# THE WHAT that will make you consistantly PROFITABLE?



## tech/a (11 December 2004)

So far we have had some good discussion and some sound suggestions.

But lets look at them a bit closer. Are they the What   of profitable trading?

THE TRADING PLAN. 

No plan and your like a ship at sea without a rudder.
No point in having a rudder and not knowing where your going.
Even worse when your plotted course ends up to be incorrect.

Without knowing WHAT makes your plan profitable your trading with a Plan that MAYBE profitable NOW but long term could be disasterous or may not be profitable at all..

This is where many are.
They have a plan (read Theory) they have some loose ideas on stops entries,no idea or very little idea on exits (read gut feelings) a handfull of cash and off we go. (sounding Familair?)

Profits are inconsistant---there is a level of anxiety----there is a need to know a desire to be predictive---to have an idea that your plan WILL/COULD/WOULD/SHOULD work tommorow----its often altered and rehashed---when plan "a" "b" or "c" dont perform to expectations.Your constantly on a computer, or ringing for price,pager beeping,mobile alerting (Sounding Familar?)

Does the Plan work---Dunno Ill tell you once Ive traded it!
Or yeh it is now.

Nope plan on its own isnt "THE" answer.

DISCIPLINE

Discipline comes with confidence.
Ask anyone who has a losing streak----any losing streak and see if discipline isnt questioned.
BLIND DISCIPLINE can be extremely dangerous just ask the victims of the George Town massacre.
Purchasers of most Black Box systems.

Nope not Discipline on its own.


Money Management.
Yep weve all heard about it and many have a loose understanding of it.
Means minimising loss------ doesnt it!!? The 2% rule.Why 2% why not 1% or .5% or 4%?
Let your profits run ---- weve all heard that.
But RUN TO WHERE------When should I exit----how do I know--when has it run enough.

Place a stop,Take a profit--- cant lose!! -------------RIGHT!!   
Ive got Money Management firmly in place---a sound trading plan (in my mind) and come rain hail and shine IM GONNA BE DISCIPLINED!---cant loose Ive done EVERYTHING.

WRONG---VERY WRONG

While there maybe a few of you out there that CURRENTLY are running a profit because the WHAT to your trading is CURRENTLY returning you a profit,(and you dont know what that what is---and its certaintly happening if your making a profit!) unless you KNOW what your WHAT is longterm there is a very very good chance youll at best UNDER perform and at worst die a painfull financial death!

Id say that the vast majority of traders who are short term profitable and dont know what its is (and its not any of the 3 above singularly or COMBINED)---(thats got ya) that has and will maintain profitability will suffer substantially and question their trading as the market or commodity bends and twists as it invariably will.

The WHAT   is subtle and Im sure will be argued that its just a part of the above-------and that it is--------- but it IS THE ONLY COMPONENT that GUARENTEES (to the very best of our ability) CONSISTANT PROFITABILITY


Now last chance anyone like to hazard an educated guess.?

tech


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## RodC (11 December 2004)

Ok, here's my guess.

Making sure that you win on your winning trades more than you lose on your losing trades, consistently.

This can be by either having more winners than losers, or having bigger wins than losses (or preferably both).

Rod.


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## tech/a (11 December 2004)

RodC said:
			
		

> Ok, here's my guess.
> 
> Making sure that you win more on your winning trades than you lose on your losing trades.
> 
> ...




Rod BRILLIANT  I have altered your post slightly.

Simply.
The What is

POSITIVE EXPECTANCY


Most have no idea what their positive expectancy is.
And/or how to find out.

If you dont know the expectancy of the Plan your trading.
Your only guessing/hoping its profitable long term even if it is profitable NOW.


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## Fleeta (12 December 2004)

Do you mean mathematical expected value calculations, taking into account your stop level and profit taking level?

i.e E(x) = E(xi) + E(xii) + E(xiii)....

Do you have to be really good at maths or just good on Microsoft Excel?


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## tech/a (12 December 2004)

Fleeta.

Ive recieved an email which I think will sum up a lot of peoples (Including yours)general feelings.

Here it is it really bought a smile to my face.Ive Played with the type styles etc for effect.

GREAT

I cant afford the expensive software and I cant afford to trade the higher priced stocks and Im not that mathamatical,and your telling me Im screwed!! Unless I know how to put all this together.
True my trading could do with some consistancy 

Is there an easy way?

Well to tell you the truth from what Ive seen over 11 yrs you can develope and trade a plan and make a profit despite poor management statistics.
But your returns will be eratic and spasmotic.Infact I doubt that youd have the confidence to trade say $100,000 of your Super.Infact many will not even come close to profitable and will lose interest.Pity because everyone CAN make a profit consistantly from trading!

Personally the more you know about your method/methods the more successful youll be, but like all business there needs to be sizable investments in TIME and MONEY.Trading is NO different.

But THERE IS HOPE   I think there are certain things that can be inplemented to give you a greater chance of trading with a POSITIVE EXPECTANY even if you cant Finitely PROVE IT.

If you get to that stage and you are making a reasonable profit and want it tested with good software then give me a yell!

If there are enough out there interested in going further Im happy to continue with some suggestions.Let me know.

tech


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## stefan (12 December 2004)

> If you get to that stage and you are making a reasonable profit and want it tested with good software then give me a yell!



YELL! I stick my head up and say that my way of trading is what I was looking for, currently making what you call a reasonable profit. I'm always interested in testing it against whatever scenarios or analysis your software will come up with. So, what next?

Happy trading

Stefan


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## Porper (12 December 2004)

Well, count me in Tech, I am more than intrigued to see what your "WHAT" is.I think like many following your thread, maths was definately not my subject at school, and it was nearly 20 yrs. ago 

I am always willing to try and learn though, if your theory seems like a goer to me I will do my best to understand it, but only if I don't need to be a mathematician


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## tech/a (13 December 2004)

Stef and Porper.

To be able to test with software we need to be able to code what it is that is the "HOW" of your method .

In Stefs case and many others here it is a fundamental "HOW" which cant be coded with my software anyway!---dont know of any.

But we can and will go through the components of getting to Positive expectancy and how to measure it.

While doing it long hand is pretty agricultural and hardly exhaustive (as we cant run 1000s of simulations) I think atleast we can get the basics so you know what to aim and look for so you can recognise a breakdown/underperformance and indeed be able to calculate wether there is a positive expectancy.

More later when more time.


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## stefan (13 December 2004)

> In Stefs case and many others here it is a fundamental "HOW" which cant be coded with my software anyway!---dont know of any.
> 
> But we can and will go through the components of getting to Positive expectancy and how to measure it




Tech, lets focus on the positive expectancy then.

One thing, I know it shouldn't be here but I don't know if you follow all threads. If you have some spare time at hand, can you produce one of your charts for SES and post it in the SES thread? Would be much appreciated as I'm currently holding SES from the low 20s. It fits perfectly into my plan being a company that just turned cash flow positive, with lots of good fundamentals. I'm just wondering what your chart has to say as I do have something else in mind with it.

Just if you can spare a second, really. 

Happy trading

Stefan


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## crashy (14 December 2004)

they say:

"winners hold on to their winners, losers hold on to their losers"

Most traders I know have trouble holding onto winners, and although they cut losses early, they get nowhere overall.

My problem has been cutting losses quick, and I have no problems letting winners run, and thats why I dont trade much anymore.

totally disagree with this statement:

"Discipline comes with confidence."

In my 'trader psychology' post I explained how discipline and confidence are opposing forces. Think back to 1999. Every trader was a genius. Confidence was high. Was discipline?

perhaps what tech means here is that you will feel more comfortable when disciplined..... which I agree with. But that would be: "confidence comes with discipline" not the other way round.


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## tech/a (14 December 2004)

Crashy.

What you say is indeed very true.Im sure many here will associate with Holding Losers and liquidating winners.

Even worse

I often read here---Yes XYZ is now fantastic value at (x-40) bought a heap a while ago while it was (x-20) cant believe its this cheap---hope the next report/drill hole/director shuffle/wind change/xmas present gets this baby into profit for me/us/them.

Never hear.
ZYX is powering risen 20% in 4 weeks bought more last week and again today.That news of a new nickel separation (JRV) technique really has ZYX
in the sights of investors.

Re---Confidence.
Think your refering to a broad use of the word and I to a specific. 

I maintain (and happy to hear another veiw).That if you Know your method and its limits,what to expect (from exhaustive testing) as you trade your method then the discipline to stick to your trading "Plan or Methodology" becomes easy/ier.
WHY.
Without this information(and even if you have partial information) you have no idea if a string of 15 losses or an initial drawdown of 12% or your Risk Reward Ratio of 3.5 is going to return a profit.
With partial or at worst NO information the ability to stick with a plan WHEN LOSING dissolves!!
100% of Traders go back to their method and abandon the way they are now trading--forever tweeking,altering,theorising,re introducing---why---they have no idea of the LONG TERM viability of their methodology------NO CONFIDENCE (And rightly so) hence no / little discipline to trade their method.

They are Trading Blindly.

If you know exactly what to expect with a method then you can and will trade it with confidence---youll let it do its thing---thats what its designed to do and the end result if you do it is X.If you dont then YOU  will have failed due to lack of discipline not the method.If the method trades outside of those know parameters you can have the confidence that something isnt right with your methodology.A stop in trading will then be a logical/quantified call not a discipline issue.

