# What analysis do you use for trading?



## Client (26 February 2010)

It is interesting to me what kind of analysis you use to make a trading decision. If it's technical methods, tell us what exactly, like Bill Williams methods, candlesticks, classic methods or Elliott Wave Principle, etc.


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## Whiskers (26 February 2010)

*Re: What Do You Use For Trading?*



Client said:


> It is interesting to me *what kind of analysis you use to make a trading decision*. If it's technical methods, tell us what exactly, like Bill Williams methods, candlesticks, classic methods or Elliott Wave Principle, etc.




Well, I'll start this off!

Wake up, check my commitments for the day... hmmm, got a bit of spare time... how's the bank account... ohh dear, let's see now!!!  

How's my stars looking! :

If I decide to trade, I'll scratch my head for a bit to see what FA sounds good and see if that will line up with a bit of TA and EW. 

If I get a good vibe I'll trade otherwise I'll go and do some gardening, have a camp or somethin.


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## Naked shorts (27 February 2010)

http://www.amazon.com/Complete-Idiots-Guide-Trading-Like/dp/0028636538


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## PrudentInvestor (28 February 2010)

Client said:


> It is interesting to me what kind of analysis you use to make a trading decision. If it's technical methods, tell us what exactly, like Bill Williams methods, candlesticks, classic methods or Elliott Wave Principle, etc.




Pardon me, but your question, while interesting, is so deep that I will have to answer it in a rather abstract way.

I use systems based on mathematical models only, but will not delve into their details here. Instead, let me point out that during the years I've traded, I have come to the conclusion that systems based on mathematical models work the best on very long and very short time frames. On the short time frames, these models can identify relative supply-demand inequilibria and on the long time frames (talking about investing, not trading per se) they allow one to stay rational while taking risk and anticipating return in compensation.

I've never had much success picking bottoms and tops on medium time frames (weeks-months), but luckily I've also been wise enough to realize it and focus on the more profitable strategies.


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## nunthewiser (28 February 2010)

and a calculator


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## ThingyMajiggy (28 February 2010)

nunthewiser said:


> and a calculator




What do you use her for? :


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## James58209 (28 February 2010)

Hi,

I would have posted this in the "Technical Analysis: Useless?" thread, but it has been closed.  I know people get tired of discussing the philosophical differences between different approaches to trading, but I'm just wondering whether anyone can point me to any rigorous backtesting of claims like "the trend is your friend".  For example, if a stock's price has been increasing by at least 0.1% per day on average over the past 3 months, is it more likely to increase or decrease in price over the next 3 months (ignoring all other information to try to determine if the claim "the trend is your friend" has any value in isolation)?  Has anyone done any backtesting of this type?

I follow trends sometimes without having any strong empirical evidence for why I am doing that.  The reason I don't worry about not having a strong positive expectancy for my stock picking is that I believe that my trading plan for how I manage the trade after the initial stock picking is far more important.

I know some tech analysis fans will say that it doesn't matter whether picking stocks based on trend gives you a positive expectancy, what is more important is how you frame your risk/reward plan based on that trend.  But I suspect that a lot of beginners see claims like "the trend is your friend", and assume that it does give them an edge in stock picking.

Cheers,
James


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## tech/a (28 February 2010)

James

Explain for me how you make a profit or a loss for that matter (Other than arb and some options spread) without a trend?

If your a technical trader with analysis which anticipates a move from $X to Y
OR a Fundamental trader who believes the same stock at X is worth at least Y both are anticipating a trend in a positive direction.



> The reason I don't worry about not having a strong positive expectancy for my stock picking is that I believe that my trading plan for how I manage the trade after the initial stock picking is far more important.




This statement really interests me,I'm absolutely riveted to hear how your Trade management helps your positive expectancy (Indeed Profit) after you take a trade without a positive EXPECTATION. Not saying you cant do it but cant understand why you'd take a trade that hasn't a positive expectation and then try to manage it into one??



> I know some tech analysis fans will say that it doesn't matter whether picking stocks based on trend gives you a positive expectancy, what is more important is how you frame your risk/reward plan based on that trend. But I suspect that a lot of beginners see claims like "the trend is your friend", and assume that it does give them an edge in stock picking.




Clearly you like most "beginners" don't understand positive expectancy how to calculate it and how you come about knowing you have it
But I could be wrong---the above statement certainly doesn't give me confidence!!.
Question
Framing your Risk/Reward based on a trend what is it that you are trying to achieve?


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## Mr J (28 February 2010)

James58209 said:


> but I'm just wondering whether anyone can point me to any rigorous backtesting of claims like "the trend is your friend".




I can't provide any backtesting, but then I don't need it. If it weren't true, trends would not be as significant as they are. Consider that human behaviour drives markets, not monkeys flipping coins.



> I believe that my trading plan for how I manage the trade after the initial stock picking is far more important.




It's all important. You didn't specifically mention the entry though, which in my opinion is the most important part of a trade.

Tech, we don't know he doesn't have positive expectancy. Actually, I re-read that last quote of yours. Sounds like he's expecting R:R alone to be enough.


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## tech/a (28 February 2010)

> You didn't specifically mention the entry though, which in my opinion is the most important part of a trade.




Most do.
I dont.



> we don't know he doesn't have positive expectancy




I suspect he doesnt either.


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## Mr J (28 February 2010)

tech/a said:


> Most do.




And still most of them don't make good entries, at least by my definition. As for qualifying the importance of entry, it's easier to profit from a good entry and poor exit, than a poor entry and good exit. The entry sets the stage for the rest of the trade. I think a good first decision makes subsequent decisions better and easier. Obviously you feel differently, but I make good entries and it makes my trading better, so it's what is most important to me.


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## Trembling Hand (28 February 2010)

Mr J said:


> The entry sets the stage for the rest of the trade. I think a good first decision makes subsequent decisions better and easier. Obviously you feel differently, but I make good entries and it makes my trading better, so it's what is most important to me.




