is that they are made for short term trading as I cannot see how the systems would be of any benefit if your trading was over the medium term, other than generating more trades and taking the human emotion out.
The other point with systems is getting caught in a large drawdown.

 A discretionary trader would have an advantage over the longer timeframes as they are more likely to position trade and the system would need to see each bar before it gives out a signal.

I would also think that you would need different systems to trade in different styles of markets.

Can the system traders make some comments on the timeframes and holding period that they trade using systems...Thanks


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## tech/a (27 May 2017)

My current view is to have the program identify price action which is tradable then rate and implement it

This is an on going eduction process for the program on a chart by chart basis

As not all bars are equal
All charts are not equal
All patterns and volumes related to price bars and groups of bars are also not equal

Computers can and do find things HIDDEN to us
Some of the results I see are lightbulb moments


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## Quant (27 May 2017)

tech/a said:


> My current view is to have the program identify price action which is tradable then rate and implement it
> 
> This is an on going education process for the program on a chart by chart basis
> 
> ...





100% +  , these conversations/debates are ones I will not participate in for " Is this a futile undertaking? " is not a relevant question to me , I know its not futile and I have no need to convince anyone either way . I am on the right path and no-one can tell me or convince me otherwise 

And exactly what Tech says all bars are not equal with many irrelevant , low volatility ( small range ) inside bars are a prime example , the key to this whole price action algo type thing is measuring/filtering the things that *matter* to help *disregard* price that doesn't matter .

What is meaningless chop ? 
Where are the most reliable signals produced ?
What are the rules to help define edge ?

Systems traders find solutions

Statistical analysis can and will produce an edge ..  I think that's beyond debate 

I know what I wanted to define when I started this journey . I wrote a bullet list and I worked tirelessly to breakdown each point and work on solutions to measure/define and to assign a set of rules to get an empirically proven edge .

Discretionary traders aren't as discretionary as the word implies , all the successful discretionary traders have rules even though they may not be used in a binary sense . Binary removes doubt , it improves performance , its measurable and therefore easily analyzed . If you can measure it , its easier to improve it  . 

I believe as an ex price action discretionary trader I have an extreme edge over the average number crunching curve fitting algo writer  . Mathematize your thoughts , where it leads is mindboggling  , nothing will get you closer to the illusive " holy grail " .    When x , y & z happen I have an 80% chance of having a positive outcome with outstanding expectancy  is as close as the holy grail gets . There are no absolutes

In any of these threads don't be put of by other peoples expressions of *their *limitations . Its not impossible and it is not easy 

Id rather spend 5 hours on systems building than spend 5 hours discussing whether systems trading is effective  . I already know   .... good luck to all   ... rock on


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## Triathlete (27 May 2017)

Quant said:


> Mathematize your thoughts , where it leads is mindboggling , nothing will get you closer to the illusive " holy grail " . When x , y & z happen I have an 80% chance of having a positive outcome with outstanding expectancy is as close as the holy grail gets .




Then I must be at the holy grail for the time being.....my x , y & z = price , pattern & time...Looking back at my results over 3 years:

Win % = 84.9%
Reward to Risk =1.96
Expectancy ratio = 1.52

over 12 months
Win % 85.2%
Reward to risk = 2.26
Expectancy ratio = 1.77

Happy trading....


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## rb250660 (27 May 2017)

What's your average holding period Tri?


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## Gringotts Bank (27 May 2017)

Triathlete said:


> Then I must be at the holy grail for the time being.....my x , y & z = price , pattern & time...Looking back at my results over 3 years:
> 
> Win % = 84.9%
> Reward to Risk =1.96
> ...




wow, nice work.


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## ducati916 (28 May 2017)

tech/a said:


> My current view is to have the program identify price action which is tradable then rate and implement it




Your words imply a single program. 

I am however assuming a number of different screens within that program identifying different types of price action. Is this a fair assumption?

_This is an on going eduction process for the program on a chart by chart basis_

This implies some form of AI, where the machine learns. As far as I know, this is not yet possible.

_As not all bars are equal
All charts are not equal
All patterns and volumes related to price bars and groups of bars are also not equal
_
We can agree on this.

_Computers can and do find things HIDDEN to us
Some of the results I see are lightbulb moments_

Here is the crux [sort of]:

(a) Historical data is the past;
(b) it is 1 realised path;
(c) there are billions of possible paths that are unrealised

These statements are also true.

Therefore:

(a) the content of a bar contains the market reaction to 'X';
(b) which occurred [the bar] at that time; and
(c) no-one knows what 'X' was [which can include of course market reactions in of themselves]

Some 'Xs' are important, many are not.

Successful systems traders have at a point in time, identified correctly, the prevalent pathway in the market. An easy example that I have seen recently in various threads is 'reversion to the mean'.

Having quickly glanced at the ASX chart, the ASX has exhibited exactly this quality for a number of years, thus, programmes that identify this quality, should be successful.

Markets change [they still go up/down/sideways] over time periods, reflecting [a different] 'X'.

Are the following statements true?

(a) How quickly the trader adapts is a function of the trader.........not the programme.
(b ) How the trader manages risk is a function of the trader..........not the programme

I saw later in a reply '85% expectancy. This is high. This will not [one assumes] be discarded lightly. Some thoughts:

(a) the use of a '%' indicates a sample size [in this case total trades taken] which is 'n'
(b) the expectancy is calculated inductively, therefore realisation of the new 'n' advances only at the square root of 'n', viz more slowly.

Even with excellent risk management [a skill in itself] a very successful programme can turn to custard overnight, but not be detected for a long time. Would you agree?

jog on
duc


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## ducati916 (28 May 2017)

Quant said:


> Id rather spend 5 hours on systems building than spend 5 hours discussing whether systems trading is effective . I already know .... good luck to all ... rock on




Therefore I shall respect your wishes and leave you in peace to pursue your interest. I didn't wish to be rude and simply ignore your [initial] response.

jog on
duc


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## Triathlete (28 May 2017)

rb250660 said:


> What's your average holding period Tri?



The 3 year results based on 90 day average and the last 12 months has been 19 day average


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## barney (28 May 2017)

Triathlete said:


> The 3 year results based on 90 day average and the last 12 months has been 19 day average




Nice work on those stats "Tri"!!

To "Duc" ..... Nothing really concrete to add to the thread, however to state the obvious, the importance of the "bar" being traded needs to be studied in context with the idiosyncrasies of the instrument being traded .... particularly the "time of day" the bars in question are being printed. 

I am a great believer that everything in relation to "Time" is the key to the market's mystery


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## CanOz (29 May 2017)

This guy uses quantitative analysis to generate signals and discretion for context to execute trades ... he's pretty much explained away my edge as well as his. Chat with traders @HF_Trader


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## ducati916 (29 May 2017)

barney said:


> I am a great believer that everything in relation to "Time" is the key to the market's mystery




Market data is historical.
Trades are taken in the present.
The past, does not predict the future.

Therein lies the dichotomy.

This is why mechanical traders talk in terms of probability and expectation.

Asymmetry in the market deals with probabilities and expectations. Probability is nothing more than a math calculation that tries to deal with uncertainty or the unknown, which is of course the future.

It is the asymmetry that seems to be inaccurately calculated, but on this I may be wrong, which is why I was interested in generating this discussion.

jog on
duc


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## Quant (29 May 2017)

Duc you seem to have tried to become systematic , what did you measure and how did you measure it ?  Did you find any measurement that had potential ?   Surely you found something that had a modicum of edge . What would you consider a significant edge ? Many people find an edge but are put of by the amount of transactions at a small size to extract the profit out of a marginal edge .


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## tech/a (29 May 2017)

Fuzzy logic

Computers will find common price action whether it be a single bar or a combination of bars,range and volume 
It needent be perfect but it will reflect
Behaviour in the instrument.

Just as you can calculate crowd behaviour
In a given space so you can in a given instrument.

Like Quant I'll leave you here
I know as he does


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## barney (29 May 2017)

ducati916 said:


> .....  which is why I was interested in generating this discussion.
> 
> jog on
> duc




And a great discussion it could well create Duc!!

In my haste I probably missed the true essence of what you were questioning initially(Nothing new lol) ....
Before I babble any further ...... the "partial post" you originally quoted ... was that yours or someone else's?  Cheers.


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## ducati916 (30 May 2017)

tech/a said:


> Computers will find common price action whether it be a single bar or a combination of bars,range and volume
> It needent be perfect but it will reflect
> Behaviour in the instrument.




It will.

It will all be historical. Which is my point.

jog on
duc


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## ducati916 (30 May 2017)

tech/a said:


> Just as you can calculate crowd behaviour
> In a given space so you can in a given instrument.




You are not calculating crowd behaviour, which implies a 'prediction' of the outcome, viz, 2 + 2 will if added, equal 4.