Back nearly 12 mths ago while we were trading CTX on the TechTrader thread one of the traders asked.
"CTX is $5.00 I cant see this going any higher we have had it since $3.65 we should sell it!!"
My reply was that we hadnt an exit yet and I have no idea what CTXs value was $3,5,10,(Today its $10) our method had us in this trade for another 8mths and an exit was triggered at $8.20.It was easy to ride this as I knew and Know that the OVERALL result from testing tells me I can achieve 20-80% annually from TechTrader---if I follow the method.
I have 100% confidence as I have traded in testing  20000 portfolio combinations over the last 8 yrs and not a single portfolio combination lost.100% win rate.

CONFIDENCE = DISCIPLINE.Or perhaps the ability to apply it----or the REASON to stick with it


Crashy in your example above Confidence in the Market without the HOW,WHY and WHAT of trading it--------certaintly equates to lack of discipline--traders dont have anything to use as a bench mark

no blue print[/SIZE]

Blind Discipline/Faith is as dangerous if not MORE DANGEROUS than none at all.

(Friend of mine had Breast cancer--was a health nut but there was a family history.She owned a health store and was the healthiest person Ive every known.Oncologists said there was a 70% chance of cure with removal of around 50cc of tissue-----NO WAY Laetril----juices---Positive attitude-------DISCIPLINE--2 yrs and she died!! I did ask SHOW ME 1 survivor using natural therapy! Not a Book or someone who knows someone,a real bonifide,quantifiable survivor---Im still waiting.The Oncologist has 7/10 he can show me.)

Thanks for your veiws

tech


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## Tric (14 December 2004)

really interesting thread you guys.
great that you are spending time posting and trying to help us to all grow as investors.

thnx from all of us reading


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## markrmau (14 December 2004)

Tech, this is all very interesting, but you have never actually specified what signals you use to trade (as far as I have read). I have seen spreadsheets showing your risk/reward ratios etc. but not the actual signals you use for entry and exit. 

Cheers, Mark.


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## tech/a (15 December 2004)

Mark there are 300 + posts on TechTrader here and a great grounding for the method.

http://www.reefcap.com/ubb/Forum8/HTML/000091.html

Im happy to use the Method as a live case example as its been released for public scrutiny for 2.5yrs.I do have another method I trade which will remain proprietry.For those with Metastock here is the code.

ENTRY

Cross(H,Ref(HHV(H,10),-1)) AND H > Mov(C,40,E) AND HHVBars(H,70)=0 AND C < 10.00 AND C > O AND Fml("Liquidity") > 500000;

[In English,Todays high is greater than the highest high of the last 10 periods,AND the High is greater than the moving average of the close over the last 40 periods,AND todays Bar is the Highest High value of the last 70 periods,AND C is Less than $10,AND Close is Greater than the open,AND the average trading turnover for the last 21 periods is $500000]

The liquidity formula which should be placed in the INDICATOR BUILDER is 

Mov(V * C,21,S) [call it Liquidity]

The system has a INITIAL SET STOP  of 

If(Ref(C,-1)>0.90*EntryPrice,0.90*EntryPrice,Ref(C,-1));

This is code for TRADESIM and should not be entered in Metastock.
However in English.[If the last close falls below 90% of the entry price then exit]

EXIT

Cross(Ref(Mov(L,180,E),-1),C);

[English. If close Crosses the 180 day moving average of the low on the previous bar then sell this bar.]

ALL BUY,STOP and EXIT signals are traded NEXT DAY on OPEN

tech


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## markrmau (15 December 2004)

Thanks for this Tech. I will study the thread tonight. How often to stocks meet the entry criteria (a few per week?).


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## tech/a (15 December 2004)

Mark you need to know that the Universe of prospects is the BT Margin list.
The method was designed for these stocks.(Im lazy happy for BT to do the Fundamentals).

There are around 300 in the list.
Works well on the ASX 200 and 500 but not good for Smalls.

There are way more prospects than you need generally a few each day.

Thats the beauty of a method like this you dont need to take every trade.Regardless of which you buy Montecarlo analysis tells us that youll still have a winning method.

sure if your lucky some will return more than others.

EG the testcase is returning more than my own portfolio!!
Bugga.


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## RodC (15 December 2004)

I've been playing around with the techtrader formula on Amibroker (modified to include the stocks >$10) and using the comsec margin list as the "universe of stocks".  I usually get 3 to 5 buy signals per day - more than I need.

Rod.


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## markrmau (15 December 2004)

Wow - that is a truly impressive system. Thank you for sharing it. I see that I have been loosing the bigger picture of making a long term profit, by jumping in and taking a series of smaller profits. I guess this is because of my extremely limited 'pain' threshold. (I dump whatever is not going up almost immediately eg HDR, MRL and unfortunately QBE).

Now, just supposing we go through a period like the March 2002 - March 2003 period. How did back testing go here?


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## tech/a (15 December 2004)

Ah.

Mark at least you have identified your problem and its a very wide spread problem of taking profits way to early and taking losses way to late.

When you understand the impact it has on your top line youll all of a sudden enjoy your trading and become more relaxed.When I get started on Positive Expectancy Im sure youll follow.Many like you will associate with much that I will walk you through.

Now to backtesting and specific periods and of course equity curves (The visual record of your test results.)
Equity curves only record closed trades.Long term methods (particularly like TechTrader which on average holds trades for 360 days) will generate an equity curve which looks very eratic.If we had accurate data for 50 yrs then the curve would look a lot smoother.Unfortunately I only have 12 yrs of data.
I use 8 for testing.

The nature of the beast is that at anyone time there will be open trades with open equity so when testing I set the end of the test period to be a sell.Youll then notive a sharp rise at the end of the test period as all positions are liquidated.
I can answer your question about March 2002/3 in 2 ways.
The actual results of the method we are trading and the tested results.

Firstly a pick of the bar chart showing the actual growing equity of the method being traded this is actual equity not just closed trades.

Ill then post the test results for the same period but Ill start it in 1998 and close out on March 2003.
Ill also do March 2002 start March 2003 finish but doubt this will have much meaning.

Back in a minute

OOPs sorry period is 2003/2004 Ill leave it anyway and run the simulations.
Pollogies!!


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## markrmau (15 December 2004)

Also, one other thing. I am intrigued by which is the most discriminating (profitible) part of the decision making process - is it the entry or the exit? Or are both the entry AND the exit points REQUIRED to make this a profitible system?

Are you able to do backtesting where you:

1. First randomly select entry stocks / dates -> then use your defined stop loss and exit points. 

2. Use your defined entry point -> then randomly select an exit date.

How do the results compare with system where you use both your defined entry/exits? (This may be too much work to do however).

Also, how well does your system work on more liquid markets such as the NYSE? (can you define a universe of stocks which are on margin loan lists)?


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## tech/a (15 December 2004)

Mark Ill post the charts but they are pretty meaning less given the time constraints---all profitable though


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## tech/a (15 December 2004)

markrmau said:
			
		

> Also, one other thing. I am intrigued by which is the most discriminating (profitible) part of the decision making process - is it the entry or the exit? Or are both the entry AND the exit points REQUIRED to make this a profitible system?
> 
> Are you able to do backtesting where you:
> 
> ...





In answer to your question.
Entries,Exits and Stops are simply points of action.How you define or arrive at your entry ,exit ,or stop is of no consequence.

HOWEVER you cannot be profitable in ANY trading method unless the combination and Implimentation of all 3 lead to a POSITIVE EXPECTANCY

To your questions.
(1) Yes
(2) Yes I presume you mean on the portfolio being traded not individual stocks.
(3) See statement above in red
(4)NYSE it works well but you do have to alter some parameters eg
$ value of the stock.
Liquidity
Universe of stocks.

Margin lists.
BT have a complete list on their site so does comsec.
If you mean NYSE stock margin lists I do have (Only reciently) a list of the top 200.I havent run tests on these yet.

I have run tests on Hong Kong and they are very good.
Alos FTSE and they are also OK not mind bending.

tech


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## stefan (16 December 2004)

Tech,
Did you happen to explain POSITIVE EXPECTANCY in more details somewhere? That's what I'm looking forward to and I certainly don't want to miss that. Just asking as I couldn't find anything but there are so many threads and postings going on, if one isn't around much for a few days it gets cofusing.

Happy trading

Stefan


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## tech/a (16 December 2004)

Stef.

Im going to run through it from the perspective of most here.

That is that they dont have test capable software and have very little technical or mathamatical knowledge.(There will be some simple maths---sorry).

The objective (although we wont be able to finitely prove it) will be to put traders in a POSITION to have a positive expectancy and hence trade to a profit.

If nothing else Im sure people will look at what they are doing and how they are doing it in a different light.
Many will go from spasmodic profit to consistant profit and thats what we all want.
Then we can work on ways to MAXIMISE that profit.

Then we will all be filthy rich and meet in Barbados!! And kick Paris Hilton off the front cover of magazines. :bier: 


tech


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## wayneL (16 December 2004)

Here is an article I wrote a few months ago for a firm I was doing some work for:

This is not a Casino

Most of the people I talk to refer to the market as one big Casino. The unfortunate fact of the matter is that somewhere between 75% and 95% of people who become involved with the sharemarket as traders lose some or all of their capital. So who can blame them for coming to that conclusion?

I can!