Clearly a good entry will effect your R:R. So I would agree.


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## tech/a (28 February 2010)

Intrigued as to how you determine a good entry until after the fact.
Same with an exit.

You can set a buy up to give excellent R:R but you wont know how excellent that turns out to be until after it turns out!

I think EVERY entry I make is The Ducks guts (As I would I'm a Duck) but inexplicably not all are!


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## Mr J (28 February 2010)

> I think EVERY entry I make is The Ducks guts (As I would I'm a Duck) but inexplicably not all are!




I'm not suggesting any differently, I'm just saying the entry is the most important part of a trade for me, because the perfect entry maximises potential profit and minimises risk. Until the trade is well underway, the entry is only a predicted good entry.


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## tech/a (28 February 2010)

Mr J said:


> I'm not suggesting any differently, I'm just saying the entry is the most important part of a trade for me, because the perfect entry maximises potential profit and minimises risk. Until the trade is well underway, the entry is only a predicted good entry.




The entry may well be the most important to you in your mind.
Every single trader aims for the perfect entry and the perfect exit.
Yes and we all know what it means to the bottom line--- but unless you can couple it with the perfect exit your RR for that trade may well be less than optimum.

So on the point of entry what is in your mind a perfect entry---the thing you aim for---*other than *the trade to be executed and the trade played out to the exit or trailing stop.

Isn't that (the trade to be executed and the trade played out to the exit or trailing stop.) the only definition of a perfect entry?


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## Trembling Hand (28 February 2010)

tech/a said:


> Intrigued as to how you determine a good entry until after the fact.
> Same with an exit.
> 
> You can set a buy up to give excellent R:R but you wont know how excellent that turns out to be until after it turns out!
> ...




There is idea generation, like buy the breakout, then there is idea execution, 

Miles about. This is where the practicalities of trading smokes the theories. If you're happy punting with 2 ATR stops, like the other 90% of punters, I'm happy for you.


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## tech/a (28 February 2010)

Trembling Hand said:


> There is idea generation, like buy the breakout, then there is idea execution,
> 
> Miles about. This is where the practicalities of trading smokes the theories. If you're happy punting with 2 ATR stops, like the other 90% of punters, I'm happy for you.




Where do you get the idea that I trade only breakouts (Yeh I trade breakouts but differenly to what you percieve in many cases) and use a 2 ATR stop mechanism?

My bottomline and aim is to increase my real (as in closed trades) RR and in turn expectancy--the real one. ---From this you may be able to decipher then what I consider the most important aspect of Trading/Business or Property.


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## Trembling Hand (28 February 2010)

I didn't say you trade anyway. I was just giving an example, a breakout trade is an idea, within that idea you must execute it. Most just hit a magic buy button. I 100% believe that is poor trading. A fortune is to be milked from the next step, execution of the idea.

Just like in business. Plenty of good ideas go broke or could of been helped with some finesses on the execution.


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## James58209 (28 February 2010)

Hi Tech/a 



tech/a said:


> Explain for me how you make a profit or a loss for that matter (Other than arb and some options spread) without a trend?




I think most of the profits I have made have been by riding trends, (and by listening to/reading thoughts of more experienced traders than myself about whether they are bullish or bearish on the general direction of the overall market). But because I am not a system trader, (more discretionary), there are always factors other than trend influencing my decision, so I certainly don't have enough data to prove that pure trend following is consistently profitable for me.  In some cases I have profited without following a trend, e.g. when a company director leaves a company and liquidates their holdings, and the share price appears severely oversold as a result, I might take a punt and buy in, hoping for a bounce back in the short term, which is not exactly following a trend.



tech/a said:


> This statement really interests me,I'm absolutely riveted to hear how your Trade management helps your positive expectancy (Indeed Profit) after you take a trade without a positive EXPECTATION.
> 
> Not saying you cant do it but cant understand why you'd take a trade that hasn't a positive expectation and then try to manage it into one??




I suppose I'm splitting hairs here about the definition of EXPECTATION.  Of course I "expect" to make a profit when I put money on a trade, otherwise why would I put money on it?  But sometimes I find it difficult to accept that it can be proven by backtesting that the trade will have a positive expectation (mathematically speaking), because I would need a lot of data based on the same or very similar market conditions and similar reasons for entry (which are partly discretionary) to be convinced that the effectiveness of this particular entry can be predicted in advance.



tech/a said:


> Clearly you like most "beginners" don't understand positive expectancy how to calculate it and how you come about knowing you have it
> But I could be wrong---the above statement certainly doesn't give me confidence!!.




Expectancy = (Probability of Win * Average Win) - (Probability of Loss * Average Loss) 

What I am questioning is how accurately you can estimate the Probability of Win vs Loss.  Obviously it is easier if you are system trader (rather than discretionary) and if you believe that the market conditions have not changed significantly since you gathered enough backtesting data to assess its statistical distribution accurately.



tech/a said:


> Question
> Framing your Risk/Reward based on a trend what is it that you are trying to achieve?




No, that's not what I am personally trying to achieve. I mentioned the framing risk/reward stuff after reading point 3 of Trembling Hand's Post #2 in the "Technical Analysis: Useless" thread, which makes sense to me after the trade has begun.  If I make an entry because I think a stock is on an uptrend, then it reverses immediately, I am happy for my stop-loss to be hit which suggests that I may have been wrong about the stock being on a continuing up-trend.  But if this happens 3 times in a row, how do I know whether my entry method is flawed or whether I was just unlucky?

I think the only way I can be 100% confident in my entry method is if I become a system trader (which I don't particularly want to do), and if I believe that the market conditions have remained the same (or close enough) for long enough to accumulate enough backtesting data to form a statistical distribution from which meaningful hypotheses can be made.