You are merely observing the numerical volume that actually transacted at a given price, at a given point in time. Past tense. Again.

jog on
duc


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## ducati916 (30 May 2017)

tech/a said:


> Like Quant I'll leave you here
> I know as he does




And that is of course fine.

jog on
duc


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## ducati916 (30 May 2017)

Quant said:


> Duc you seem to have tried to become systematic , what did you measure and how did you measure it ? Did you find any measurement that had potential ? Surely you found something that had a modicum of edge . What would you consider a significant edge ?




I do consider myself systematic, just not possibly with quite the same definition that you may have.

What do I measure?

Now this is an interesting question. My immediate response would have been nothing, but that is actually inaccurate. I measure only when I enter a new trade and I measure:

(a) the historical P/E ratio; and
(b) that the ETF is well diversified; and
(c) the capitalisation; and
(d) the average daily volume

So a mix of some fundamental factors and 1 technical. I have to accept going forward, that these will change, perhaps in a material way. This is a risk that I manage, so this if you like is an ongoing measure.

After the trade is entered, I only observe price in real time, ie, price that I can transact at.

The reason for this is that I no longer rely on the security trending higher/lower/sideways. Any combination of the 3 possibilities will suffice.

In this way I embrace the [incomplete] randomness of the market.

I cannot manage a complete blow-up of the security/bourse/country/currency/etc. That is a black swan beyond my control.

Therefore I diversify my [total] wealth away from purely financial markets and have land/job/ to manage that risk....as best you can.

What is a significant edge?

A significant edge to me is an edge [as you may have gleaned already] is an edge that is independent of market conditions at any given point in time. It must be robust and embrace either high or low volatility, trends or chop, news or no news, etc.

The edge must be scaleable and therefore the edge must be able to compound if required.

jog on
duc


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## ducati916 (30 May 2017)

barney said:


> Before I babble any further ...... the "partial post" you originally quoted ... was that yours or someone else's? Cheers.




No not mine. The partial post belongs to another.

jog on
duc


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## ducati916 (30 May 2017)

Suppose that over time traders have experimented with trading rules, drawn from a very wide universe of trading rules, perhaps tens of thousands of different iterations. As time progresses the rules that happen to perform well historically, attract more attention and are considered serious rules by the trading community, while unsuccessful rules gradually fall by the wayside.

If enough trading rules are considered over time, some rules, by pure luck, even in a large sample, will produce superior performance, even if they do not genuinely possess predictive power.

Mechanical systems, through talking about 'probability' and 'expectation' are talking about predictive power.

The past, does not predict the future.

It would seem that I am denigrating the role of history. That is not my intention. After all "_Those who cannot remember the past are condemned to repeat it._"

jog on
duc


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## Quant (30 May 2017)

At first this thread ' appeared ' to be in good faith but now it seems something else , yeah all systems traders  running statistical analyisis based on empirically significantly reliable rules are running on ' pure ' luck . There is another participant who will never get another second of my time and almost with as much doubt as the efficacy of systems trader will now in all likely hood stalk anyone who thinks differently  . The only thing I can glean from all this is the OP "cant " systems trade ....    Rock on

freaking fragile lawyers


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## tech/a (30 May 2017)

Analysis of data is commonplace in scientific research

Why is it that Data analysis in the Financial world is seen as less accurate.

Duc
You've been around a long time
All I've ever seen from you is arguement without
Any positive input to a trading plan or strategy

To be honest I think you enjoy circular meaningless 
Exchange


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## ducati916 (31 May 2017)

tech/a said:


> Analysis of data is commonplace in scientific research
> Why is it that Data analysis in the Financial world is seen as less accurate.




Simply because of the number of uncontrolled variables. Some examples:

(a) each ordinal or cardinal buy/sell order of each market participant; and
(b) the information driving those ordinal/cardinal decisions.

_Duc
You've been around a long time
All I've ever seen from you is arguement without
Any positive input to a trading plan or strategy_

What is positive input?

Can it not be legitimate questions that create some thought/debate? My questions seek to challenge some of the assumptions inherent in mechanical trading based on historical time series data. If in point of fact these are not assumptions at all, then the challenge can easily be answered. If not, then the assumption that has been made, is potentially a uncontrolled risk or variable that may, under certain or specific conditions bite you.

jog on
duc


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## ducati916 (31 May 2017)

Quant said:


> At first this thread ' appeared ' to be in good faith but now it seems something else
> 
> , yeah all systems traders running statistical analyisis based on empirically significantly reliable rules are running on ' pure ' luck .




The thread is in 'good faith'. I engage with those that wish to, and leave in peace those that do not wish to.

You use 3 words: '_empirically, significant[ly], reliable_.'

(a) Empiricism refers to historical, or the past; which implies that
(b) significant, referring to confidence levels calculated statistically, are high; which then
(c) gives reliable, or robust rules that have predictive power.

(a) + (b) does not = (c)

I simply provided an example, whereby luck alone could, account for the success of the rules selected. 

jog on
duc


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## ducati916 (2 June 2017)

A bit of fun for the systems traders out there. 


There is a set of trading rules that only fails [true positive] 1/1000 times. However, when entering the trade, there is a 5% false positive rate in screening trades, which can take you out of the trade based on your risk management rules, thereby missing the return. You are only authorised by your partner/manager/firm to take a maximum of 10 trades each year. Trades are screened through this rule set randomly from all manner of securities, [stocks, futures, options]. A trade is screened and it is positive. What is the probability that the trade will fail? Will you take the trade?

jog on
duc


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## ducati916 (2 June 2017)

So........a bit more fun:

_Using my Bloomberg, I’d just entered in an index built from companies with “cat” in their names -- yes, the furry felines -- hit a button and watched it back-test to an 849,751 percent return. 

I notified Andrew Ang, head of factor investing strategies at BlackRock Inc. Everything in my program was by the book, I assured him. It was rules-based, equal-weighted and premised on a simple story -- that people love cats.

So how, exactly, did I go about investing in cats? Factor funds rely on formulas, preset criteria that tell you which stocks to include and which to chuck out. It’s the idea behind things like value ETFs, which gather groups of shares that share the common characteristic of cheapness. The idea is that put together, they’ll beat the wider market.

My model buys any U.S. company with “cat” in it, like CATerpillar, or when “communiCATion” is in the name. It rebalances quarterly to keep trading costs low. That’s important for when Vanguard or BlackRock license it and charge a competitively low fee.

Because of my stubborn desire to produce claw-some returns, I took my thesis and ran with it. Fine, so my first few trials didn’t spit out exactly what I wanted. No biggie, I’ve got the statistical resources of Bloomberg LP at my fingertips -- so I tinkered with the data until it did.

At first, I only invested in companies beginning with C - A - T to capture the essence of my investment thesis. 

Not great. But expand the data-set a little, CAT anywhere, and the returns look stellar, making my hypothesis look better. In the scientific community, this is called p-hacking
_
Contains some of the pitfalls inherent in backtesting. They can all be fixed of course, but you need to be aware of the issues.

jog on
duc


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## rb250660 (2 June 2017)

Anyone with 1/10 of a brain know this is never going to work. So what's your point? His back testing methodology was probably perfect, it's the underlying theory as to why profits are generated that is flawed. I fail to see your point about bad back testing. So tell me, how do you fix it? Change the letters to DOG? Or might it be better to say that after X bar pattern, the probability of Y happening, is Z.

I say that if done correctly
X + Y does = Z


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## ducati916 (3 June 2017)

rb250660 said:


> it's the underlying theory as to why profits are generated that is flawed.




Correct.

People can convince themselves of all manner of fundamental/economic/other reasons as to why the profits are being generated.

Some may rely on the p-test to validate their hypothesis as to why/how profits are being generated.

All science entails human judgement, and using statistical models doesn’t relieve us of that necessity. Working with misspecified models, the scientific value of significance testing is actually zero –  even though you’re making valid statistical inferences! Statistical models and concomitant significance tests are no substitutes for doing real science. Or as a noted German philosopher once famously wrote:

_There is no royal road to science, and only those who do not dread the fatiguing climb of its steep paths have a chance of gaining its luminous summits._

In its standard form, a significance test is not the kind of “severe test” that we are looking for in our search for being able to confirm or disconfirm empirical scientific hypothesis. This is problematic for many reasons, one being that there is a strong tendency to accept the null hypothesis since they can’t be rejected at the standard 5% significance level. In their standard form, significance tests bias against new hypotheses by making it hard to disconfirm the null hypothesis.

jog on
duc


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## tech/a (3 June 2017)

Duc
What babble are you going on about

More circular waffle with absolutely no value.


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## ducati916 (3 June 2017)

tech/a said:


> More circular waffle with absolutely no value.




It is abstract, certainly. You seemingly find no value in the abstract, which is fine. Some might.

jog on
duc


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## ducati916 (5 June 2017)

Quant said:


> Statistical analysis can and will produce an edge .. I think that's beyond debate




Very far from being beyond debate.