You see most people get involved with the sharemarket because they see all their friends making money out of it, the newspapers are talking about it, heck, even your hairdresser is waffling on about nickel stocks! So they think to themselves, "Hey this looks easy, I'll have a go!" The public has become excited about a bull run in the market and for a while, everyone is making money despite themselves. 

Genius is a rising market!

Unfortunately, bull runs don't last forever. Our brand new sharemarket traders also leaped in without learning the rules of the game.....a recipe for disaster! This phenomenon always occurs at tops in the market because that is when the most excitement is generated. Exactly the time when the professionals are SELLING!

What happens next is ugly. The market starts going down, it may even crash as it did in 1987. Our brand new traders never learnt how to preserve profits and they watch their profits quickly disappear, hoping that prices go back up again. Can't sell now because they've been bragging to their mates how well this sharemarket thing is going!

So they hold on, and prices continue right on down until eventually the pain becomes too great and they then sell all of their holdings at a substantial loss. This usually occurs right at the market bottom. To add insult to injury, this is when the market starts going back up again! This is when the conclusion is reached; "The sharemarket is nothing more than a hyped up casino!!!!!" They swear to never, ever go near the sharemarket ever again!

What has just happened, is that they went to the market with "Casino Mentality". Attracted by the bright lights and the excitement and the stories of big winnings, they placed their chips on the table.....and got fleeced by the professionals!

That would never have happened if our new trader had learnt the rules of the game first. 

No! I don't even like the word "game"! It's a business, and should be treated as such! Even if you are starting out with a small amount of money! If you were going to start a cafe' business, wouldn't you learn how to run one, where to buy the coffee wholesale, where's the best place to situate it, how to hire staff, how much to pay them etc. etc. etc.?

You bet you would!

Well I'm not going to teach you how to trade in this article, but I am going to show you the principle the professionals use to turn a profit. But first lets have some fun and take a trip to the casino to see how they make money out of you. It involves a little bit of mathematics, but bear with me.

A Trip to the Casino

OK, we've been sucked in by the bright lights and Harry down the pub just told us how he cleaned up at the roulette table, so that's what we'll play, roulette. After the household treasurer has commandeered the bulk of our pay for groceries and paying bills, we have $100 left. So this is what we have brought along with us, this is our capital.

Here's the rules, we're going to place a $10 chip on either red or black every spin of the wheel. This gives us 18 chances out of 37 to win, for which the casino will pay us even money. So if we lose, we lose $10, this is our risk. If we win we make $10, this is our reward.

Now we can work out some ratios and see how they might impact on our capital.

Our generous hosts have given us 18 chances out of 37 to win, so our win/loss ratio is 18/37 or 48.65%. We've already worked out our risk and reward but we need to put that into a ratio as well. We have one unit risk verses one unit reward and it is expressed as such- 1:1. This is our risk/reward ratio. ( Actually it is more correct to express this as reward/risk, but for some reason we traders say it the other way round).

OK one more calculation for now: Expectancy

Expectancy=((1 + reward/risk ratio) * win/loss ratio)-1
                    =((1 + 1) * 0.4865)-1
                    = -0.027

In other words for every dollar you risk, on average, you will lose 2.7 cents...straight into the casinos coffers. This is what we call negative expectancy. That's not too bad you say, I can have fun gambling $1000 over the course of the evening and only lose $27...a cheap evening out!

It gets worse though. because in the real world it doesn't happen that way does it? Depending on your luck you may come out ahead or you may lose all of your capital very quickly. I tested this scenario a thousands times using an excel random number generator and guess what? Six times out of 10 the entire capital was lost before 100 bets and that's no fun at all!

This brings up a whole new subject and that is money management, which will discuss this when the time comes, OK.?

Now think about this! It's one thing taking $100 out on a Friday night and blowing the lot; but it's entirely another thing to take your life savings into the sharemarket with casino mentality and blowing the lot!

It's no wonder that casinos......and sharemarket professionals, make so much money!

OK how do the pro's do it then?

This part is a little bit contradictory because a lot of the features of trading somewhat resembles gambling.  We have winners and losers just the same as a gambler, but we still do not approach the sharemarket with casino mentality!

The difference is that the successful sharemarket trader uses strategies to ensure a positive expectancy. We won't go into that in detail now, but briefly it goes something like this; we cut our losses short and let our winners run, and we do that enough times for wins to overcome losses. Therefore the sum of our winning trades will always be greater than the sum of our losing trades. This is of paramount importance. Remember in my last article, I told you to remember the phrase "risk/ reward ratio", well this is where it applies.

Ok then, lets go ahead and make some assumptions. Lets say that we risk the same $10, but when we win, our reward is $20. This gives us a risk/reward ratio of 2:1. ( or reward/risk ratio if we're being pedantic.)

Lets say though, that we are not that accurate at picking winners and our win/loss ratio is 37% .......hmmmmmm lets go ahead and do our expectancy equation:

Expectancy=((1 + reward/risk ratio) * win/loss ratio)-1
                    =((1 + 2) * 0.37)-1
                    = 0.11

AHAH! There's our positive expectancy! For every dollar risked we will make 11 cents on average.

Here's a question for you. Would you take your life savings and risk it in the market on the above scenario....I wouldn't! You still have about a 15% chance of losing all of your capital. Run the numbers through excel and you will see what I mean.

You must add in money management (and perhaps a system with a higher expectancy), a topic worthy of a separate article.

How Does a Trader Use Expectancy?

There are a few ways; one is to examine your historical trading performance. 
If you become a good trader, your risk/reward ratio and your win/loss ratio will be a lot better than the figures above. To give you an idea, at the time of writing, with my swing trades, my win/loss ratio is running at 57% and my risk/reward ratio is 3.4:1. So  based on those figures my expectancy works out to be 1.508. So that means that for every dollar I placed at risk in the market, I made about $1.51 profit. That's a pretty good figure. It gives me every confidence to go right on trading exactly the way I have been. It lets me know that every further dollar I place at risk in the market, I can expect to make around $1.50....and that is a great psychological advantage to have that in my mind.

It has a further use in that it helps me to optimise my money management....and if there is one thing that can improve profitability, it's proper money management.

The second way that expectancy can be used is to compare trading systems.
The technical trader can create computer trading models and backtest these with his/her charting software. This is where the trading system is tested with historical price data. There are even specialized software packages specifically for this purpose. We can devise a new trading format, backtest it, and come up with an expectancy figure for that system.

This is useful as we can compare the expectancy of one system over another and select which one(s) we are prepared to use in our trading. We can compare  our new models against our current system in use also.

Here is an example:

Suppose I have thought of two new trading systems.  After doing my backtests I have found that one system has a win/loss ratio of 90% and a risk/reward ratio of 1.2:1. The second system has a win/loss ratio of 35% and a risk/ reward ratio of 5.5:1.

How am I going to decide which one is better and how am I going to decide if these new systems are better than my current one? You guessed it right first time didn't you......expectancy! Let go ahead and do the calcs:

Expectancy=((1 + reward/risk ratio) * win/loss ratio)-1
System 1    =((1 + 1.2) * 0.9)-1
                    = 0.98
System 2    =((1 + 5.5) * 0.35)-1
                    = 1.275

Interesting! The second system has a higher expectancy than the first system even though it wins only a third as often. Presuming that the opportunity to trade these two systems is similar (something which must also be considered), I would prefer to trade the second system, obviously. Hang on a minute! my current system is running at 1.508! Hey I'll just stick with what I'm doing. 

There is a third way to use expectancy. Suppose that six months ago I created a trading model with an expectancy of 0.87 and decided to trade it. After six months trading, I can now compare the actual results against my expectancy figures to see if it is performing as anticipated. 
This is why the sharemarket is not a casino. There is no way that you can change the negative expectancy at the casino into a positive expectancy; and if you do they'll ban you from ever coming back!!!!! Not so in the sharemarket.
In the share market one can truly play to win!


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## tech/a (16 December 2004)

Wayne.

Saved me sometime.
Wayne has bought up an important point here ----its not simply a matter of having a beter win ratio to loss ratio and its not just about having higher wins than losses.

We are talking Risk to Ruin here and this is determinate on consecutive losses.
If your losses can at anytime wipe out your capital its game over.

Infact they dont have to wipe it out just make position size in effective and that comes well before ZERO.

Now before going on to what Joe Average can do to increase his chance of having Positive Expectancy are we clear on the explaination?

More needed? Could go a little deeper if you want some charts and examples if you like---it is IMPORTANT VERY IMPORTANT dont be shy!

tech


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## tech/a (18 December 2004)

Time to get to the meat of the topic.

Most traders here trade in a Fundamental/Discretionary manner.A few others trade both Fundamental and some Technical but again in a Discretionary manner.Very few have a Sytematic or Mechcanical Trading methodology.

The following is for everyone but in particular the majority of traders here,-----And of course those who are interested ---- the first 2.---They are by the look of the majority of posts SHORT TERM TRADERS as well.

This is fine---its not the "WHY" or the "HOW" that will make you profitable its the "WHAT"

Success doesnt come without some effort on your part-------infact Ive found that result is directly proportional to effort!