Cheers,
James


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## tech/a (28 February 2010)

Trembling Hand said:


> I didn't say you trade anyway. I was just giving an example, a breakout trade is an idea, within that idea you must execute it. Most just hit a magic buy button. I 100% believe that is poor trading. A fortune is to be milked from the next step, execution of the idea.
> 
> Just like in business. Plenty of good ideas go broke or could of been helped with some finesses on the execution.




Ill argue that thats more MM than entry.
Then I'll argue that Trade and better still Portfolio Management will have a greater effect on Business  (trading is a business) profit than simply entry/execution.

Sure finess should be a primary aim and if you dont get it right 1st ---4th time just keep at it.
But this is a far cry from "J"s entry being the most important.


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## tech/a (28 February 2010)

*JAMES*



James58209 said:


> Hi Tech/a
> 
> 
> 
> I think most of the profits I have made have been by riding trends, (and by listening to/reading thoughts of more experienced traders than myself about whether they are bullish or bearish on the general direction of the overall market). But because I am not a system trader, (more discretionary), there are always factors other than trend influencing my decision, so I certainly don't have enough data to prove that pure trend following is consistently profitable for me.  In some cases I have profited without following a trend, e.g. when a company director leaves a company and liquidates their holdings, and the share price appears severely oversold as a result, I might take a punt and buy in, hoping for a bounce back in the short term, which is not exactly following a trend.




I see.



> I suppose I'm splitting hairs here about the definition of EXPECTATION.  Of course I "expect" to make a profit when I put money on a trade, otherwise why would I put money on it?  But sometimes I find it difficult to accept that it can be proven by backtesting that the trade will have a positive expectation (mathematically speaking), because I would need a lot of data based on the same or very similar market conditions and similar reasons for entry (which are partly discretionary) to be convinced that the effectiveness of this particular entry can be predicted in advance.




You wont ever be able to predict simply anticipate.
Advanced Get have an in built trading method called XTL trading (Expert trend locator) its aim is to get you int an early stage of a wave 3 in a trend be that long or short. They "Claim" a higher than 50% win rate around 60ish if I remember---No I havent seen exhaustive testing and have had mixed but worthwhile results using it.

I think it would be hard to argue that trend trading or more to the point getting on a trend forms the basis for profit for the vast majority of those trading in profit.Likewise for those failing dismally (holding losses far to long---trend in the opposite direction). You can after extensively testing a method have an idea of expectancy---you will be presented with a "Blueprint" which your live trading should follow (it has in all my experiences) until the market alters appreciably from the market data in which it was tested.





> Expectancy = (Probability of Win * Average Win) - (Probability of Loss * Average Loss)




Which can only be calculated after a sequence of trades. 



> What I am questioning is how accurately you can estimate the Probability of Win vs Loss.  Obviously it is easier if you are system trader (rather than discretionary) and if you believe that the market conditions have not changed significantly since you gathered enough backtesting data to assess its statistical distribution accurately.



You cant you can only work from know results---we both concur on backtesting.





> No, that's not what I am personally trying to achieve. I mentioned the framing risk/reward stuff after reading point 3 of Trembling Hand's Post #2 in the "Technical Analysis: Useless" thread, which makes sense to me after the trade has begun.  If I make an entry because I think a stock is on an uptrend, then it reverses immediately, I am happy for my stop-loss to be hit which suggests that I may have been wrong about the stock being on a continuing up-trend.  But if this happens 3 times in a row, how do I know whether my entry method is flawed or whether I was just unlucky?




Only a large data set or large closed trades will supply an answer.



> I think the only way I can be 100% confident in my entry method is if I become a system trader (which I don't particularly want to do), and if I believe that the market conditions have remained the same (or close enough) for long enough to accumulate enough backtesting data to form a statistical distribution from which meaningful hypotheses can be made.
> 
> Cheers,
> James




So then when the entry is not seen or known to be the most important part of a trade the dilema pales.
Discover how to trade with as best as we can anticipate entries and skew our losers to be as small as possible and our winners to be as large as we can and Profit will be assured.


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## >Apocalypto< (28 February 2010)

Focus on a system via charting. 

Simple approach with retracements to moving averages entering inline with the direction, with volatility confirmed by the ATR.

Good Trading............


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## wayneL (28 February 2010)

For option trades:

Standard deviation (in the option sense, not the indicator in metacrock amibroke etc), seasonality for commods, plus a bit of crude statistics.


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## MRC & Co (28 February 2010)

wayneL said:


> seasonality for commods




Interesting, I've seen a great analyst/trader use seasonality a lot with commods.  Thx.  Will look further into it.  These are the tiny comments by real seasoned traders why I still come back here.


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## Mr J (1 March 2010)

tech/a said:


> The entry may well be the most important to you in your mind.




It's most important to me full stop. My theory that the entry is the most important comes down to the fact that the entry is the first action, and it sets the risk and potential range of the trade. I feel my entries give me a significant advantage. Not like a good jump off the blocks for a swimmer, but like getting a 2 second head start.



> So on the point of entry what is in your mind a perfect entry---the thing you aim for---*other than *the trade to be executed and the trade played out to the exit or trailing stop.
> 
> Isn't that (the trade to be executed and the trade played out to the exit or trailing stop.) the only definition of a perfect entry?




I'm not sure what you mean. Are you saying the perfect entry is just one that allows you to get into the trade?


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## goldorak (1 March 2010)

Mr J said:


> It's most important to me full stop. My theory that the entry is the most important comes down to the fact *that the entry is the first action, and it sets the risk and potential range of the trade.* I feel my entries give me a significant advantage. Not like a good jump off the blocks for a swimmer, but like getting a 2 second head start.




I agree but even when you are able to spot perfect entries, it doesn't mean that you will be profitable if you don't know how to manage properly a winning trade.


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## Frank D (1 March 2010)

It’s quiet interesting that some believe that the trend is more important 
than the entry.