The statistical outliers, which give the 'probability' of an outlier event have no place in the financial markets.

August 31 1998 - 1/20,000,000, expectation 1/100,000 years
3 days in August - 1/500,000,000,000

In 1997 Dow falls 7.7% - 1/50,000,000,000
The 1987 crash - less than 1 in 10 raised to 50 power. Essentially impossible.

So the point of all this?

When the backtesting crunches all of the data, available to be analysed, we have the following possibilities:

(a) the back-tester excludes these points in constructing their trading plan; or
(b) the back-tester includes these points and adds a risk management strategy to the trading plan.

If (a), well good luck with that.

If (b), then this is more interesting.

Day-trading stocks should manage the risk as about as well as it can be managed. Flat every market close and a new entry the following day, unless a trading halt is called. Then at the next open, well who knows. Futures day trading, if limit lock days still exist, is not as risk free as stocks on any given trading day. Day trading options, pretty much a waste of time, although with the weeklies, not impossible. As long as you are long volatility, your risk is managed to entry price.

Many [most] will position trade over an indeterminate time period, but longer than 1 trading day. The previous declines and odds were from an index. An individual stock will likely be a multiple of any index move.

Of the risk management strategies that I have seen on this site, which is only I'm sure a small sample, all would essentially be crushed in these type of outlier events. For those who traded through the market collapse of 2008, which I did, Bear and Lehman vaporised and Citi etc trading at fractions. Looking at the historical charts [bars] gives a very false impression, the contents of the candle is telling fibs. The bars imply that trades took place pursuant to a stochastic pricing process intra-day. Nothing of the like actually took place: liquidity just evaporated, in the US markets which claim the deepest most liquid markets in the world. One consistency is that in times of [extreme] stress, liquidity does not exist.

Most traditional risk management strategies that I have seen on this site, require and rely on there being liquidity. If there is not, you do not have a any risk management at all in place.

Mathematics and statistics in particular, are seriously flawed tools, at specific points in market [dis]function. They are fine at most other times. That is the problem.

jog on
duc


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## tech/a (5 June 2017)

*August 31 1998 - 1/20,000,000, expectation 1/100,000 years
3 days in August - 1/500,000,000,000

In 1997 Dow falls 7.7% - 1/50,000,000,000
The 1987 crash - less than 1 in 10 raised to 50 power. Essentially impossible.*


Where and how do you determine these probabilities??
Your discussing statistical analysis in a scientific manner and using (From what I see)
Made up statistics.

Again meaningless argument.


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## ducati916 (5 June 2017)

tech/a said:


> Where and how do you determine these probabilities??
> Your discussing statistical analysis in a scientific manner and using (From what I see)
> Made up statistics.
> 
> Again meaningless argument.




No they [the statistical calculations] are accurate to the probabilities.

As to meaningless, clearly they are meaningless to you, which is fine. Maybe you don't use statistics or probabilities in your trading. For those that do however, the problem with using statistical analysis and probabilities in their trading [mechanical systems] should be obvious.

jog on
duc


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## tech/a (5 June 2017)

Haha

Duc much has passed since we first met.( Well nearly )

Real Scientific Statistical analysis is in the Family.

But 
Jog on


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## ducati916 (7 June 2017)

tech/a said:


> Haha
> 
> Duc much has passed since we first met.( Well nearly )
> 
> ...




tech/a,

Not all uses of statistical analysis are inappropriate, for example looking at physical characteristics such as height, weight. These lend themselves to statistical analysis and the results will be reliable.

Statistical analysis applied to the financial markets is not [as] reliable as its proponents advocate. It is useful until it is not. The problem being that you never know when it stops being useful.

So really this thread is more about how to manage the risk than anything else. Which by implication is critical of theory touted as risk management, that is no such beast.

jog on
duc


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## ducati916 (7 June 2017)

So in that vein:

(a) You are a swing trader. You trade a mechanical system, or a discretionary system or even a hybrid of the two. 

(b) You enter a new long position on day 1, or possibly open a new 'portfolio' of long positions.

(c) On day 2 that position or portfolio gaps 15% lower and is trading lower fast.

Statistical analysis of this scenario would tell you that the probabilities of this happening are remote to impossible, particularly if you have used some form of (a) backtesting and (b) particularly in the portfolio scenario.

What would, or should, the 'average' individual trader, trading his own money do in this circumstance?

jog on
duc


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## Triathlete (7 June 2017)

ducati916 said:


> So in that vein:
> 
> (a) You are a swing trader. You trade a mechanical system, or a discretionary system or even a hybrid of the two.
> 
> ...



In my situation 15% is my maximum stop loss position. So I would close the position immediately.


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## ducati916 (7 June 2017)

Triathlete said:


> So I would close the position immediately.




Which is the response that I would expect to see, particularly on a single position basis. Would the same response apply if your entire portfolio contemporaneously, followed suit?

Also, I'm interested, with regard to an alternate thread that discusses 'diversification': is diversification, or concentration, your preferred methodology?

For tech/a

“But everything was not fine. Long-Term, which had calculated with such mathematical certainty that it was unlikely to lose more than $35 million on any single day, had just dropped $553 million — 15 percent of its capital — on that one Friday in August 1998. It had started the year with $4.67 billion. Suddenly, it was down to $2.9 billion. Since April, it had lost more than a third of its equity.”

This where the calculation came from.

jog on
duc


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## tech/a (7 June 2017)

ducati916 said:


> For tech/a
> 
> “But everything was not fine. Long-Term, which had calculated with such mathematical certainty that it was unlikely to lose more than $35 million on any single day, had just dropped $553 million — 15 percent of its capital — on that one Friday in August 1998. It had started the year with $4.67 billion. Suddenly, it was down to $2.9 billion. Since April, it had lost more than a third of its equity.”
> 
> ...




If the stock had lost a third since April there is a high chance you wouldn't have been in the trade at the time it dropped 15 %.

Duc your concentrating on outliers 
Your making generalisations 
Well designed systems will survive outliers.

TechTrader missed the 2008 melt down although not at
It's highest open profit I closed out completely with enough
To buy a house 3 mths before it crashed 
90 % of positions closed out on rules in the system. With only one open
And 7 yrs of live trading on the Chartist I decided I'd had enough.

On diversification 
I now mainly trade DAX and FTSE Futures 
I can control $100's of 1000s of Stock in one contract
I can trade long and short.

This what I was alluding to in the thread.

Much more coming on the topic of Systems development.
But not here.


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## skyQuake (7 June 2017)

ducati916 said:


> Which is the response that I would expect to see, particularly on a single position basis. Would the same response apply if your entire portfolio contemporaneously, followed suit?
> 
> Also, I'm interested, with regard to an alternate thread that discusses 'diversification': is diversification, or concentration, your preferred methodology?
> 
> ...




The beauty here is that most retail traders can cut a 15% loss with minimal slippage. LTCM had positions that were insane multiples of ADV, made worse by the copycat funds that were levered in the same trade.


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## ducati916 (7 June 2017)

tech/a said:


> Duc your concentrating on outliers
> Your making generalisations
> Well designed systems will survive outliers.




Yes, I am concerned by 'outliers' exactly because in the financial markets they are not outliers.


tech/a said:


> Duc your concentrating on outliers
> Your making generalisations
> Well designed systems will survive outliers.




Yes, I am concentrating on 'outliers' as many [most] believe that their risk management is up to snuff.

I am currently talking in the abstract, but that is because in the abstract you can make normative universal statements.

Some might. Many will not.

jog on
duc


----------



## ducati916 (7 June 2017)

tech/a said:


> TechTrader missed the 2008 melt down although not at
> It's highest open profit I closed out completely with enough
> To buy a house 3 mths before it crashed
> 90 % of positions closed out on rules in the system. With only one open
> And 7 yrs of live trading on the Chartist I decided I'd had enough.




Which is my point, the past does not predict the future.

jog on
duc


----------



## ducati916 (7 June 2017)

tech/a said:


> On diversification
> I now mainly trade DAX and FTSE Futures
> I can control $100's of 1000s of Stock in one contract
> I can trade long and short.




Lots of leverage. Lots of risk.

jog on
duc


----------



## ducati916 (7 June 2017)

skyQuake said:


> The beauty here is that most retail traders can cut a 15% loss with minimal slippage. LTCM had positions that were insane multiples of ADV, made worse by the copycat funds that were levered in the same trade.




All true. All historical.

As to 'retail traders' are you sure about that?

jog on
duc


----------



## skyQuake (7 June 2017)

ducati916 said:


> All true. All historical.
> 
> As to 'retail traders' are you sure about that?
> 
> ...