The aim of the following is to give you the greatest opportunity to trade by ANY METHOD you choose and have a positive expectancy

Now some general info.
Short term traders need to be right more often than longer term traders as their time in a trade means that in general terms they are taking smaller profits (Yes there are some exceptions).So I would expect that to be profitable you need a method which turns a profit over 40% of trades and preferably more than 55%,Ive seen 75%.You will soon be able to determine this from your method (well in a year or so! unless you have great records of past trades!).

It is easier to achieve short term trading success by following a singular entity (futures) or a very small group of Stocks,(Watch list) rather than a longterm portfolio approach (trading 10 or so at a time)

(1) KEEP RECORDS

You must now keep a record of all trades the GOOD the BAD and the downright UGLY.In particular you NEED to know.
(a) Buy Price.
(b) Sell Price.
(c) Loss in $ terms
(d) Gain in $ terms
(e) Parcel size.
(f) Total capital being used in your trading.
(g) Have 2 sets of figures --winning trades and Losing trades seperate.
(h) Entry and Exit DATES
(i) Brokerage costs. Very important for the short term trader
(j) Stop level and seperate record of Stopped trades.


From these records you will be able to find out.(Among other things)
(1) Length of trades.Time in days
(2) Consecutive number of winners AND losers.
(3) Average win.
(4) Average Loss
(5) Risk Reward ratio Average win/Average loss.
(6) Net Position---then annual return or annualised return if partial to a year.
(7) An indication of Positve expectancy (Only an indication as we cannot compile extensive testing from just one set of records).

RECORDS will have little meaning unless.

(2) YOU SET A STOP LEVEL  

On ALL your trades.

Defining a stop ( a point where you can say--Im WRONG OR My timing isnt Spot on.) gives you a finite RISK.A level which many other calculations can reference.Having NO STOP equates to having UNLIMITED RISK

Much is written on the 2% risk rule and while a good figure in general everyones method will be effected by the amount of RISK allocated.Note there is a great deal of difference to being stopped out of a trade and an open ended Losing Trade!

The biggest fear is pulling out of a trade ---taking a loss and then seeing the trade turn to a profit.Ponder this--The longer you remain in a losing trade the greater this fear becomes!!  

Not only that but the greater the potential loss.

QUESTION---What is better a single 20% loss OR 10 2% losses and WHY? 

How important is all this?
How serious are you at turning a profit?
Do you want to be in the 3% or the 97%  

You can choose to do nothing and nothing will change.

Next will be some charts to demonstrate.When I get time.

tech


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## tech/a (18 December 2004)

Just quickly on the One year equity curve above.

The return is $22000 on the $100,000 invested ---22%.
(The 7% is on closed out trades.--before you ask).

However when trading on margin I would have $35K of my money being used to generate the $22K.

Return on $35K original investment is 62%.
Leverage and Compounding are other topics first things first.

Longterm trading can make remarkable returns!

Ive only just begun on the last post much more to come on what you can do to increase your chances of a Positive expectancy!!


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## tech/a (19 December 2004)

tech/a said:
			
		

> QUESTION---What is better a single 20% loss OR 10 2% losses and WHY??




Any takers before we move on?


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## Mofra (19 December 2004)

OK I'll bite:

10 x 2% losses from a mathematical point of view (each subsequent 2% loss is from a lower total trading pool), ie:

20% loss of $100k pool leaves you $80k
10 x 2% losses of $100k pool leaves you $81,707.28

Also from a back-testing point of view, it would be easier to identify a trading weakness and correct it from a larger sample (10 small losses), rather than just sitting back after copping a 20% pasting and asking "what the hell happened?"

I'd cop 10 x 2% losses a year (always do?) if my winning trades more than compensated for it (yes for last two years, no previously)

Now I guess tech/a is going to teach me how wrong I am? (do it constructively please, enjoying your posts so far)

Thanks for your thoughts tech/a,

Mofra


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## markrmau (20 December 2004)

I guess it depends on your expected reward percentage and win/loss ratio.

One 20% loss is fine if your reward is also 20% on 2/3 trades. 20 lots of 2% loss is no good if you expect only 2% gain on 50% of trades.


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## tech/a (20 December 2004)

Both of you have good points.

Taking the 2% is a little cheaper even when including brokerage.

OK
The 2% is the more preferable.
WHY.

You have 9x the opportunity of finding a trade which goes in your direction.
I should have been clearer on the 2% that is meant as 2% of Total Equity.

Now the issue of how long we should hold a trade that doesnt move in our direction 
IE the best balance point for a STOP value has been answered by exhaustive testing.(Not mine although I have checked my results against it).

9% of trades get stopped out if 20% of purchase price is used as a stop.
27% if 10%
over 50% if 5%
Anything below 5% seems to be un workable.

This is an exhaustive topic and one we will cover later.

However I wished to point out a COST we dont often think about and one a few here are experiencing.

OPPORTUNITY COST While we are in a trade that is doing nothing wether it be in profit or sitting between our buy point and our stop-------the $$s we have invested in the trade are not working positively for us.
This is known as OPPORTUNITY COST


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## stefan (20 December 2004)

> OPPORTUNITY COST While we are in a trade that is doing nothing wether it be in profit or sitting between our buy point and our stop-------the $$s we have invested in the trade are not working positively for us.
> This is known as OPPORTUNITY COST



I agree. BUT how can you calculate this cost? You're saying that this cost applies whether the stock is profitable or not. However, if a stock is currently returning 20% and you're expecting more over the next few months, what do you base your opportunity cost on? How expensive is it to hold a stock that's currently returning a profit with all indicators pointing upwards? This may not be of importance if your a short term trader. But as a long term investor it becomes a major issue. How long do you hold on to a stock that's grown but stopped? 

Happy trading

Stefan


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## tech/a (20 December 2004)

stefan said:
			
		

> I agree. BUT how can you calculate this cost? You're saying that this cost applies whether the stock is profitable or not. However, if a stock is currently returning 20% and you're expecting more over the next few months, what do you base your opportunity cost on? How expensive is it to hold a stock that's currently returning a profit with all indicators pointing upwards? This may not be of importance if your a short term trader. But as a long term investor it becomes a major issue. How long do you hold on to a stock that's grown but stopped?
> 
> Happy trading
> 
> Stefan




It can be calculated but youll need System testing software.Simply you add a filter to your exit for stocks which dont advance X over Y periods.It can have a significant effect on a portfolio.

I guess another way to put it is LOST OPPORTUNITY COST.

This I agree will vary from timeframe to timeframe,and there are a number of ways Ive seen for dealing with it.Ill go through a few Ive come in contact with.
(1) You test the time period for which both the stock stays within its Initial buy and Stop level without increasing,You also test an inactivity exit where this stock fails to make a new high in X periods.If these increase the return of the system then you trade it that way no questions.

                                                 OR

(2) You have a buy opportunity you are fully committed. You pick your most inactive stock and sell it to finance your new purchase.

                                                 OR

(3) You recognise a no (2) Opportunity but sell only the cost of the trade EG you bought 10000 at $1 and now they are $1.70 you sell $10000 worth and take $10000 of the New position.The remainder is profit on the original trade which you just leave to run until exit is triggered OR you add to it if another buy opportunity appears


2 and 3 are really topics on there own in the area of Creative Money Management.

Frankly most traders infact the general populace dont have their money working hard enough! 

How expensive if a stock is in profit with all indicators pointing upward.
Could be very expensive if it doesnt make new highs or worse reverses.
Trade Price action and watch indicators!

Personally Im doing (2) but Im questioning efficiency(Use of $$s) number (3) has the most appeal.(Number One should be determined regardless of which method I use.) 
The time period is 6 mths but it isnt fully tested (Pretty dumb as I advocate rigorous testing!!)However the results have been better than holding the non performing stock in the portfolio.Logic has paid off in this instance.

About 6 yrs ago I revisited a short term portfolio I traded (with very little knowledge of what I use now and Talk about here).It lost 35% of initial capital.
If I had used Method (3) I would have made a 200% gain (I had traded that way for 2 yrs.) Mainly due to 2 stocks going Nuts when I wasnt even watching!!
Stef ------ A way of getting the timing right while making best use of funds.
Afterall youd have to have the stock delisted to lose 100% of your winnings!
OPTION (3)

tech


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## tech/a (29 December 2004)

So how can we be more confident in the method we use----even though we cannot prove Positive Expectancy---as 99% of traders here dont have the software capabilities necessary.

There are 3 aspects we must be constantly aware of

](1) % winners( Long term methods(Holds of 12 mths or more) will/Should have approx 30-40% winners,Medium term (Holds of 3-9 mths) will have up to 50% and Short term (a few days to 3 mths) up to 70%.---Intraday (Could be up to 90% winners)

(2) GAINS / LOSS known as your Reward to Risk ratio.(Long term will always be higher 5 to 20 times Reward to risk,Medium term 3 to 10 times Short term 1.5 to 4 times and Intraday can be as low as .8 due to a high win rate.

(3) Number of consecutive losses.This must be applied to your RISK. If you have a 10% risk on each trade in 10 trades your broke and in 8 trades you have capital exhaustion.
Longer Term methods will have more consecutive losses as trades last for months-there is much we can do to reduce this figure and increase 2 and 3

The first and one of the most important issues to address is the UNIVERSE of stocks we will choose to trade.

Im sure many have heard of the "Top Down"  Trading approach.Simply the theory is that you pick the strongest sector and then the strongest stocks from that sector.

Great in theory but in practice by the time the sector has flagged that its out performing the market and the one or two stocks within that sector that are causing this outperformance are identified the opportunity to ride a winner is often far gone.