Framing your risk reward on trend can’t be calculated because a trend 
can’t be measured. A trend is subjective.

The point of successful trading is to remove as much subjective material 
as possible and rely on objective & probability based strategies.

Either using hardcoded systems or observed phenomena:- The ENTRY 
which doesn’t need a trend initially to be successful, but will need a trend 
to be profitable.


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## tech/a (1 March 2010)

Mr J said:


> It's most important to me full stop. My theory that the entry is the most important comes down to the fact that the entry is the first action, and it sets the risk and potential range of the trade. I feel my entries give me a significant advantage. Not like a good jump off the blocks for a swimmer, but like getting a 2 second head start.
> 
> 
> 
> I'm not sure what you mean. Are you saying the perfect entry is just one that allows you to get into the trade?






Frank D said:


> It’s quiet interesting that some believe that the trend is more important
> than the entry.
> 
> Framing your risk reward on trend can’t be calculated because a trend
> ...




Some excellent stuff for discussion.
Will comment further over the next couple of days have a bugga of a week in front!


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## tech/a (1 March 2010)

Mr J said:


> It's most important to me full stop. My theory that the entry is the most important comes down to the fact that the entry is the first action, and it sets the risk and potential range of the trade. I feel my entries give me a significant advantage. Not like a good jump off the blocks for a swimmer, but like getting a 2 second head start.




I hear you but again I cant see how you can be so sure that EVERY entry will be a home run.



> I'm not sure what you mean. Are you saying the perfect entry is just one that allows you to get into the trade?




Yes your entry which is designed to be as good as it can be would do exactly that and no more.



Frank D said:


> It’s quiet interesting that some believe that the trend is more important
> than the entry.




Getting on one is a must for profit --- you can have an excellent potential  entry only to see it fail.



> Framing your risk reward on trend can’t be calculated because a trend
> can’t be measured. A trend is subjective.




Ive never heard of anyone doing this.



> The point of successful trading is to remove as much subjective material
> as possible and rely on objective & probability based strategies.




A systems trader would agree a discretionary trader would I would have thought be constantly working on a higher Reward for risk.



> Either using hardcoded systems or observed phenomena:- The ENTRY
> which doesn’t need a trend initially to be successful, but will need a trend
> to be profitable.




How can an entry be successful initially??---without a follow through---trend.

I have found the best way to increase my Reward to risk is better trade management of BOTH the failures and the winners.
Rarely does a trade lose its full initial stop or risk.

My initial risk doesnt remotely resemble my actual risk on closed trades.
I may start with 1-3% risk but my resultant Risk to reward is .72% at the moment. I can get that lower and is a work in progress.


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## Synergy (1 March 2010)

Mr J said:


> It's most important to me full stop. My theory that the entry is the most important comes down to the fact that the entry is the first action, and it sets the risk and potential range of the trade. I feel my entries give me a significant advantage. Not like a good jump off the blocks for a swimmer, but like getting a 2 second head start.




This is exactly how i feel.



			
				Frank D said:
			
		

> It’s quiet interesting that some believe that the trend is more important
> than the entry.




Perhaps there has been too much of a shift towards things other than entries? it's seen as a bit untrendy to be talking about entries in this day and age...

For me, my system would struggle severly using a random entry. It would probably survive, but it would not be worth trading. For me the entry itself is not so important, but the timing is critical. I dont want to be wasting time in trades that aren't doing anything.

I see my entry as a springboard onto a trade. Sometimes the board breaks, but there isn't far to fall.


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## professor_frink (1 March 2010)

Client said:


> It is interesting to me what kind of analysis you use to make a trading decision. If it's technical methods, tell us what exactly, like Bill Williams methods, candlesticks, classic methods or Elliott Wave Principle, etc.




I use technical analysis to make my trading decisions for me. The chart should explain it all


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## Mr J (1 March 2010)

tech/a said:


> I hear you but again I cant see how you can be so sure that EVERY entry will be a home run.




If I was, I'd be a fool or a billionaire by year's end. I don't believe that every or any trade will be perfect, I make the trade knowing that on average, my entry will be pretty good. 




> Yes your entry which is designed to be as good as it can be would do exactly that and no more.




That the trade is just a starting point and no more, that the result is decided after the entry, not by the entry? I partly agree, but it feels like we're debating whether a glass is half full or half empty. Different perspectives, each to suit ourselves?



			
				goldorak said:
			
		

> I agree but even when you are able to spot perfect entries, it doesn't mean that you will be profitable if you don't know how to manage properly a winning trade.




I never said entry was the only important part of trading, just the most important. Anyway, I think the vast majority of people who can spot great entries should be able to adequately manage the trades.


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## tech/a (2 March 2010)

Mr J said:


> Anyway, I think the vast majority of people who can spot great entries should be able to adequately manage the trades.




Would you be kind enough to post a few of these Great entries as close to realtime as possible to demonstrate your point?


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## Frank D (2 March 2010)

A probability-based entry doesn’t need a trend to begin with, you don’t 
have to be on a trend to begin with, and it doesn’t have to be successful 
at the start, otherwise everyone would be running 1-point stops.

If you rounded up every trader and placed them in a basket and labeled 
them as trend traders using momentum type strategies then everyone 
would be using ‘trend-type’ entries based on probability associated with 
a known pattern.

If I go to bed a place short trades at a dynamic 5-day or Weekly highs
 or any other level that has *observed phenomena associated with 
*it, then I’m placing my *trades against the initial trends, I’m 
not concerned about the initial trend of the market,* all I’m concerned
 is finding levels in the market that provide *probability*, that 
will eventual lead to a reversal pattern based on *markets being
 linear regressive*.