Reasonably - if you get long in a day, you should also be able to reasonably get out in a day. On a bad day you'll pay some slippage but nothing ruinous!
Accumulating a large position in illiq small caps over weeks/months can change that obviously


----------



## skc (7 June 2017)

Interesting discussion... I find this to be a good link for some background on statistics in finance.

https://sixfigureinvesting.com/2016/07/understanding-interpreting-high-sigma-events-black-swans/


----------



## Quant (7 June 2017)

Outliers certainly can catch you out , but they work both ways as long as you trade markets in both directions , the 15% gap down can be a winner  . I don't worry about outliers too much because over time they will even out if you are a proactive bi directional trader .  Trading indice limits the max slippage/gaps compared to stocks  , indice is diversification . I have older systems tested over decades that got huge drawdown in 1987 crash , difficult to filter  a crash from all time high , Things have changed with curbs to prevent these huge moves so not such a massive concern .  Outliers are a risk for " EVERYONE " not just systems traders and id go as far to say a systems trader is " LESS " likely to have the debilitating drawdowns that most market participants go through  . If a 10% drawdown concerns you go invest in govt bonds and sleep well at night .  This thread is dead ..

multiple systems running concurrently is a form of diversification as well and likely the ultimate form of it . smooth curve is the realm of systems traders . measure it and you can improve it  .  " SOLUTIONS "  it is what I do  ... systems traders can beat the market with way less portfolio risk with only 20% of the time in the market  . YES that's right

Worse case scenario is something we need to be aware of but it doesn't stop you driving to work / crossing the road / insert any daily task  ...


----------



## tech/a (7 June 2017)

ducati916 said:


> Lots of leverage. Lots of risk.
> 
> jog on
> duc




No more risk than trading 100s of 1000s of stock.
But unlike stock I'm in and out generally in under 30 min.
May do up to 3 trades a session and 3 sessions a week

Agree with Quant.


----------



## ducati916 (7 June 2017)

skyQuake said:


> Reasonably - if you get long in a day, you should also be able to reasonably get out in a day. On a bad day you'll pay some slippage but nothing ruinous!
> Accumulating a large position in illiq small caps over weeks/months can change that obviously




I have already discussed day-trading. Most will day-trade either:
(a) stocks; or
(b) futures; or
(c) both.

If day-trading futures or stocks, what is you response to the risk of
(a) lock limit; and/or
(b) trading halt?

jog on
duc


----------



## ducati916 (7 June 2017)

skc said:


> Interesting discussion... I find this to be a good link for some background on statistics in finance.
> 
> https://sixfigureinvesting.com/2016/07/understanding-interpreting-high-sigma-events-black-swans/




Yes it is. There are some issues where the author commits common errors. I'll address these directly later.

Ta.

jog on
duc


----------



## ducati916 (7 June 2017)

tech/a said:


> No more risk than trading 100s of 1000s of stock.
> But unlike stock I'm in and out generally in under 30 min.
> May do up to 3 trades a session and 3 sessions a week




Same question:

If day-trading futures or stocks, what is you response to the risk of
(a) lock limit; and/or
(b) trading halt?

jog on
duc


----------



## ducati916 (7 June 2017)

Quant said:


> Outliers certainly can catch you out , but they work both ways as long as you trade markets in both directions , the 15% gap down can be a winner . I don't worry about outliers too much because over time they will even out if you are a proactive bi directional trader .




Yes, they can, but a 'good' outlier is not an outlier that could deplete/destroy your trading capital.

Even if outliers did 'even out', this totally misses the point which is an outlier could wipe you out. If you are no longer playing the game, or playing with significantly reduced capital, exposure to a positive outlier may not rectify the initial damage from the negative event.

jog on
duc


----------



## ducati916 (7 June 2017)

Quant said:


> Outliers are a risk for " EVERYONE " not just systems traders and id go as far to say a systems trader is " LESS " likely to have the debilitating drawdowns that most market participants go through .




Yes they are. It is just that systems traders seem less aware that they are still at risk, which is bourne out in your answer.

jog on
duc


----------



## ducati916 (7 June 2017)

Quant said:


> multiple systems running concurrently is a form of diversification as well and likely the ultimate form of it . smooth curve is the realm of systems traders . measure it and you can improve it




The reliance on mathematics, or rather the overconfidence in mathematics, is a risk in of itself.

jog on
duc


----------



## ducati916 (7 June 2017)

Quant said:


> Worse case scenario is something we need to be aware of but it doesn't stop you driving to work / crossing the road / insert any daily task ...




Which is my point.

jog on
duc


----------



## skyQuake (7 June 2017)

ducati916 said:


> I have already discussed day-trading. Most will day-trade either:
> (a) stocks; or
> (b) futures; or
> (c) both.
> ...



Stock Halt - Good risk management helps a lot here... eg ACO went to new highs then 0. Concentration will clearly hurt in this case
Futs Halt - pretty rare, but you can always hedge with other correlated futs or even CFDs


----------



## tech/a (7 June 2017)

FUTs Locked limit.

Never seen it on an Index.
Id be on the right side of it anyway and would
just call you up and P-a-r-t-a-y.

Stock Halt
Happens often when trading Smalls
But Has never been an issue relative to
capital at risk and net worth.


----------



## Quant (7 June 2017)

ducati916 said:


> Yes they are. It is just that systems traders seem less aware that they are still at risk, which is bourne out in your answer.
> 
> jog on
> duc



You are clueless on what I or anything else is aware of . good bye from me  . If you ever wanted clues about how to correct " your " failings  on system trading you aren't going to get **** from me or anyone else .  YOU cant do it and YOU are so clever it must be impossible because it cant be ME    . sorry I wasted a couple minutes on you    ...  wont happen again

I know risk of ruin  and probability curves/matrixes  , position size , trade risk ( I document and measure all aspects ) . Trading carries risk and you can only manage it so far . like I said go get some bonds and be risk free and sod of  . You've made your point , you R a pussy

The skinny part of the curve is your worst case scenario and as a competent systems trader I probably will never see that , bit like me winning lotto div 1 , possible but extremely unlikely , WE ALL KNOW THERE ARE NO ABSOLUTES


----------



## ducati916 (7 June 2017)

tech/a said:


> Stock Halt
> Happens often when trading Smalls
> But Has never been an issue relative to
> capital at risk and net worth.




Fair enough, in this case the answer [would seem to be] diversification, leading to small position sizes. From reading some of your posts, it would seem that you have moved in the opposite direction, viz more concentrated [day] trading futures.

Also given that a stock halt was posited in the day trading milieu, how small a position would you day trade?

When I day traded, I would trade 1 position at a time, and they were definitely larger than if I was running a longer term portfolio of stocks. If a stock got caught in a halt, moves against my position definitely hurt and I definitely got caught a few times.

jog on
duc


----------



## ducati916 (7 June 2017)

tech/a said:


> FUTs Locked limit.
> 
> Never seen it on an Index.
> Id be on the right side of it anyway and would
> just call you up and P-a-r-t-a-y.




Nice.

jog on
duc


----------



## ducati916 (7 June 2017)

skyQuake said:


> Futs Halt - pretty rare, but you can always hedge with other correlated futs or even CFDs




So you would do this as a matter of course? Or are you saying after the fact, you would try to implement this as a way to save/bail out the position?

jog on
duc


----------



## ducati916 (7 June 2017)

Quant said:


> You are clueless on what I or anything else is aware of . good bye from me . If you ever wanted clues about how to correct " your " failings on system trading you aren't going to get **** from me or anyone else . YOU cant do it and YOU are so clever it must be impossible because it cant be ME  . sorry I wasted a couple minutes on you ... wont happen again




You seem very angry. Not my intention at all. My apologies.

jog on
duc


----------



## tech/a (7 June 2017)

ducati916 said:


> You seem very angry. Not my intention at all. My apologies.
> 
> jog on
> duc




He doesn't know you Duc!

Small caps
5-10K a position.
Max 5 positions but generally 3

Bit of fun really keeping the hand in.
Futs
1-3 Contracts.


----------



## ducati916 (7 June 2017)

So, with regard to the article linked earlier. There are a couple of issues.

(a) Normal [or any other types] distributions; and
(b) Explanations after the fact

(a) Mathematical distributions and their calculations are in the realm of pure math, or abstract. Pure mathematics is not [in this case] applicable to real life situations [applied math] and this is the root of the problem.

(b) After a [true] black swan event, there emerges a narrative that explains the 'what happened' and makes it seem that if only a, b, c , had pertained, then the event could have been mitigated/avoided/managed.

This [once] again opens the door for the next failure.

True black swans are rare. They are just not as rare as advertised. Any number of recent events would not classify as black swans: 2008 meltdown, Brexit and many others which were known well in advance and yet, still, they caught many with their pants down.