What is needed is EARLY RECOGNITION and this will come from individual stocks well before an index shows out performance as these stocks must pull the whole index beyond mediocrety while other stocks in the index do little--- infact in many cases underperform the Index/Market.

The UNIVERSE of stocks you choose will have the Greatest bearing on your future trading performance and Profit

Whether your UNIVERSE consists of 1 stock or 100s.

Now most traders understand the concept of Gambling.Lets say you have Two horses who races every day and their wins and losses are recorded.

Of these 2 horses which would you back??


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## GreatPig (29 December 2004)

Tech,

Given that the first chart looks like MUL, I'd have to think that many would pick that one .

GP


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## Mofra (30 December 2004)

tech/a,

I like the Martin Pring quote "a trend is assumed to be continuing until overwhelming evidence to the contrary".
Obviously the second has a greater chance of continuing upward then the first does of halting AND reversing.   

What you haven't touched on yet (as far as I can tell) is the effect of basic human intuitions, the sort of reactions that would have kept us alive as cavemen but hurt us as traders. This is the intuition that tells newbies to buy those trending down because they are "bargains" and ignore those going up because they are "getting expensive". They are the same emotions as the ancient caveman who would grab any bounty he could before running back to his cave - like the trader who snaps and takes a small win on a stock that is moving upwards instead of holding for greater gains.

Trading is a counter intuitive activity - and because of this, I suspect most people will learn trading rules the hard way (I certainly did).

Thanks for posting tech/a


Mofra


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## RichKid (31 December 2004)

Hi Tech,

Just saw the last few posts. I look for risk to reward ratios of 1:3 min and trade short term (generally a week to a few months). Does this mean I'm not fitting into (1) and (2) above or are your figures just guidelines to show the concept? I'm probably missing something here as I haven't enough trades to get real stats but was intrigued by the low risk reward ratio for short-term traders (I don't trade that often- that may be the assumption not stated above in your post). Also, I haven't counted my winners percentage but I can't see it needing to be so high (70%) if I don't trade often and my risk to return is high.

Do I make sense??? Still learning....maybe I don't understand the relevance of (3) yet? Maybe that's it...


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## tech/a (31 December 2004)

Rich.

I think it is necessary to explain using charts the various R/R ratios.

A low Risk Reward number like 2 doesnt mean its less risky to trade infact its more.Simply it means if Im risking a $ Im expecting a return of $2.

My longer term method expects a return of $12---an R/R ratio of 12

Ill put together some charts and post them up.


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## tech/a (31 December 2004)

Firstly its vitally important that all understand the difference between Risk Reward Ratio and Positive Expectancy.Im getting the feeling that some maybe confusing them as being one of the same.-They're not!

Having a positive Risk Reward Ratio doesnt GUARENTEE a Positive expectancy trading method particularly if the R/R ratio is a theorehtical ratio of return without a sufficient sample of recorded data to determine a more accurate R/R value. 

Simply the longer you have accurate recorded results of the method you are trading the more likely you will be able to develope both an Acceptable R/R ratio and a method with a positive expectancy.Once you understand the Simplicity of Profitable trading youll also see the value in investing in software that can save you Months of calculations all done in seconds.

There are many but those of best value and universal appeal are.

(1) Amibroker.(about $395 Aus)
(2) Wealthlab (Not sure but think $1000+)
(3) Metastock coupled with Tradesim (My choice of software Over $2300)
(4) Tradestation not suitable for Portfolio analysis ($1500)

But as we have said we are presuming you dont have and cant get it (If you cant afford it why are you trading???)

Here are 2 case scenarios.
(1)Starting capital $10000 and Risk / trade 5% (Cant be less as parcel size would be meaningless).R/R ratio 3:1
(2)Starting capital $10000 and Risk / trade 5% (Cant be less as parcel size would be meaningless).R/R ratio 10:1

If anyone wants the Probability calculator email me rwi@chariot.com.au address it R/R calculator as i delete emails Im not aware of.

Please take the time to understand your trading profit is at stake!!


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## tech/a (1 January 2005)

So now lets see what happens when we have the same win size but the Risk is deminished by trading with a tighter stop.(Sure other factors like consecutive losses do come into play).
In this case you would need a Minimum of $50000 to trade with a 2% stop in my veiw.Clearly bigger wins mean you need to trade less winners (Longer term makes this easier to achieve) Short term trading with small wins clearly shows that you must trade much higher % winners.

Note the win size of 10:1 on a 5% risk is the same as a 25:1 win size on a 2% risk 

Rule (3) YOU  decide when to enter the market and where to place your stop.
Let the MARKET tell you when its clearly time to exit the trade your in


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## tech/a (1 January 2005)

So along the line of preserving capital and controlling risk so we can aim at a greater Risk/Reward Ratio remember every time you take a trade!


You only have control of your capital at the point of ENTRY(determining parcels size risk parameters and why your buying it) once your in a trade the MARKET has total control,movement in price up or down is out of your control.
Never let the market take control of your capital outside of your set parameters,stops and exits.Never redefine your KNOWN parameters


The only other variable controlling Positive Expectancy is CONSECUTIVE LOSSES and INITIAL DRAWDOWN


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## obiwan (2 January 2005)

techa, your posts are very insightful, I am sure you will become a successful trader unless a series of losses befalls you or you succumb to an external psychological event.

Have you tested your system over long time periods with drawdown amounts ? Over the last 15 years would you have been blown out ? You need to test it over a long period if you assume you will be trading long term. This is assuming the previous distribution of wipeout events will be the same in the future (which it may not be). 

How much % capital do you have deployed in your trading ? Have you tested the parameters of your portfolio ? what is your trading account beta, alpha, and the beta alpha for your whole portfolio ? In a general sense you may make money from trading in the long term with your system but your capital maybe better deployed over multiple time periods by not trading. If you are getting a high return from deploying 20% of your assets in your trading but it is too risky to deploy 100%, you maybe better off employing 100% in a more efficient portfolio using mutual, hedge funds or whatever, and going to the beach or getting a dayjob (this is the beta issue on your trading account). Just an thought, cheers, obi


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## tech/a (2 January 2005)

obiwan said:
			
		

> techa, your posts are very insightful, I am sure you will become a successful trader unless a series of losses befalls you or you succumb to an external psychological event.
> 
> You have just described the failure of ANY trader.In terms of successful my definition is obviously poles apart from your ownYou seem to be under the impression that which I write is theory--------It is based upon fact and has been traded live for the last 2.5 yrs with a return on investment of 435% in that time------I guess that out performs your Mutual Funds
> 
> ...




As for deployment of funds.I have yet to see a fund which I cant out perform.
Infact over the last 2.5 yrs my compulsory super (with fortunately a pitance as a balance) has returned negative.
I have a Day job which gives 15 other people a day job as well.
My trading only uses a portion of Nett worth as does Property holdings and Subdivision developement.

Unlike many I dont aspire to wanting to trade for a living.(Although current returns would supply a fair living I would think by most peoples standard).
Firstly its as boring as hell,and secondly I dont need to.

My reason for posting here is to give something back! To make everyone Think and to give people the opportunity to discuss topics with someone who deals in fact and not theory

tech


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## tech/a (2 January 2005)

obiwan said:
			
		

> techa, your posts are very insightful, I am sure you will become a successful trader unless a series of losses befalls you or you succumb to an external psychological event.
> 
> You have just described the failure of ANY trader.In terms of successful my definition is obviously poles apart from your ownYou seem to be under the impression that which I write is theory--------It is based upon fact and has been traded live for the last 2.5 yrs with a return on investment of 435% in that time------I guess that out performs your Mutual Funds
> 
> ...




As for deployment of funds.I have yet to see a fund which I cant out perform.
Infact over the last 2.5 yrs my compulsory super (with fortunately a pitance as a balance) has returned negative.
I have a Day job which gives 15 other people a day job as well.
My trading only uses a portion of Nett worth as does Property holdings and Subdivision developement.

Unlike many I dont aspire to wanting to trade for a living.(Although current returns would supply a fair living I would think by most peoples standard).
Firstly its as boring as hell,and secondly I dont need to.

My reason for posting here is to give something back! To make everyone Think and to give people the opportunity to discuss topics with someone who deals in fact and not theory

tech


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## obiwan (2 January 2005)

techa congrats on finding a profitable system.

If you have used leverage, you have to adust performance for this ie. if I invested in the ASX index fund over the last year with 70% leverage then my return would be roughly 100% over the past year cf index performance 30%.

Basically you can find something with positive expected return, leverage it up and get higher returns. For instance residential property in 2002-3 with say 40% appreciation in sydney over 2 years would have returned 400% return on equity with 90% leverage (or 800% with 95% leverage etc).

From memory the beta on your portfolio captures it's volatility relative to the market. What you want is something with lower volatility than the index compared to return. This is GOLD because then you can lever it up more than you could the general index (and get a greater return with same volatility).  

2.5yrs is excellent. However a portfolio probably needs to be around for 10 years before you can say it is consistently successful. 

I have just scaled out of property this year so have had a minimal share portfolio in the last 4 years. To me it is not about whether I can trade successfully but where I can get the greatest return adjusted for risk. Sometimes this will not be the sharemarket, and I have never had a time when I felt the way forward was to trade my own account. 