Trends don’t move in straight lines they zig-zag and  are 
completely subjective, as there isn’t a known end of a trend unless it’s being
 optimized with Price based rules or time based rules i.e. I’m holding this 
trade until X price is reached or until the end of the day, week, and so 
on

Trend identification is extremely important, but I don’t think there are
 many successful ‘traders’ that enter randomly simply because of the trend.

In my opinion this is a silly discussion until someone actually defines what
 an 'objective' trend is. 

And I’m not interested in text book answers of 'higher highs and higher lows' etc.

You can place that answer in the locked thread of useless analysis


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## Whiskers (2 March 2010)

Frank D said:


> A probability-based entry doesn’t need a trend to begin with...




I tend to agree there. My style is more invest or trade over a few days more so than day trade with the exception of a bit of forex and the odd stock that is on a runner... but for me I make most of my entries on probability, ie often bottom or top picking based on FA, some TA such as divergance and ocassionally EW. They don't always work out but with appropriate stops you can maxamise the number of those famous outlears to get onto.  



> In my opinion this is a silly discussion until someone actually defines what
> an 'objective' trend is.
> 
> And I’m not interested in text book answers of 'higher highs and higher lows' etc.
> ...




...er, um, not sure about that... I'm thinking... 

For me a trading trend can be defined by those 'higher highs and higher lows' an EW count that narrows the possibilities/probalities and also the Market Depth. 

Say with shares, once you've made a decision about theorised trend and made an entry, isn't the best actual trading 'trend' indicator the Market Depth and Course of Sales?


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## Trembling Hand (2 March 2010)

Whiskers said:


> Say with shares, once you've made a decision about theorised trend and made an entry, isn't the best actual trading 'trend' indicator the Market Depth and Course of Sales?





Please explain?


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## Whiskers (2 March 2010)

Trembling Hand said:


> Please explain?




Short answer... say long, trend strength determined by narrow spread and or larger bid volumes as compared to the ask side... typically trend ends (so exit) when bid side volume fades and or spread increases.

PS: Gees, I  wasn't planning to give away trade secrets, but isn't that something like how you trade the SPI, TH?


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## Trembling Hand (2 March 2010)

Whiskers said:


> Short answer... say long, trend strength determined by narrow spread and or larger bid volumes as compared to the ask side... typically trend ends (so exit) when bid side volume fades and or spread increases.




Would luv you to clear this up once and for all. Many a deluded punter states the same, that an order book stuffed on one side leads to it moving in the opposite direction.

I say BS, Size attracts size.

Care to show us say 10 examples?


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## Whiskers (2 March 2010)

Trembling Hand said:


> Would luv you to clear this up once and for all. Many a deluded punter states the same, *that an order book stuffed on one side leads to it moving in the opposite direction.*




I didn't say that... I said *when* the balance changes (as it invariably does) as in reducing ones chance to exit on ones own terms. Obviously, it maybe a matter of minutes if trading an open, to a day or three if a seriously strong run.


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## Trembling Hand (2 March 2010)

Whiskers said:


> isn't that something like how you trade the SPI, TH?



 Absolutely NOT.



Whiskers said:


> I didn't say that... I said *when* the balance changes (as it invariably does) as in reducing ones chance to exit on ones own terms. Obviously, it maybe a matter of minutes if trading an open, to a day or three if a seriously strong run.




So you get shaken out by order book games?


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## Whiskers (2 March 2010)

Trembling Hand said:


> Absolutely NOT.




Please explain?... to you too! :



> So you get shaken out by order book games?




Well if I'm only intending to do the day trade 'game', yes. After all if there ain't enough buyers on, or regularly coming into the bid side or at market, I'll nick off. Ain't that the nature of day trading?... Damit, no don't answer that! I knew I'd get into a damn bun fight here!


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## Trembling Hand (2 March 2010)

Whiskers said:


> Please explain?... to you too! :




I've explained plenty of times I give very little credence to what is sitting in the order book.

But if you are happy to make decisions off what the magician is showing you in his left hand then I'm happy. 

:aliena:


----------



## Whiskers (2 March 2010)

Trembling Hand said:


> I've explained plenty of times I give very little credence to what is sitting in the order book.




Likewise... but one has to start somewhere, and as I implied, watch the _magicans hand_, ie how the dynamics change, including 'at market sales', in the Course of Sales.

PS: I thought you shed that 'Grumpy' tag, TH.


----------



## motorway (2 March 2010)

Frank D said:


> A probability-based entry doesn’t need a trend to begin with, you don’t
> have to be on a trend to begin with, and it doesn’t have to be successful
> at the start, otherwise everyone would be running 1-point stops.
> 
> ...




You are still working with the trend JUST not BLINDLY FOLLOWING ( ALONG BEHIND IT )

eg If I go to bed a place short trades at a dynamic 5-day or Weekly highs  or any other level that has *observed phenomena associated with *it, then I’m placing my *trades against the initial trends .

Difference between BEING in HARMONY or FOLLOWING





			Trends don’t move in straight lines they zig-zag and  are 
completely subjective,
		
Click to expand...



They can be Identified OBJECTIVELY with the right tools and methods
Just like anything else can be recognized

First the data must be digitalized
Second an Objective Resolution ( like an optimal signal to noise ratio )
Determined
Then the TRENDS are Objectively there or NOT

Just like the way you Film "MOUNTAIN" or "RIVER"
and then reproduce on a LCD screen

You would use a resolution that defined the dynamics of MOUNTAIN
not MOUNTAIN RANGE or MOUNTAIN DUST

RESOLUTION  PERSPECTIVE then match the resolution of the Screen
for Optimal clarity...

THE smallest building block of an OBJECTIVE TREND is then ONE UNIT.

One DIGITAL PRICE UNIT.

There is one  or there is not ===>OBJECTIVE
PRICE MOVES MEANINGFULLY or IT DOES NOT.