Increasing complexity, correlations all contribute to [true] black swans. The first step in managing them, is to acknowledge that they exist and assume that you will be caught in one at some point. From that starting point, you are at least operating in reality.

jog on
duc


----------



## skyQuake (7 June 2017)

ducati916 said:


> So you would do this as a matter of course? Or are you saying after the fact, you would try to implement this as a way to save/bail out the position?
> 
> jog on
> duc



Its a contingency plan
Most serious traders have backups in place - eg phone trading, laptop. Tech fails often enough that this should be standard practice

Tech failure (exchange side) - Hedge with CFDs via pc or phone app
Tech failure (trading pc/platform) - Call broker/hedge with CFDs via phone app
Net failure - Call broker
Circuit Breaker halts - Hedge with alternate futs eg S&P/Dow/SX5E/DAX if necessary etc
Limit up/Limit down - Not necessary to hedge? this should not be a surprise
Swiss currency debacle - Panic!

Knowing whether your conditional orders sit on the exchange or your broker's server is paramount

Also knowing at what %move does the relevant exchange cancel orders as "disorderly trading"
eg. Dec 2008 SFE cancelled all futs trades > 10%, so if you bought at +8% and sold at +11% you'd be pretty pissed off at midday when the SFE issues their statement about cancellations and the SPI is flat!


----------



## ducati916 (7 June 2017)

tech/a said:


> Bit of fun really keeping the hand in.
> Futs
> 1-3 Contracts.




tech,

The stock positions are obviously a fraction of your net worth and not too much of a concern even if they went to zero.

Not so with the futures contracts that carry a significant level of leverage.

Getting caught in a lock limit will take a few years off of your life expectancy, as well as potentially a significant amount of dollars from your account if it goes against you.

The only way I know to dig yourself out is via the options market and exercising the position to close out your futures exposure. It's not pretty and you lose a ton of money, but at least you can close out.

jog on
duc


----------



## ducati916 (7 June 2017)

skyQuake said:


> Its a contingency plan
> Most serious traders have backups in place - eg phone trading, laptop. Tech fails often enough that this should be standard practice




So it's after the fact [generally] speaking. This is usual and certainly what I did myself for many years.

True risk management needs to be before the fact. This has some obvious drawbacks:

(a) expensive; and
(b) complicated; and
(c) usually not needed.

Which leads to some form of risk management that works in most circumstances. Therein lies the hidden risk.

Trading is so much fun, it would be terrible to be taken out, never to return. So what is needed is something that is cheap, or adds to your bottom [profit] line and classifies as [effective] risk management against the rare event that hurts your orientation in the market.

jog on
duc


----------



## skyQuake (7 June 2017)

ducati916 said:


> So it's after the fact [generally] speaking. This is usual and certainly what I did myself for many years.
> 
> True risk management needs to be before the fact. This has some obvious drawbacks:
> 
> ...




Pre-trade risk management? If x, then y kind of stuff?
Or more akin to portfolio construction where you hold mostly cash and have small bets on outrageous events?


----------



## Quant (7 June 2017)

tech/a said:


> He doesn't know you Duc!
> 
> Small caps
> 5-10K a position.
> ...




Tech knows the drill

As Howard Bandy advocates trade frequently , trade accurately , hold a short period of time .

There is risk taken care of ..  trade a lot so no 1 trade puts you under duress , trying to add 20% to account in one trade increases risk of ruin  , doing 50 trades to make 20% doesn't  . Accuracy is a high hit rate with applicable risk management to make expectancy palatable . Time is risk so keep them trades short , less time in market = less chance **** going south  . Trade when the market is active , play golf when it isn't  .  XJO for instance does  a massive part of daily range in first 90 minutes , SPX same . Take a proportion of that range and be done . There are many ways to deal with risk  , it aint rocket science  . BUT unless you do stats on this type of stuff you are clueless ( don't be clueless ) .. I'd rather be a sytems trader flying on blind luck than be a non systems trader flying totally  blind   ( insert sarcasm emoji ) The OP  just doesn't get it or just likes to argue ( he is a lawyer afterall and will continue to argue even when he knows he isn't correct , it's his job . Don't give him practice )  . Its not difficult to do this systems stuff logically  ..


----------



## tech/a (7 June 2017)

> We all know there are no absolutes




And there doesn't have to be !


----------



## Quant (7 June 2017)

tech/a said:


> And there doesn't have to be !




Precisely Define the probability , manage the possibility  for we know probability doesn't preclude possibility


----------



## ducati916 (7 June 2017)

skyQuake said:


> Pre-trade risk management? If x, then y kind of stuff?
> Or more akin to portfolio construction where you hold mostly cash and have small bets on outrageous events?




More option (a), although option (b) is a way to go, it just doesn't sit comfortably with most people, myself included.

jog on
duc


----------



## tech/a (7 June 2017)

Well duc 
Once I became comfortable with the fact that fuzzy is ok and 
I can do very well with fuzzy it all fell into place.
That was many years ago.


----------



## ducati916 (7 June 2017)

Quant said:


> Precisely Define the probability , manage the possibility for we know probability doesn't preclude possibility




Defining the 'probability' is the first error if using mathematical models. This is not an issue if you manage the 'possibility'.

In your earlier post you listed a number of risk management strategies promulgated by Howard.

_As Howard Bandy advocates trade frequently , trade accurately , hold a short period of time _.

However not everyone wants to, or can, trade this way, specifically, holding a short period of time, although 'short period' is not defined.

" _.. trade a lot so no 1 trade puts you under duress , trying to add 20% to account in one trade increases risk of ruin , doing 50 trades to make 20% doesn't_ "

I'm not clear on whether this is a strategy of diversification, or just high frequency trading. 

_There are many ways to deal with risk , it aint rocket science . BUT unless you do stats on this type of stuff you are clueless ( don't be clueless ) _.

We return to 'stats' which is the reliance on the empirical. This is what I oppose. I am more of the mind to manage risk a priori. To state that an absence of an empirical analysis makes the person clueless, is an assumption that smacks of mathematical arrogance and itself implies a blindspot to risk.

_The OP just doesn't get it or just likes to argue ( he is a lawyer afterall and will continue to argue even when he knows he isn't correct , it's his job . Don't give him practice ) . Its not difficult to do this systems stuff logically .._

What does 'OP' stand for, I'm curious?

Yes I am a lawyer and again it is a misconception that we [as a profession] argue when we know we are wrong. We have a legislated code of ethics that specifically addresses this point.

I enjoy a spirited discussion, this is true, but only with willing participants. I will on occasion argue a position [set of facts] that I do not agree with, playing devils advocate, but this is not to say that I would argue as a fact something I knew to be false.

Mathematics is [pure] logic. However in logic the premise must be a true statement, otherwise the conclusion, even if argued logically, will be incorrect. With statistics, as applied to financial markets, the premise is incorrect, which has been demonstrated a number of times with high profile blow-ups.

jog on
duc


----------



## ducati916 (7 June 2017)

tech/a said:


> Well duc
> Once I became comfortable with the fact that fuzzy is ok and
> I can do very well with fuzzy it all fell into place.
> That was many years ago.




Fuzzy is fine as long as you know the limitations of fuzzy. You have been around a long time and traded a number of market environments and survived, maybe through (a) luck, (b) skill or (c) some combination thereof.

I know that I myself survived in a number of cases through sheer luck. Realising that made me re-assess exactly what I was doing.

The thing is fuzzy works well 99% of the time. New traders equate 99% with 100%. 100% is very, very hard to achieve, maybe impossible.

Abstract discussions such as this may, illuminate some of the pitfalls. That is one benefit. Other benefits can accrue from explanations about alternatives.

jog on
duc


----------



## tech/a (7 June 2017)

Duc 
You don't have to be right 100% 
Luck or brilliance it doesn't matter.
You just have to recognise opportunity
Know what to do with the opportunity 
Then DO IT!

Do the above ONCE and you could change your life .

Eg
The housing boom
The tech boom
The mining boom
The gold boom
The oil slump
The rise of the dollar 
The rise of the DJI
The rise of the DAX 

There are countless opportunities you DONT have to get 100 % right.

Don't let FEAR cripple you
You'll look around and just see a list of opportunities----LOST!


----------



## rb250660 (7 June 2017)

ducati916 said:


> Fair enough, in this case the answer [would seem to be] diversification, leading to small position sizes.
> 
> jog on
> duc




Are you sure? That's an assumption on your part that may be (and probably is) incorrect. If my net worth is $10mil, and I trade with $500k and bet $25k per trade on a small cap is that a small position size? I dunno about everyone else but it isn't to me. Everything isn't always as it seems on the surface.


----------



## ducati916 (8 June 2017)

tech/a said:


> Duc
> You don't have to be right 100%
> Luck or brilliance it doesn't matter.
> You just have to recognise opportunity
> ...




I'm not so concerned with being right, as with being wrong. As long as I can exit, or manage being wrong so that I'm alive to fight another day.

jog on
duc


----------



## ducati916 (8 June 2017)

tech/a said:


> Do the above ONCE and you could change your life .
> 
> Eg
> The housing boom
> ...




If you catch it all, or at least the majority, with enough size, yes, it could. However as previously pointed out to me: _As Howard Bandy advocates trade frequently , trade accurately , hold a short period of time, _this style of trading would preclude much of that.