So what is the purpose of being a trader, is it to prove something to yourself or to make money ?


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## tech/a (3 January 2005)

2.5yrs is excellent. However a portfolio probably needs to be around for 10 years before you can say it is consistently successful. 

Well the best I could do was 20000 portfolios over 8 yrs with 100% success rate I wasnt going to wait 10 yrs to find out if I was right!  

I have just scaled out of property this year so have had a minimal share portfolio in the last 4 years. To me it is not about whether I can trade successfully but where I can get the greatest return adjusted for risk. Sometimes this will not be the sharemarket, and I have never had a time when I felt the way forward was to trade my own account. 

Your choice Im still in Property (In Adelaide) Have been since 96 been in the market as well,had I not then I would not have made good returns on BOTH but thats MY choice.
Your showing the way you go about investment and what suits you,I have no idea what suits anyone here as to their way of trading or investment.
My aim is to show no matter HOW you go about creating more wealth,buy applying the contents of this thread your guarenteed success.
Youve applied it yourself possibly without knowing it

So what is the purpose of being a trader, is it to prove something to yourself or to make money ?

Both for me I actually enjoy it!.You could say the same of a business owner(whats the purpose of being a Business Owner---blah blah).
That really is a stupid statement whats the purpose of doing anything

On Leverage Im aware of that its quite deliberate.




OBI

I hope you continue with a description and presentation in laymans terms your investment stratagy/s.Often small gems can be extracted and implemented into our own methods


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## idribble (5 January 2005)

OK Tech/a.  

I've read most a lot of the info on your selection method and it appears to be very, very sound.  My opinion is that it would, without doubt survive a downturn in the market, in fact I believe that your stocks would outperform in a bad market.  One valuable book, amongst many that I have read for enjoyment on the market is "Market Wizards".  Interviews with top traders.  Your method seems to take the more reliable market indicators mentioned in this book, and then use time to gain your profit.  

(Incidentally, everyone should read Extraordinary Popular Delusions and The Madness of Crowds ..... Charles Mackay).

Comments by the obiwan are valid and good on him for noting his observations.


cheers


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## tech/a (5 January 2005)

Dribbles.

*Your method seems to take the more reliable market indicators mentioned in this book, and then use time to gain your profit*

I have read both books and also Schwagers  'Schawager on Futures"
Im not aware of these "More reliable indicators" Can you list them for me?.

Sorry its purely coincidence if they are similar.

While the universe is important (The stocks we trade) Its profitability(Techtrader) is due to the combination of all aspects to test and trade at a positive expectancy.

tech


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## stefan (5 January 2005)

tech,

I have a question. I had a bit of reading up to do after the Christmas break. After all your postings about your method of trading and ways to stay profitable, I may have missed why your method would survive a downturn in the market or even outperform in such conditions as dribbles has put it.

All I could gather is that your stops would prevent you from losing too much money but that doesn't give you a profit in a down market. It only saves you some big losses which of course is very important as such. But what makes you think that your method would still produce winners while the market gets hit badly? 

In the end you are buying shares which are vulnerable to all sorts of impacts that can't be controlled. As you have pointed out correctly, once the investment is made, you lose control. All you can do is move quickly to prevent a financial disaster. 

If we assume that California would get hit by an earth quake of the magnitude we've seen in Indonesia, surely your system would fail. I'm not trying to proof anything. I'm just trying to put the bits and pieces together to better understand your confidence in your system. 

You may have tested it with the last 10 years of market data but what does that really tell you for the future? A stock may have good technical indicators that would make it attractive to buy, but in a downtrend market that may be of little value. I take it that you would use this period as an opportunity to buy shares that fit into your system but don't perform because of the overall market condition?

Thanks for a bit of enlightment here. I'm lost in the many posts. 

Happy trading

Stefan


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## tech/a (5 January 2005)

stefan said:
			
		

> tech,
> 
> I have a question. I had a bit of reading up to do after the Christmas break. After all your postings about your method of trading and ways to stay profitable, I may have missed why your method would survive a downturn in the market or even outperform in such conditions as dribbles has put it.
> 
> ...




tech/a


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## idribble (6 January 2005)

tech/a, the more reliable indicators I allude to, which are few in number include; 

buying a stock at an all time high, supposedly less than 5% of investors do this (your system does this) and,

finding a stock that has a new product or is in an emerging market and (your system does this),

monitoring that stock to ensure that the reason for buying has not altered (your system does this also).

cheers


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## tech/a (6 January 2005)

idribble said:
			
		

> tech/a, the more reliable indicators I allude to, which are few in number include;
> 
> buying a stock at an all time high,
> 
> ...




Thanks 
tech


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## stefan (6 January 2005)

> Clearly you havent UNDERSTOOD that which I write!! Thats fine as little as 3% do.



Your postings never seize to amaze me... 

I'll post some more later on. Have to call it quits for today.


Happy trading

Stefan


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## stefan (7 January 2005)

Tech,

With all due respect. I have to tell you that the stuff your writting is really not that difficult to understand at all. If only 3% would undestand it then this planet would be dominated by apes. (Which I will refer to in my posting further down).

Most unprofitable traders have a poorly matched execution style, or a good one they haven't mastered yet. They fail to recognize critical errors in their methodology because it was copied from a book, or because they made money on bad decisions in a bull market. 

*It's important to realize that profitable traders know all the weak points in their strategies and exercise damage control at all times.*

You can't understand your methodology until you analyze your profits and losses. Identify its weaknesses quickly, and then decide if it really works at all. 

*I'd say the most difficult thing is to confess that your system doesn't work.*

BUT:You may discover that your whole approach to the market isn't right for your lifestyle, emotional nature or long-term goals. For example, you could be a daytrader who hates risk. Bad things will happen when your system doesn't match your personality. 

The fact is that most of us don't follow our own rules. 

Discipline and money management go a long way toward becoming a profitable trader. However you trade, you must be confident in the positive expectancy of your style or methodology. 

System traders use backtesting to gauge the positive expectancy of their systems. My question arose because I'm not a system trader and as such can't do much backtesting at all. Probably more like retail traders choose entry and exit without this methodology, so they need to compensate through extensive record-keeping and analysis of each trade result. 
That's something you mentioned yourself a while ago in one of your many postings. I was merly checking if I missed anything in between.

The sell side of the positive expectancy equation is more important than where you buy. Which brings us back to the monkey system posted a few months ago. It's possible to make money in the same way as a chimp who throws darts at a dartboard. But the monkey still has the same problem as the losing trader: He doesn't know when to take money off the table. 

Positive expectancy requires a robust exit strategy. Libraries  have been filled with money management techniques, such as cutting your losses, riding your winners and trading adequate reward/risk. But somehow, losing traders continue to outnumber profitable ones by a very wide margin. 

One aspect of positive expectancy is more difficult to manage than any pure numbers game. All trading styles experience drawdowns, and profitable ones are no exception. Which is why you get a bit upset when someone simply points at a bad performing stock which you picked, not realising that losing is part of the game. What makes the difference is realising that you're sitting on a loser and dumping it in time. 

Traders routinely abandon profitable methods because they hate to lose money. They stop following perfectly good rules because they aren't getting the instant gratification they want from the markets.

Sums it up nicely and will increase the 3% to at least 5% in no time. 


Happy trading

Stefan


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## tech/a (7 January 2005)

stefan said:
			
		

> Tech,
> 
> With all due respect. I have to tell you that the stuff your writting is really not that difficult to understand at all. If only 3% would undestand it then this planet would be dominated by apes. (Which I will refer to in my posting further down).
> 
> ...




tech/a


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## suzanne (7 January 2005)

Dear Tech /a and everyone else,

Please correct me if I am wrong in my assumptions on what you have written.

I have re - read your postings again and must admit I don't understand all but that is to be expected at this stage in my learnings of such a vast topic.

But am I correct in assuming that what you just said is that one must test their methodology before committing money. Are you also suggesting that one needs to invest in software like that you suggested previously to help confirm your trading plan before you commence. But like you said if one hasn't any previous data (eg losses or profit results) or trading results to compare or analyse how does one do so.??

Is it correct that the software you would recommend is Metastock and Tradesim??

Still learning

Cheers 

Suzanne


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## tech/a (8 January 2005)

suzanne said:
			
		

> Dear Tech /a and everyone else,
> 
> 
> Please correct me if I am wrong in my assumptions on what you have written.
> ...




tech/a


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## tech/a (8 January 2005)

*But More importantly!!*

There will be many who dont have the money initially to invest in software
OR
*The MAJORITY of traders here will and do Trade in a discretionary manner.This means that chances are they cannot convert their trading methodology into formula language for testing.*

INFACT from years of trading Shorter term on and off,Im now convinced that to trade in short timeframes, trading mechanically is not necesserily the answer.I have looked at many trading methods short term and for a PORTFOLIO basis (more than 3 stocks at once) am yet to find a profitable short term method.For singular stocks and FUTURES YES.

(LONGTERM which I prefer is a Different story and if trading larger capital bases I would strongly suggest you look at longer term trading.)

By far the majority trade in a discretionary manner working mainly on theory and hearsay with entry exit and stop placement,position sizing and moneymanagement.
However the combination of all this into a trading method which will be long term profitable really is hit and miss.
There are common denominators to developement of a positive expectancy methodology and that is what Ive presented here.
By using this knowledge when devising YOUR trading method will place you in at least a position which has a higher rate of opportunity for success.