Time simply becomes DURATION
and not NOISE

Motorway*


----------



## MRC & Co (2 March 2010)

I actually watched a spreadsheet for a while, which I think had a bid/ask ratio of the top 20 ASX stocks, of what was sitting in the book.  So showed if the bid or the ask was cumulative larger and by what ratio.  I thought it may be good for a contrarian play, but it didn't provide any edge either way FWIW.


----------



## Mr J (2 March 2010)

tech/a said:


> Would you be kind enough to post a few of these Great entries as close to realtime as possible to demonstrate your point?




I probably have in my journal thread. They weren't real-time either, they were in advance. I define a good entry not be the result, but by where it is positioned in the subsequent move. I've illustrated it in the attachment.

I consider the green entries as the good entries, the yellow entries as marginal, and the red entries as horrible. I'm *not* suggesting the yellow and red entries aren't profitable, but they're late and not nearly as good as the green entries. The green entries by far carry the least risk and greatest reward. The yellow entries are typical for people waiting for "confirmation". Many people think that "confimation" makes the trade less risky, but I think it makes it more risky. The red entries are loser entries, although I'm sure some people profit off of them. 

All of this is relative to timeframe, so while I consider the red entry to be horrible for this move, the move represents a trend on a faster timeframe, and the red line areas probably contain retracements that allow for good entry.

You'll probably suggest that I can't know the different zones until after the move. Probably not, and this is why I take the green entries. I don't know how long a move will last, and this is why I think it's important to enter early.



			
				Frank D said:
			
		

> A probability-based entry doesn’t need a trend to begin with, you don’t
> have to be on a trend to begin with,




Every move is a trend on a faster timeframe :.


----------



## motorway (2 March 2010)

Mr J said:


> You'll probably suggest that I can't know the different zones until after the move. Probably not, and this is why I take the green entries. I don't know how long a move will last, and this is why I think it's important to enter early.
> 
> 
> 
> Every move is a trend on a faster timeframe :.




Well Since you only know that green is Green in hindsight
You are saying that you know good entries in hindsight

eg You think it is green ++++>
but the the prevailng move continues <+++++++
So it  really is a yellow or red in the other direction 

* 
Every move is a trend on a faster timeframe *

This is a more interesting observation
and leads somewhere
But that "timeframe" is a problem
price moves in ticks not units of time

so
every move  is a trend at certain scale  YES
even if it is a one tick trend

But it might be or not be on different "timeframes"

motorway


----------



## $20shoes (2 March 2010)

Mr J said:


> You'll probably suggest that I can't know the different zones until after the move. Probably not, and this is why I take the green entries. I don't know how long a move will last, and this is why I think it's important to enter early.




Mr J, are you constantly attacking the green zone in anticipation of a move? That is, I assume these "green" areas show some sign of congestion. 

Do you not get whipsawed out of your position several times? I assume you anticipate a significant R multiple that will account for being stopped out, say 3-5 times in a row on that same trade while you wait for momentum to kick in. 

And because you've been taken our several times while you wait for the price to move, I wonder if you end up with a better R/R play by entering with more momentum in the yellow zone?


----------



## Mr J (2 March 2010)

> Well Since you only know that green is Green in hindsight
> You are saying that you know good entries in hindsight




I can't _know_ until there has been some movement, but certainty isn't an issue - I don't trade certainty, I trade probability. I know that over time, I'll make enough 'green' entries to making trading worthwhile. These zones are just a personal standard for me. Typically I'd just describe them as good or bad, good being early, and all the rest being bad.



> eg You think it is green ++++>
> but the the prevailng move continues <+++++++
> So it really is a yellow or red in the other direction




Doesn't matter, it was an entry that didn't work. Whether it was a bad entry depends on perspective.

*All I'm really doing with my 'green'/'great'/'early' entry talk is advocating picking tops, bottoms, swing highs and lows.*



> But that "timeframe" is a problem
> price moves in ticks not units of time




True, but I don't use the literal meaning. It's the term I've seen used for describing different scales. Anyway, change in time almost certainly leads to change in ticks :.


----------



## Trend Hunter (2 March 2010)

Hi,
Everyone trades with different systems and are looking for different signals in the market, as there are many ways to skin a cat, so to speak.....

I like to keep things simple and uncomplicated, I like to use one simple system which is based around the Williams R% indicator (plus a few secondary indicators) and it helps me define exactly what price mode a Stock, Sector or the Market is in. 

This system helps me quickly quantify each chart in into 5 different Price modes Bullish, Mildly Bullish, Neutral, Mildly Bearish, or Bearish.

It also helps me define initial entry and low-risk retest entry into positions to the cent.

My Systems Purpose.

So firstly I define what Mode the Market is in.
This helps me assess whether to have a Bullish, Bearish or Neutral Bias or to take money off the table and step to the side lines for a while.
I also use this same system to define entry into individual positions in Stock, Indices, Currency, or Commodity.

I find by keeping my approach simple and consistent I am able to be disciplined to follow it, and therefore learn and improve its execution.

Hope this helps,
Cade

Ps. Also use other indicators to confirm what what my main system is telling me.


----------



## lukeaye (2 March 2010)

Client said:


> It is interesting to me what kind of analysis you use to make a trading decision. If it's technical methods, tell us what exactly, like Bill Williams methods, candlesticks, classic methods or Elliott Wave Principle, etc.




Getting back to your question. I think most people use adapted strategies of their own. I doubt anybody could say they purely use ellitowave strategy on a daily chart, Or they buy dragonfly doji candlesticks formations.

Truth be told they may be used as an idnetification tool, but then, to confirm an entry or exit, other things need to be used. So to enter a position they use a momentum shift indicator, like volume and spread, a retracement level. Then for an exit they may then use an ATR stop, or fractional risk based stop with a fibanacci extension profit target. In short there is no simple answer.

I can't say to you, i just use EW principle, because there is more to it. Everyone uses different techniques, which may work on different timeframes and different stocks/currencies etc, so there is no holy grail if that is what you are searching for.