Something like your old techtrader could catch something like the above.

jog on
duc


----------



## ducati916 (8 June 2017)

rb250660 said:


> Are you sure? That's an assumption on your part that may be (and probably is) incorrect. If my net worth is $10mil, and I trade with $500k and bet $25k per trade on a small cap is that a small position size? I dunno about everyone else but it isn't to me. Everything isn't always as it seems on the surface.




Now in context:

Initially from tech/a

_Stock Halt
Happens often when trading Smalls
But Has never been an issue relative to
capital at risk and net worth.

Fair enough, in this case the answer [would seem to be] diversification, leading to small position sizes. _

You seem to have started your analysis with the word 'diversification' and worked backwards. This has led to your assumption that the word diversification pertains to a diversification of stocks held, in a single strategy.

Clearly this need not be the case. The word diversification could equally be applied to a diversification of strategies, which has already been raised on this thread as an option.

Further, it ought to be clear that by including the words [_would seem to be_] in the sentence, that the sentence becomes conditional on confirmation by the original protagonist. My sentence is therefore in the form of a question. It cannot therefore be an assumption.

_If my net worth is $10mil, and I trade with $500k and bet $25k per trade on a small cap is that a small position size_?

Well that is 5% of your trading capital as a position size and your trading capital is 5% of your net worth. That to me, would seem to be prudent, or a small position size.

Putting $25K into a small cap might or might not be a small position size. All depends doesn't it.

jog on
duc


----------



## ducati916 (8 June 2017)

So from the abstract, to the practical.

Today I manage risk differently than I have in the past. I offer this as an alternative to some of the other strategies.

My starting point is the structure of the security. Do I want individual stocks? The answer is no. While individual stocks have many advantages, they also have disadvantages that for me, cross them off my list.

I will only hold ETFs. There are many to choose from. If you hold a sector ETF, for example 'consumer retail' you have a concentration of consumer retail stocks. Usually, not what I want.

I want a concentrated position, that is diversified. So I want an index, or an ETF structured like a mutual fund with a diversified holding of stocks. The reason will become clear later. On occasion I will hold commodity ETFs [Gold/Silver]. I want a dividend yield. It must be optionable.

An ETF does not preclude the ETF from being delisted due to lack of assets under management and other reasons, but this risk you have to accept for the most part. Just ensure in your selection that you choose wisely.

Then I look at structuring the trade. I want to and will hold for long periods of time. This is now measured in years rather than days or months. I want the trade position to be comprised of:

(a) ETF shares; and
(b) option position; and
(c) cash position.

My assumptions entering the trade position are:

(a) it will rise; and
(b) it will fall; and
(c) it will go nowhere.

The option position and cash position are the risk management tools after the selection of the ETF.

The options are used simply as a covered call position. So they generate an income. As each contract is 100 shares, hence the requirement to keep the number of ETFs lower, which allows lower trading costs and more contracts per position.

I am looking to trade the position over time. So I will sell shares or allow shares to be exercised when in an uptrend, thereby adding to the cash balance.

In an extended chop, the options expiry OTM provide a return while waiting for something to happen.

In a downtrend, you will lose money on shares held, which will be offset by income from OTM options expiring.

At certain points, I will add to the position from cash.

It is not foolproof. Nothing is. It is an alternative way of trading that seeks to embrace randomness, rather than avoid randomness [assuming you even consider randomness].

jog on
duc


----------



## Triathlete (8 June 2017)

ducati916 said:


> Also, I'm interested, with regard to an alternate thread that discusses 'diversification': is diversification, or concentration, your preferred methodology?




It all depends but usually it is between 5 and 12 stocks.

It is closer to 5 stocks in a trading portfolio and between 8 and 12 for a longer term portfolio.

While it is true that diversification reduces risk, a portfolio of shares that is over-diversified is exposed almost exclusively to market risk, which cannot be eliminated by diversification

As a trader, if you are looking to achieve higher returns, you invariably need to take on a higher level of volatility to outperform the market.

Therefore, you need to hold a smaller number of shares around 5-8 to actively manage the specific risk.

If you do not have time to manage the specific risk then holding a portfolio of 8 to 12 shares enables you to reduce volatility without dramatically reducing returns.

You do not get twice the benefit from holding 20 stocks than you do from holding 10,and you certainly do not get 10 times the benefit from holding 100 rather than 10.

It makes sense to simply get rid of the stocks that are going sideways or down. We only want to hold stocks that are rising in price. ( if going long)

Assets that move sideways or fall in price have a negative effect on your overall ability to create wealth.

If stocks are falling in price, it increases your risk and reduces your overall returns.

Cheers Triathlete


----------



## ducati916 (8 June 2017)

Tri,

Essentially you are advocating the fairly standard methodology of the systems traders, which is select stocks based on specific criteria, hold those that win, cull those that don't, measured by specific price levels, or some other criteria.

Most of the time, that works perfectly well. There will be times, when it doesn't. That is my concern. Although the more simple the system, the more resistant it is to outliers. Simple in financial markets is an attribute.

jog on
duc


----------



## ducati916 (8 June 2017)

For consideration:

(a) There has been a suggestion that the higher the volatility, the higher the returns; and
(b) the higher the diversification, the lower the returns.

So currently, in the US stock market, volatility is historically about as low as it has ever been, yet market [index] returns have been trending higher since 2009, viz. high diversification [500 stocks SPY].

So my question:

Given the high returns, with the opposite of the metrics claimed, should you increase your exposure and/or leverage at this current point in time.

jog on
duc


----------



## Triathlete (8 June 2017)

ducati916 said:


> Tri,
> 
> Essentially you are advocating the fairly standard methodology of the systems traders, which is select stocks based on specific criteria, hold those that win, cull those that don't, measured by specific price levels, or some other criteria.
> 
> ...




I personally like to keep things simple as there is no use over-complicating things.

I am not sure what system traders do or how their selection process goes, but I would think that they would generate far more buy and sell signals than I ever would.

Currently I only average about 2 trades a month going back 3 years, so as you can see I do not trade that much but it is not required in my strategy as I also use leverage CFDs etc....The success of the strategy is in the Leverage X high win rate with the current R:R and expectancy.
Until this changes I will keep moving in the same direction and no need to change anything.

I can only trade the way I have been taught and that is all that is required for me.

I like to trade on what I see [on a chart] and not what I think and reading this in context with the market. This has served me well.


----------



## Triathlete (8 June 2017)

ducati916 said:


> *Given the high returns*, with the opposite of the metrics claimed, should you increase your exposure and/or leverage at this current point in time.




 What are you saying are high returns??
What has been the returns over the particular timeframe ???,please advise.


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## ducati916 (8 June 2017)

Triathlete said:


> What are you saying are high returns??
> What has been the returns over the particular timeframe ???,please advise.




Since March 2009 to May 2017

Total S&P return 215%+
Annual 15.2%
Dividends reinvested [annual] 17.5%
Trading costs: close to nil

500 stocks [high diversification]
Volatility has been low for years now.

So with volatility [very] low if you were entering the market today, do you believe based on the volatility metric that:

(a) risk is low; therefore
(b) to earn a higher return it is necessary to;
(c) increase exposure [or leverage]; and
(d) reduce your diversification, that is, increase your concentration?

Volatility is usually a component of the calculation of risk management strategies.

jog on
duc


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## rb250660 (8 June 2017)

How to you measure volatility?
What's the definition of low volatility?


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## Quant (8 June 2017)

Lever up on todays low volatility and you are tomorrows high volatility margin call  

And the most risk adverse person in the world bought the march 2009 low and held through the 20% 2011 correction  . yeah right  .


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## Quant (8 June 2017)

rb250660 said:


> How to you measure volatility?
> What's the definition of low volatility?





I measure range as a % over 'x' period along with ATR as a % over 'x' period  . Cant speak for others , they probably cant use these metrics unless they can code it up


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## ducati916 (8 June 2017)

rb250660 said:


> How to you measure volatility?
> What's the definition of low volatility?




I would simply use the VIX

jog on
duc


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## Triathlete (8 June 2017)

ducati916 said:


> Since March 2009 to May 2017
> 
> Total S&P return 215%+
> Annual 15.2%
> ...




While this may be a good return for a Fund manager who may manage hundreds of millions in their fund, but do I think this is a good return for someone who manages 50k or 100k... absolutely not.

Now I am not saying do not have any of your money in funds such as these.
Where I see the problem is will these people know when they should be removing their money from the fund or at least protecting their position after such a good run??.

I  assume we do not want to get caught out with another GFC and many of these funds are mandated to stay invested which could cause problems.
 I am making the assumption that this is a long only fund.


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## Triathlete (9 June 2017)

ducati916 said:


> So with volatility [very] low if you were entering the market today, do you believe based on the volatility metric that:
> 
> (a) risk is low; therefore
> (b) to earn a higher return it is necessary to;
> ...