You STILL cant be sure long term---but far better than pot luck.

This also applies to those using methods which cant be programmed into language effectively.Gann and Elliot Wave analysis are some.
Fundamental Analysis another.

No matter what style you choose to trade applying the basics of best trading practice will give you perhaps the EDGE you need to turn from mediocre to profitable.

tech


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## phoenixrising (8 January 2005)

Suzanne,

If you have not used a software package as yet,
incredible charts from incrediblecharts.com is a
good starting point.It's free also and gets you 
started in technical analysis.

Cheers

PR


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## Lucifer_au (8 January 2005)

Van Tharp talks alot about expectancy and I've been going through some of his material and it seems quite good (almost inspired from you tech/a!) , anyway I thought this might be useful:

Calculating R Multiples & Expectancy 
Calculating Standard Deviation
Calculating Trading System Confidence
http://www.yourproductteam.com/vti/tutorials.htm

Hope this helps some of the beginners (which includes me). 

Rgds.
Lucifer_au


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## tech/a (9 January 2005)

Excellent link.

Thanks for your post.

I notice VanTharps into Property Wraps!

Nother discussion best entered at property.com.au


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## idribble (9 January 2005)

Hi Suzanne,

tech/a has provided the best information on a thread I've ever read on how to profit in the stock market using T/A.  Better than most, if not all the books I've read.  Opened my eyes to a couple of things I've not been doing!!

For the other side of the coin may I suggest you go to Sharescene and read all the posts by kahuna1.  He gives a great insight into the process of selecting or rejecting a stock using fundamental analysis.  Good reading.  

cheers
the dribbling one!


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## suzanne (9 January 2005)

Hi Everyone,

Thanks for all the information. Its great. Saves me a lot of searching.

I've got plenty to read.

Cheers 

Suzanne


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## tech/a (22 January 2005)

*Every now and again an absolute GEM of advise appears this is not from me   but unlike some I recognise absolute brilliance when I see it!! Hell this IS GOOD!
From a Poster on the Metastock Forum.(Superfragilist)*


Someone asked about a system recently and said it seemed to work well 
when the markets were trending upward, but not so good when they 
weren't. 

No surprise there. Most newbie's don't understand how the 
trend really works, and how it impacts systems, both for trading and 
for development, so I thought I would share a little experience and 
opinion.

I'm very sure there are some of you who won't believe what I 
write, and that's fine. You're free to do things anyway you
want. After all it's your money. 

I don't want to write a book in order to educate the one or two 
people who will read this so I'm going to be as brief as I can
and then you'll have to figure out the rest based on what I say in
here. Also, I'm not going to put any lace on what I have to say. I
usually don't anyway, but from now on I'm going to post a disclaimer
saying you need to pay attention to information and not the style. If 
you are easily irritated by the style stop reading now, and don't
waste your time (or mine ) with posts or emails about being 
politically correct. So here we go.

Newbie's are very concerned about finding a system that works 
across a long time frame, etc. They are especially concerned about 
entries. They want to hit the entry as close to the turning point of 
a trend as possible. Both of those issues are a complete waste of 
time. The reality of it is when a market is trending either up or 
down, it really doesn't matter much what you are using for
entries as long as you are entering in the direction of the trend. 
(Yes, this is true. Later I'll give you some more facts you can 
research on this.)

A few simple trend indicators are all you need to see when to enter a 
trade. Entries during trends require almost no brain cells. You can 
see this from the nineties when everybody was a wizard trader, and 
then got wiped out in 2000 on. They just didn't pay attention to
what I'm explaining to you in this post. 

Once we have our entry, the problem becomes one of exit strategy and 
money management. 

You should develop an exit strategy that works separately 
from the entry indicator. If you don't know how to do this, you
can read many good systems development books by Chande, LeBeau and 
Kaufman. They discuss exits in great detail. They will also educate 
you on money management. 

Exit strategies are too numerous to discuss in a post. 
However, there is not such thing as the BEST exit. There are exits 
that work for your style of trading. 

To start the process of systems development, throw a few 
trend indicators on template and look at some charts. The do a few 
tests WHEN THE MARKET IS IN AN UPTREND. Most newbie's test
everything across a broad range of all kinds of market conditions. 
That's doing things the hard way. They've heard this is a good way to 
test systems. Wrong! The only people who need to test a system that 
way are the people who are trying to get you to pay $3000 to $10,000 
for one. They want it work at least a little when the market is not 
cooperating so they don't have hear a lot of complaints. (If you
want to read an interesting history of trading systems and the people 
who sold them, Bruce Babcock has a history section in his book The 
(Dow Jones) Irwin Guide to Trading Systems. After you read that you 
want ever consider buying one. It's got all your old favorites in
there Gann, Wilder, etc)

Since you're an individual trader and you've studied the 
systems development books I've recommended, educated your mind
and finally understand how trading actually works, you can change 
what you are doing according to market conditions. When that's the
case, there is an easier and more profitable way.

First figure out the trend. There are several ways to do this 
and they're all easy. On a weekly chart you can use a 10 and 40
week moving average. When the index of choice is above the 10 week 
moving average the market is in an uptrend. When the index is in 
between the 10 and 40 week moving average, it's whipping around,
consolidating, and screwing you out of money. That's what it's doing 
in there. When it's below the 40 week moving average it's in a down 
trend. That's the easiest way to define things. 

You can also look at some set of moving averages on a daily 
basis, like the 4, 9, and 18 triple MA or something else close like a 
5 and 20 EMA or SMA. It doesn't matter that much. Pick one.

The dailies will tell you when a correction is taking place 
in an up trend or down trend market. If the long term market bias is 
up, but there's a correction going on, you will want to take
shorts only and expect to hold them for a very limited period of 
time. This means use tight stops and don't let things run just to see 
where they're going to go. You only do that when the daily trend 
agrees with the long term trend.

Okay, now we know how to determine the trend, what comes 
next? As I said, stick a couple of trend indicators on a
chart-your choice of which ones-they all work about the same. There's 
no BEST one.

See how they look on a chart with a few symbols---during a 
period of time WHEN THE MARKET IS IN A DEFINITIVE UP TREND. Then put 
them in your systems tester and test them on a bunch of stocks like 
the S&P 500. Use the same trend indicator formula for entries and 
exits-reverse the entry please-don't worry about exits at
first. If the trend indicator returns a reasonable amount of money, 
has a rational number of trades, etc then you're in business. 

Next develop your exits. Exits need to fit your personality 
more than entries. What I mean by that is too many people look at 
what makes the most money and then they can't trade it because
the draw downs, trade frequency or other problems cause them hysteria 
in the knickers. Pick exit strategies that you are comfortable with. 
Look at them on a chart. If you feel good about what you are seeing, 
put them in the tester. If the tester gives you reasonable results---
even if they're less profitable than some other set of
conditions-you're in business. 

One of the first steps to becoming a pretty good trader is to 
understand that you don't, shouldn't and can't maximize
everything. Don't even try. If it fits and you can trade it, you'll 
learn to improve it over time. However, you won't throw it out 
because you hate the way the system messes with your emotions. 

Now run the system over all the time frames that show the 
market is in an up trend and that you have data for. Break the 
periods into subparts and see how the system performs. If it does 
pretty good during all the up trends, then you've got your up
trend system. 

Reverse the process for down trends. Most decent trend 
indicators identify down trends just a good as they do up trends. 
Remember to test your down trend system WHEN THE MARKET IS IN A 
DOWNTREND. Seems obvious, doesn't it. Okay!

If you test you're up trend system when the markets are in a 
down trend, guess what-it will perform poorly. Now why would you 
trade it during a down trend. Well, here's a clue---don't
trade it during a down trend unless you have a death wish, and some 
of you do.

If you don't like shorting, then stay out of the market when 
it's not in an up trend. Let me repeat that, STAY OUT OF THE
MARKET WHEN IT IS NOT IN AN UP TREND IF YOU DON'T LIKE SHORTING.

Well, you've read that the markets only trend 30% to 40% of 
the time. So how is this good systems development?

If you test your system during up trends and it has 6 winners 
for every 4 losers and it makes 3X the profit for each 1X the loss, 
if you run the tests when the market is in a sideways pattern, the 
systems test results are going to go down. Now it produces 4 winners 
for every 6 losers and only 1.5X the profit for 1X the losses. You 
can trade the system during sideways markets but get ready for more 
losers with smaller profits on your winners. In addition, you
won't be able to hold the trades for as long. Sideways markets may 
require tighter stops, and different exit conditions. Do you know how 
you figure that out? Well, it involves using those market bias 
charts I talked about earlier when the market is in the sideways 
pattern. 

You may find that of three up trend systems, one works better 
in sideways markets. However, it's not going to work much better. 
Nothing will because sideways markets baffle everybody. Up two days, 
down three days is hard to trade, period. 

You may want to stop trading in sideways markets. A lot of 
people do. You may want to consider a sort of market neutral strategy 
where you are taking longs and shorts at the same time. Just
don't expect to make as much money. It ain't going to happen. 

In a sideways market if you violate the rules of good money 
management and exit strategies, you are going to pay, and pay and 
pay. This is the time when money management and exit strategy is 
everything. 