Its funny that nobody asks what money management techniques you use?

Just tell me how to pick the winners with a tool that i dont have to understand to make money.  (no disrespect to the OP intended.)


----------



## Mr J (2 March 2010)

lukeaye said:


> Its funny that nobody asks what money management techniques you use?
> 
> Just tell me how to pick the winners with a tool that i dont have to understand to make money.  (no disrespect to the OP intended.)




Unless someone is trading overly aggressively, money management is pretty irrelevant. It changes the scale of growth and fluctuations, it doesn't turn losers into winners, or winners into losers.


----------



## lukeaye (2 March 2010)

Mr J said:


> Unless someone is trading overly aggressively, money management is pretty irrelevant. It changes the scale of growth and fluctuations, it doesn't turn losers into winners, or winners into losers.




Yes but it is equally important, but gets not a proportionet amount of attention. Consider you use no money managment and on average win 50% and lose 50%, and on average you make the same amount as you lose. Where are you? your behind given brokerage. So it is MM which helps generate profit.


----------



## Synergy (2 March 2010)

Money management won't compensate for a fundamentally flawed system.


Mr J, while I understand the logic behind your entries, I too feel the start of the yellow sections would be more efficient. Or even a quick correction back from the yellow to the green perhaps. How much time do you spend in trades that go nowhere? And for those that do move in the right direction how long do you have to wait for the move to occur?

I would rather be buying into the start of a move, at its very early stages, than to be buying into something on the hope that it will move in the near future. Even if i had more losses, and probably larger losses, I could have a much higher turnover of trades, as the failed trades would show themselves much sooner. 

If you feel your entry is somehow predicting moves in advance then thats another thing. A very good thing.


----------



## lukeaye (2 March 2010)

Synergy said:


> Money management won't compensate for a fundamentally flawed system.




Im not arguing that you can have one without the other? Im saying you need both? Im saying nobobody seems to give it enough importance


----------



## MRC & Co (2 March 2010)

Mr J said:


> Unless someone is trading overly aggressively, money management is pretty irrelevant. It changes the scale of growth and fluctuations, it doesn't turn losers into winners, or winners into losers.




Exactly, and relating this to account size.  There is nothing much else to say about money management!  

Learning to trade is much more important!


----------



## tech/a (2 March 2010)

Mr J said:


> Unless someone is trading overly aggressively, money management is* pretty irrelevant*. It changes the scale of growth and fluctuations, it doesn't turn losers into winners, or winners into losers.





> Exactly, and relating this to account size. There is nothing much else to say about money management!




Your kidding!!



> Learning to trade is much more important!




This is top class drivel



It can and does have an enormous bearing on controlling loss you can and should adjust it. You can have a dramatic effect on your RR.
Why set a stop and just sit there and wait for it to be hit IF you can clearly see that your analysis is incorrect.
Why not add to your trade if clearly its screaming buy me.
Why not turn a trade into a free trade.

It can and does turn losers into smaller losers and winners into bigger winners from an R perspective.

To many people work on MM theory and not in practice.
If they did they wouldn't be making stupid statements like yours.

*Back to your entry arguement.*

You still haven't answered the question.
When is a "great entry deemed a great entry"
When you place it?
At 1R profit
At 1R loss
When your at B/E
When you've closed the trade?

Frankly its just ANOTHER entry.

You may think its predictive just as Franks convinced his method is predictive. Its not. We all place trades in anticipation of a move in "A" direction. If Franks method was predictive there wouldn't be the need for 27 Dilernia principals.

Same with Gann/Elliott/Steidlmayer/P&F/Weinstien/Williams------


----------



## MRC & Co (2 March 2010)

I think your getting confused between trade management and money management tech/a.


----------



## tech/a (2 March 2010)

You see them as totally seperate aspects.??

Yet another difference in how we look at things.

So in business the way we keep the books has little bearing on the way we produce our income?


----------



## MRC & Co (2 March 2010)

tech/a said:


> You see them as totally seperate aspects.??
> 
> Yet another difference in how we look at things.




Completely seperate if we are talking about the theoretical definitions.

Trade management includes all exits and entries after the initial entry still relating to the original trade/position (whether that be averaging up/down or a subsequent entry in another market that relates to a spread with the original position).

Money management takes into account your account size and puts that trade into context and gives it relativity, ultimately to ensure damage control on an individual trade level.  

But we are once again bordering on semantics here.  

Learning to trade, or 'top class drivel' (typical insults used by those with little man syndrome), includes trade management and original entry.

There is some 'black and white' for you!


----------



## tech/a (2 March 2010)

Both must be managed (Together) if you've "learnt how to trade".


----------



## MRC & Co (2 March 2010)

tech/a said:


> Both must be managed (Together) if you've "learnt how to trade".




Tushay.  But you did attack myself and Mr J about 'money management' specifically, of which you created your own definition.  

Do you remember where this debate started just a couple of posts ago?  

.
.
.
.
.
.
.
.
.


I didn't think so.


----------



## white_goodman (2 March 2010)

ooooh the PWNAGE!


----------



## Mr J (3 March 2010)

I was going to differentiate between 'money management' and 'trade management', but it will be clearer if I substitute 'money management' for 'bankroll management'.



			
				Lukeaye said:
			
		

> Yes but it is equally important, but gets not a proportionet amount of attention. Consider you use no money managment and on average win 50% and lose 50%, and on average you make the same amount as you lose. Where are you? your behind given brokerage. So it is MM which helps generate profit.




If we win and lose 50%, and make the same amount on each, adjusting R:R will not help, neither will adjusting bankroll management. 

If we assume markets are random, theory states that adjusting R:R will simply change the distribution of wins and losses. I.e. higher winrate but smaller wins, or larger wins but lower winrate. In practice, the markets are not random, so there may be a sweet spot, but I think any worthwhile edge at 4:1 reward-risk should be +ev (positive expectancy) at 1:1.