Again this depends on the type of trader or investor you are.

I make my decisions based on the Top down approach and whether or not the particular companies will continue growing over a set period of time and from a technical perspective does it also line up with where is the share price is today based on its current cycle and where it is likely to move too in the following cycles.

If I am just trading with leverage than 4 stocks is the most I will have running at any particular time. I will also make the comment that I only use leverage on a maximum of 10% of my total portfolio so the other 90% is without leverage.

Based on this criteria above I will make my decision and I would use leverage if the company passes my selection process.

Cheers
Triathlete


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## ducati916 (9 June 2017)

Triathlete said:


> While this may be a good return for a Fund manager who may manage hundreds of millions in their fund, but do I think this is a good return for someone who manages 50k or 100k... absolutely not.




This is the 'market' since March 2009.

I suspect that many fund managers trail the actual market returns. They will also be the odd out-performer in there as well.

jog on
duc


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## ducati916 (9 June 2017)

Quant said:


> Lever up on todays low volatility and you are tomorrows high volatility margin call




Exactly.

However the point that I wanted to make, but clearly didn't, was that 'volatility' is an endogenous quality of stocks [futures, etc] and not exogenous quality.

Many [some] who consider risk as market participants, consider it as a quality of the latter. This is the genesis of the issue.

jog on
duc


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## ducati916 (9 June 2017)

Triathlete said:


> I make my decisions based on the Top down approach and whether or not the particular companies will continue growing over a set period of time and from a technical perspective does it also line up with where is the share price is today based on its current cycle and where it is likely to move too in the following cycles.




I would argue that this is one of the approaches that contains so much uncertainty as to make it very dangerous. So much so, that I would assign zero weight to any analysis.

I will at a certain point in a 'macro' approach contradict myself, or flip sides. However when looking at a macro economic analysis, I am cognizant that 'time' remains [highly] unpredictable. Given that the 'when' is going to be random, how much can you wager on the 'if'?

jog on
duc


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## ducati916 (9 June 2017)

Triathlete said:


> If I am just trading with leverage than 4 stocks is the most I will have running at any particular time. I will also make the comment that I only use leverage on a maximum of 10% of my total portfolio so the other 90% is without leverage.




Leverage [margin, futures, cfd] allows other people [your broker, lenders, etc] to dictate how you must react in periods of stress. If your trading plan [system] makes account of this, then leverage can work.

I prefer 'options' for leverage, as I still retain control, even when the trade goes wrong. There are more strategies available to modify [leveraged] positions and thereby retain control of the trade.

jog on
duc


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## Triathlete (9 June 2017)

ducati916 said:


> *I would argue that this is one of the approaches that contains so much uncertainty as to make it very dangerous. So much so, that I would assign zero weight to any analysis.*
> 
> I will at a certain point in a 'macro' approach contradict myself, or flip sides. However when looking at a macro economic analysis, I am cognizant that 'time' remains [highly] unpredictable. Given that the 'when' is going to be random, how much can you wager on the 'if'?
> 
> ...




I have only been trading the last 3 years and prior to that spent 3 years completing courses to understand the markets and how to trade them so can only follow the process that  I have learnt and been shown.

At this stage it has not been the case in my situation as yet and in the leveraged portfolios over the last 3 years trading only ASX 200 stocks a couple outside of this, whilst the market has only increased by about 400 points or 6%-7% over that time period the portfolios have increased 550% of the starting capital.

1st year 6 trades  6 wins      250% increase
2nd year 21 trades 18 wins  165% increase
3rd year  26 trades  21 wins  135% increase
Can it continue only time will tell...


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## ducati916 (9 June 2017)

Triathlete said:


> I have only been trading the last 3 years and prior to that spent 3 years completing courses to understand the markets and how to trade them so can only follow the process that I have learnt and been shown.




As I have not completed, nor know anything about the course, apart from the odd snippet that you have disclosed, I really can't comment on the course. You alluded to a 'top down' approach, not for me for the stated reasons.



Triathlete said:


> and in the leveraged portfolios over the last




The leverage used, or claimed, seems inconsistent. It is not really an issue to me, suffice to say, the higher the leverage utilised, the higher the risk of a blow-up. It is that simple.



Triathlete said:


> 1st year 6 trades 6 wins 250% increase
> 2nd year 21 trades 18 wins 165% increase
> 3rd year 26 trades 21 wins 135% increase
> Can it continue only time will tell...




I understand that with this track record to date anything that I, as a random chap on a chat forum will have zero impact on your trading. Possibly rightly so. However, I simply can't resist.

Those returns are high. Therefore:

(a) I suspect that you are using quite high leverage, whether that be CFDs, Futures, Options, Margin or other
(b) the higher the leverage, the bigger the mess, if it goes wrong

(c) over the 3 years, the number of trades has increased; and
(d) the returns have fallen; and
(e) the % of winning trades has also fallen (100%, 85%, 80%)

(f) the last 6 years of trading (particularly in the US) has been unidirectional in the overall market;
(g) buying the dips has been a very successful strategy in the general market (US); and
(h) stocks in their index (US) have been reasonably correlated to that index (to date); but
(i) the correlations are starting to weaken (in the US);
(j) the ASX may not have any of the same qualities.

So my questions (which feel free to ignore) would be:

(a) does the strategy taught to you allow flexibility in market conditions (long/short/range); and
(b) if so, how much; and
(c) have you arbitrarily increased the number of trades taken, to include some marginal trades; and
(d) if not; 
(e) how do you account for the diminishing efficacy of the trades to date.

jog on
duc


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## tech/a (9 June 2017)

Don't think he has a problem
500% return
If he loses all of his capital he will
Still be 400 % up.

You CAN and should trade with leverage and take on no
More risk than if trading without it.

It's pretty simple to do.


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## minwa (9 June 2017)

tech/a said:


> Don't think he has a problem
> 500% return
> If he loses all of his capital he will
> Still be 400 % up.




Don't see how going to 0 will still be up 400%. 

But great results nevertheless


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## ducati916 (9 June 2017)

tech/a said:


> Don't think he has a problem
> 500% return
> If he loses all of his capital he will
> Still be 400 % up.




tech/a

This is a classic error that is normally expressed as the 'market's money'.

The issue with leverage is that you can lose multiples of initial capital and losses like wins, are compressed and accelerated. Good when positive, bad [very] when negative. Leverage, usually reduces the individual's control over their trading strategy.

jog on
duc


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## ducati916 (9 June 2017)

tech/a said:


> You CAN and should trade with leverage and take on no
> More risk than if trading without it.




I would disagree with the accuracy of this statement broadly speaking. It is true if buying options, but not at any other time.

That of course does not preclude using leverage to juice returns, but you cannot use leverage and reduce your exposure [save with options] or risk.

jog on
duc


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## ducati916 (9 June 2017)

tech/a said:


> It's pretty simple to do.




Buying a call/put option, yes, agreed, that is simple and low risk. The risk is low because your loss is limited to the purchase price, viz. 100% loss.

Other forms of leverage, margin, futures, and other derivative based contracts are not so limited and the losses can be multiples of the initial capital risked.

jog on
duc


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## tech/a (9 June 2017)

Duc 
Seriously I'm now in Quants court.

Trading capital $100k
Up 500 %
$500k + trading capital $100k

Lose 100 % 
$100 k

Have better things to do.


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## ducati916 (9 June 2017)

tech/a said:


> Trading capital $100k
> Up 500 %
> $500k + trading capital $100k
> 
> ...




Well actually, a 100% loss = $0.00

But simple arithmetic apart, assuming you remove your $100K from the trading account leaving your profit, then:

(a) you open a position utilising x 10 leverage;
(b) using only $10K capital;
(c) then you control $100K of stock long at $10/share
(d) the stock gaps lower 10% on unanticipated news, CEO resigns, blah, blah

Do you still maintain that your risk is reduced?

The question is rhetorical I suppose as you are otherwise more profitably occupied.

jog on
duc


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## tech/a (9 June 2017)

Again you use Leverage properly and you don't take on any more risk than any other trade.

For you and the un initiated.

You have a 100000K account and have 3 trades already going taking up $75K
You want to buy WTC at $8.00 your risk is $1500 on a trade and your stop is 15c from your buy so you can buy 10000 you now use leverage for that purchase.
of $80K. (OR insert any Ticker of choice).

Your not taking on any more risk.

And yes I am.


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## minwa (9 June 2017)

tech/a said:


> Duc
> Seriously I'm now in Quants court.
> 
> Trading capital $100k
> ...




LMAO


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## craft (9 June 2017)

tech/a said:


> Again you use Leverage properly and you don't take on any more risk than any other trade.
> 
> For you and the un initiated.
> 
> ...




*Gap Risk*



So first gap example that jumps to mind and imagine a strategy that gets somewhere near Tech’s risk numbers.  [Up trend – breakout of consolidation – trail stop on daily low.]