Now you're thinking that can't be true, he's saying
entries mean little, and that I can use almost anything when the 
market is in an up trend or down trend. Yes, that is what I'm saying. 
LeBeau, Van Tharp and others have tested all kinds of random entry 
strategies and random exit strategies and guess what. During the 
trending markets they made money with all kinds of dart throwing 
crap. 

In the sideways markets, very few strategies made money. You 
have to scratch out profits where ever and when ever you can find 
them. 

These are all the secrets you need to know to be successful. 
Okay, there's one more success factor worth repeating. Quit
trying to maximize everything, Stop it, stop it, stop it. Maximizing 
will kill you. There is no one best method, strategy, theory, etc. 
There are one or more strategies that fit you and that will allow you 
to trade with enough success to make money. If you try to find the 
maximal money making strategy, it will wrap itself around your neck 
like a boa and choke the life out of you as punishment for violating 
the common sense rule that maximization only works in theoretical 
mathematics and engineering classes. In real life, it is going to eat 
your fruits and nuts until you starve to death. 

If you take your up trend system and run it when the market 
is in a down trend, it's going to look very, very bad, and it
should. If it didn't it wouldn't work worth a crap in an up trend. So
don't struggle trying to fix it so it finds the one long trade out of 
the hundreds of short trades that are there. 

Let's summarize. You have two systems-one for up trends' 
which is long only' and one for down trends, which is short only.
You use them according to the market bias derived from the weekly and 
daily charts that I mentioned. You learn that almost any half decent 
trend indicator will work when the market is trending, so you
don't worry about the perfect setup, etc. You simply take the trades 
when the trend indicator tells you to take them. You spend some time 
finding both a money management and exit strategy that fits your 
personality but is not the optimal strategy for making the most 
money. When the market is moving sideways you use your up and down 
trend system, but you recognize that trades are going to be quick and 
you're only going to make a little money. You will not fall in
love with semi-meaningless words like over bought and over sold 
because you understand there really is not way to determine that. You 
will, however, recognize that almost every indicator is right part of 
the time. Your job is to figure out which ones you LIKE and when they 
are likely to be right. You will understand which market conditions 
cause your favorite indicator to decline in its predictive abilities, 
and you will adjust as need be using the market bias trend detection 
system. And finally, you will erase from your mind the thoughts that 
it is possible to maximize or minimize any thing for any reason 
regardless of your educational back ground, profession or belief in 
higher powers. 

I think I'm going to write a detailed article on how to make 
all of this work for Roy's newsletter. In it I'll explain
what the better trend indicators are and how to use them, and I think 
I'll give more detail on testing and trading these systems. 

Sign up, I think you'll find it very enlightening. 

www.metastocktips.co.nz

No, I don't work for Roy. I don't get paid for writing 
anything in the newsletter. Roy lives halfway around the world from 
me. So why do I recommend his newsletter all the time. For the same 
reason I recommend system development books. 

Because the newsletter is directly on point with a whole lot of the 
questions I read on the boards. If you won't spend $120 a year to
get your questions answered, improve your trading systems 
dramatically and learn how to code your own stuff, then why should I 
spend my time answering your pleas for help on the boards. If you 
won't help yourself why should anyone else bother with you. 

You'll notice I mostly recommend systems development books rather 
than trading books. Systems development books tell you what works and 
what doesn't. Most trading books talk about somebody's
personal trading system, or a system that newbie's can't seem to get
enough of. Ninety nine percent of the time, after you've spent a lot 
of money and time learning some guru's pet system, you'll wind
up giving it up and doing what I'm telling you to do. You never hear 
the guru's tell you their system only works well when the market is 
in an up trend. You know why they don't tell you that, because you
wouldn't buy their system. 

Do you know how many of the guru's trade from a large capital
account-almost none of them. At least a few of them admit it. Most 
of their money is in mutual funds. They move it in and out of the 
mutual funds using the trend identification methods I've told you 
about. They don't trade with their serious money. 

Rather than follow the guru's, develop your own simple methods.
It will serve you much, much better as will learning how to see the 
market bias without Gann or Elliot or some other complex as hell 
method. 

Have fun! 

*Now put the 2 together(Both This Post and This Thread)*


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## RichKid (27 January 2005)

Lucifer_au said:
			
		

> Van Tharp talks alot about expectancy and I've been going through some of his material and it seems quite good (almost inspired from you tech/a!) , anyway I thought this might be useful:
> 
> Calculating R Multiples & Expectancy
> Calculating Standard Deviation
> ...




A bit more info in this thread on Van Tharp, thanks again Lucifer, excellent stuff! Book came out in 1998, still very popular.
https://www.aussiestockforums.com/forums/showthread.php?t=846

Also, TechA thanks for that post from that other forum, very enlightening, does clear up quite a few points for me. Which means more work to get my head around things (again!), I seem to be starting from scratch everytime a new concept becomes clear. Your contributions on this thread are much appreciated, my learning is slow but progressing.


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## tech/a (27 January 2005)

RichKid said:
			
		

> A bit more info in this thread on Van Tharp, thanks again Lucifer, excellent stuff! Book came out in 1998, still very popular.




*The principals will remain the same for decades.*

*Its one thing to understand WHAT will make you profitable and another to select a methodology and design it in such a way that it is profitable.Seperate the 2,The latter can be simple or complex but it MUST satisfy 1*.

tech/a


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## kpgduras (8 April 2005)

tech/a said:
			
		

> The system has a INITIAL SET STOP  of
> 
> If(Ref(C,-1)>0.90*EntryPrice,0.90*EntryPrice,Ref(C,-1));
> 
> ...




Hi Tech et al

Thanks Tech/A for this fantastic thread - it certainly gives me a lot of information to help me formulate my own system.

My question is:

*How do I code Metastock to exit if the last close falls below 90% of the entry price?*

Regards

kpgduras


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## RichKid (8 April 2005)

tech/a said:
			
		

> tech/a ...Principles will remain the same....




Thanks for explaining that Tech, just saw your reply. Your explanations are finally making a bit more sense to me now that I have read a bit more. I'll keep going with it...


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## tech/a (9 April 2005)

Hi from NZ----- bloody cold this place.

Im in the Extreme sport capital of the world ---Queenstown


Now with the stop for metastock un fortunately you have to apply it manually.
One of M/S restrictions.
Tradesim makes it possible with a dll.

Anyway catch you later a paraglider is calling!
Now thats a Rush!!


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## nizar (2 January 2007)

Hands down *THE BEST * thread i have read in this forum.
Contains very sound advice regarding systems trading.
I recommend everyone to read this thread.
If you have already -- READ IT AGAIN!

Thanks tech/a for your contributions.


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## stink (8 February 2007)

HI Tech,

Mate you have done it again with this one, have made me question things in my own strategy again which is a good thing.

A question though, i will be shortly ablt to trade a small amount 20k on margin now are you saying that a starting capital of 20k is to low to use a system like yours on?

Regards Stink

Thanks again for spending the time to share your experience.


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## tech/a (8 February 2007)

No We started the system using $30k initial in the trading exercise on Reefcap.

I know of an Aquantance who started it off with $7,500 the minimum then.
Last I heard he was at around $40K in both realised and un realised profit.

So no matter what system you use if you know your longterm results---unless the market does something outside of those conditions used in the test period,then chances are it will perform within the boundaries of the "Numbers" your method returns.

Mind you longterm methods often take years to show a healthy return.
The power of compounding and leverage takes time to kick in.

T/T was called at one time the Snail method. ---Havent heard that terminology for sometime.
Expect 2-3 yrs on any account size.


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## Bronte (8 February 2007)

Having just read this thread...again
Very well done tech/a


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## tech/a (8 February 2007)

Hopefully Yogi wont read it or I'll attain Guru status------again.


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## stink (9 February 2007)

OK Cheers Tech,

Definately gives me something to think about. I managed to get myself a copy of Amibroker so now i just need to work out what to do with it  

I already have a charting package that i am happy with and i have a data feed, but i suppose i need to work out how to get the EOD into amibroker right?

Cheers Stink

Tech, are the parameters etc that you use in techtrader available anywhere? Or is it Tech's super secret recipe


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## tech/a (9 February 2007)

Stink.
They are on Reefcap in both metastock AND Amibroker code.

All done for you. See the formula page.

http://lightning.he.net/cgi-bin/suid/~reefcap/ultimatebb.cgi


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## stink (9 February 2007)

Thanks again Tech,


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## stink (9 February 2007)

Hey Tech,

It looks like that thread is buggered or something. I really need a step by step guide if thats available.

Cheers Stink


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## Joe Blow (9 February 2007)

Just realised this thread was in 'General Chat' for some reason.

Moved to 'Beginners Lounge'.


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## tech/a (9 February 2007)

stink said:
			
		

> Hey Tech,
> 
> It looks like that thread is buggered or something. I really need a step by step guide if thats available.
> 
> Cheers Stink




Its all there just register as a member and there is everything you'll need.


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## stink (9 February 2007)

Yeah I am registered etc but in the amibroker thread i can only see one post from MDS2 and all the previous posts are just blank? Just that thread for some reason, i can read the metastock and other threads fine??

Cheers Stink


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## tech/a (9 February 2007)

Sent a query to the boss. I'll let you know.


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## Joe90 (19 February 2020)

Quick post to bump this to the top. Quality material from the Duck buried in the archives.


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## jbocker (15 February 2021)

rebump the thread. good reading and learnings


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