Buy SRX $36.24  on 10/3/15 stop $35.46

Risk @ 1.5% of Capital = $ 1,500

Risk per share = $36.24-$35.45 = $0.79 per share

$1,500/ $0.79 = Buy 1898 shares for $68,783.


Next 3 days lift trailing stop:

$35.66

$38.01

$38.83

Whoo Hooo – In the money: stop nearly $5K above purchase price.


Day 4 whoops – Gap open $15.00, 1898 shares sold on open

Loss ($36.24-$15.00) * 1898 = $40,313.52


Loss is not limited to the mathematical 1.5% prior to the trade

*Actual Loss = 40% of the account.*




Maybe in theoretical forum la la land gap risk doesn't matter, but in live markets it does..... eventually


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## tech/a (9 June 2017)

Yep it happens

So does Cancer
Plane Crashes
Companies going Bankrupt and pulling you down with them
Being Killed by a terrorist event.

You cant take the risk out of life.

But you can miss life through FEAR of RISK.


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## craft (9 June 2017)

But your position sizing calculation is a risk that doesn’t have to be taken. Limit Max position size, Diversify, put in place strategies to acknowledge gap risk.

I’m not advocating not living your life because of risks that can’t or are debilitating to managed.

But why needlessly take ones you don’t have too? You can get rich quickly by taking outlandish risk - but is it worth it?  Where's the line?  Should we just bet it all on black a few times in a row? Fear or prudence?


Ps – thoughts with you, your wife and family – Hope her MS doesn’t impact life too much.


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## minwa (9 June 2017)

craft said:


> *Actual Loss = 40% of the account.*
> 
> Maybe in theoretical forum la la land gap risk doesn't matter, but in live markets it does..... eventually




Well in the duck's account it would only be X% profit accumulated -40%. No big deal when it's triple digits.


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## tech/a (9 June 2017)

I guess for me the risk of an outlier even in pretty well all I have done in life
is something I have never tried to eradicate entirely as a risk. Its something I have
quantified and deemed rightly or wrongly as acceptable to me.

Through luck or poor management I have so far come out OK.

Thanks for your wishes Craft
The impact on life in the future is the biggest concern.
So live it while we can.


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## skc (9 June 2017)

tech/a said:


> Again you use Leverage properly and you don't take on any more risk than any other trade.
> 
> For you and the un initiated.
> 
> ...




I am assuming you meant 100k, not *100000K*.

Placing 80% of capital in a pretty bubbly SAAS stock trading at 50x revenue is probably a bit higher risk than desirable. And I'd suggest it is not the most prudence advice to the uninitiated. ACX would be a good example of the consequence of an adverse gap.



Triathlete said:


> 1st year 6 trades  6 wins      250% increase
> 2nd year 21 trades 18 wins  165% increase
> 3rd year  26 trades  21 wins  135% increase
> Can it continue only time will tell...




Nice stats! Continue to build on the process and improve the frequency of trades. The percent increase will come down but as long as the total $ profit goes up that's what you want.

The gap risks are real so definitely keep that in mind if you haven't already. It's like wearing seat belts when you drive - You hope it's never needed but it's prudence for any driver. Dial back the leverage as your account grows.


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## skyQuake (9 June 2017)

Great stuff craft. Similar story with ACO, gap risk could lead too account wipeout right after new highs...



skc said:


> The gap risks are real so definitely keep that in mind if you haven't already. It's like wearing seat belts when you drive - You hope it's never needed but it's prudence for any driver. Dial back the leverage as your account grows.



+1
Frequency is a decent substitute for leverage


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## Triathlete (9 June 2017)

ducati916 said:


> So my questions (which feel free to ignore) would be:
> 
> (a) does the strategy taught to you allow flexibility in market conditions (long/short/range); and
> (b) if so, how much; and
> ...




The main principles that are covered is based on Price ,Pattern and Time.

Yes we can trade in all market conditions long / short / range trading, Pairs trading and Hedging.

I have rechecked my figures as I was at work when I responded previously and was going off memory but the 3rd year should have been 29 trades 23 wins 2 open increase portfolio 163% and    85% win/loss still have 3 weeks to go.

Cheers
Triathlete


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## Triathlete (10 June 2017)

ducati916 said:


> I will at a certain point in a 'macro' approach contradict myself, or flip sides. However when looking at a macro economic analysis, *I am cognizant that 'time' remains [highly] unpredictable. Given that the 'when' is going to be random, how much can you wager on the 'if'?*




There is many ways to trade the markets and I have found that using timing cycles as one form of time analysis which when cross referenceed with price and pattern will  give me all the confidence required for my next trading decision.
I also use basic Elliott Wave to give me the direction of the market for longer term decisions.

However being competent with the use of cycles for short term trading seems to do.
This is based on the teachings of Walter Bressert who was a Futures trader who introduced "Timing Cycles" in the late 1960,s.

Bressert found that markets moved from low to low in measurable timeframes which he called cycles.
He discovered this was a very powerful analytical tool that added confidence to the trader's decision making process. Raymond Merriman is also a very early exponent of cycles theory "merriman on market cycles" the basics.

 If we use timing cycles in our analysis that show that they repeat greater than 70% of the time at regular intervals on a chart then this gives us an idea as to were the market is likely to turn next, not on a specific date but within a specific interval of time.

For example....A timing cycle moves from low to high then back to low. So between the lows is say 12 weeks and we find that this has happened 70% of the time going back 5 periods so 1 year, then it would make sense to me that the next low is going to be somewhere between 8 - 14 weeks. So I would then confirm the low using price and pattern.

Going into the next cycle I would trade the first 3 weeks long as I would be with the momentum and the last 3 weeks short going into the next low...I leave the 6 weeks in the middle for the speculators...


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## ducati916 (12 June 2017)

Triathlete said:


> Going into the next cycle I would trade the first 3 weeks long as I would be with the momentum and the last 3 weeks short going into the next low...I leave the 6 weeks in the middle for the speculators...




Through the years I have had a number of interactions with EW enthusiasts. I have never been able to make heads nor tails of it.

jog on
duc


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## Triathlete (12 June 2017)

ducati916 said:


> Through the years I have had a number of interactions with EW enthusiasts. I have never been able to make heads nor tails of it.
> 
> jog on
> duc




EW is a subjective theory. I would never try to trade on it alone.


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## tech/a (12 June 2017)

Ah

Someone who "gets it "

Those who need to be right find Elliott impossible to fathom.
In fact all analysis becomes far easier to understand when you accept and understand that you don't have to be perfectly correct.

Around the mark can be very profitable


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## Quant (12 June 2017)

Cant backtest EW  , useless in my eyes  , looks like moving goal posts to me  . Give me Objective anyday  . I doubt there is a systems trader on the planet using EW

EWers try and predict 3 swings ahead when just getting 1 right is hard enough  . they are never " wrong " , like economists they just revise #s


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## tech/a (12 June 2017)

Quant said:


> Cant backtest EW  , useless in my eyes  , looks like moving goal posts to me  . Give me Objective anyday  . I doubt there is a systems trader on the planet using EW
> 
> EWers try and predict 3 swings ahead when just getting 1 right is hard enough  . they are never " wrong " , like economists they just revise #s




And that's the beauty of it.
It will tell you when it's right and you'll
See when it's wrong all in good enough time to be of
Benefit.
You certainly can't use it in systems testing
Boggo uses it well.

It has its place for me at least.


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## Quant (12 June 2017)

tech/a said:


> And that's the beauty of it.



 well one mans trash is another mans treasure , I will leave it at that


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## Boggo (12 June 2017)

Ha ha


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## tech/a (12 June 2017)

And so you should


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## traderxxx (14 June 2017)

I don't know anything about ew apart from the basic wave counting thing
and that yes as others say can be very subjective depending on when counts
are started.
but I have adapted the basic principle to suit myself,  the recent wave calc had a low on
the spi at 5630   and the low was 5630 a few days ago.
and yea I know, hind sight now.
the next calc for the wave up comes out at 5837 , current high today so far 5828
not sure how that will pan out though given contract expiry tomorrow.


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## traderxxx (14 June 2017)

ok reasonable reaction off 37, down to 15.
better say now though, other numbers at 5855-57


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## Triathlete (17 June 2017)

ducati916 said:


> I prefer 'options' for leverage, as I still retain control, even when the trade goes wrong. *There are more strategies available to modify [leveraged] positions and thereby retain control of the trade.*
> 
> jog on
> duc




I have no experience with using options.( I have seen comments around that the Australian market is not very liquid for options here???) .

 The way I see it you are either right or wrong, so you would either stay in the  trade or close the position or if their is a reason to keep the trade open for a certain amount of time then you could hedge the position for that period required then close out.

Would you like to give us an example of a trade that is going wrong and what type of strategy you would implement to *"retain control of the trade"
*
Cheers
Triathlete


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