Many people think that we need a certain R:R to profit, or that adjusting R:R can make one profitable, but I disagree. I think that anyone who profits and attributes it to R:R, is just exploiting a bias in the market and not aware of it. Example, perhaps someone buys in a bull market and uses a 1:3 risk-reward. It's not the R:R that is allowing them to profit, but the fact they're buying in a bull market.



			
				Synergy said:
			
		

> Mr J, while I understand the logic behind your entries, I too feel the start of the yellow sections would be more efficient. Or even a quick correction back from the yellow to the green perhaps. How much time do you spend in trades that go nowhere? And for those that do move in the right direction how long do you have to wait for the move to occur?




I used to do that, and I think it was marginal at best. I think my change to trying to pick tops and bottoms was a major leap forward for me.

I've found price doesn't retrace often or far enough to consider that as an entry.

It might move immediately, or take 10 hours.



> If you feel your entry is somehow predicting moves in advance then thats another thing. A very good thing.




I think we all try to forecast moves, the difference is that a top or bottom picker is trying to do it before it occurs, while the yellow entries are doing it after it has been hinted. I do know that if I waited, it would cost me a lot.



			
				Tech/a said:
			
		

> Your kidding!!




As MRC says, I'm talking money management, not trade management. When I say 'money mangement', think 'bankroll management'.


----------



## tech/a (3 March 2010)

> Many people think that we need a certain R:R to profit, or that adjusting R:R can make one profitable, but I disagree. I think that anyone who profits and attributes it to R:R, is just exploiting a bias in the market and not aware of it. Example, perhaps someone buys in a bull market and uses a 1:3 risk-reward. It's not the R:R that is allowing them to profit, but the fact they're buying in a bull market




Are you serious??
Truly amazing


----------



## lukeaye (3 March 2010)

tech/a said:


> Are you serious??
> Truly amazing




I honestly cant fathom it either.

And when i say money management i do refer to those other things, like position sizing, pyramiding, stop loss, account size etc.

As i said, not enough importance is given to it. And If you sit down and work it out, it can turn a trader who is right 40% of the time, into a very profitable trader. That is a huge edge. 

The other edge, is the fact that money management can be completely objective, you can control it, you cant control the way the markets move after you enter your position. (Or should i say trade management :S)


----------



## brty (3 March 2010)

Cade,



> I find by keeping my approach simple and consistent I am able to be disciplined to follow it, and therefore learn and improve its execution.




One of the better posts in this thread, and ignored by many.

Mr J,



> If we assume markets are random,




The absolutely worst place to start in talking about any concept of a system. As you state the assumption is wrong, therefore any probabilities/results that come from it will be incorrect in the real world.

Trade management is simply a subset of money management, why is there so much discussion about it? Money management is about keeping you in the game with an even consistency throughout trades over time. Trade management is about an individual event that has parameters to keep you within the original money management.

brty


----------



## BBand (3 March 2010)

Hi,
First of all read "The Zurich Axioms" - first British publication 1985.

Not much has changed since then, we still get the same old info regurgitated over and over again in the lastest must have Trading book with fancy names given to the obviious to impress the impressionable

In the old days we called trade management and money management COMMON SENSE - those who did not have it or could not apply it, did not last too long.

That other in word "expectancy"  - its constituents have been around for a long long time, their outcome was shown in our account balance - the wise soon fathomed out when their "system" needed attention. I think it was Van Tharp who named and formulated it for the masses what the successful traders already new.

Apparently there are still the same ratio of winning traders to losing traders now as there was years ago, despite the fact that we now have access to an ever growing bank of trading knowledge and we now have far more superior equipment etc etc. - so how do you explain that

Just a little quicky, never gave it much thought - just said the obvious
I'm sure someone will latch on to that last sentence ha ha
Peter


----------



## Mr J (3 March 2010)

Tech/a said:
			
		

> Are you serious??
> Truly amazing




I'm serious. You think R:R alone can provide an edge? You might want to make sure you're correct before being condecending.

I can't prove my point without a proper explanation, but I don't think I can give a clear one. I'll look around on the internet.



			
				Lukeaye said:
			
		

> As i said, not enough importance is given to it. And If you sit down and work it out, it can turn a trader who is right 40% of the time, into a very profitable trader. That is a huge edge.
> 
> The other edge, is the fact that money management can be completely objective, you can control it, you cant control the way the markets move after you enter your position. (Or should i say trade management :S)




R:R does not turn a 40% loser into a winner. If he wins 40% of the time, I'm pretty confident his average R:R will be about 1.5 to 1, before market bias, commissions and spread are deducted. If you change his reward to 3 to 1, then his winrate is likely to drop to something like 25%. Changing R:R has little impact on expectancy. The argument that r:r alone can make for profitable trades is as strong as using martingale for bankroll management.

You question why I think R:R alone does not make for profitable trades. I question why you think R:R alone does produce profitable trades. If it were that simple, why aren't the majority of traders successful?



			
				brty said:
			
		

> The absolutely worst place to start in talking about any concept of a system. As you state the assumption is wrong, therefore any probabilities/results that come from it will be incorrect in the real world.




It's not the worst place to start at all, unless you don't follow me (I can't really explain all of this clearly). The assumption is wrong, but the general behaviour applies to the real world. The 'random' example is easier to understand, and when people understand why that doesn't work, they might be able to understand why it doesn't work in the real world.



> Trade management is simply a subset of money management, why is there so much discussion about it?




Because the real discussion here is where or not R:R can provide an edge.


----------



## xinyu09 (3 March 2010)

I read through the posts, I feel the real question here is how I can be 100% confident in trading? 

Well, I am no expert on that but my opinion is that try all methods and stick with the one that work for you. Hope this helps.   

(Thing worked for me last year:  Buying a trending stock that going through consolidation and have healthy business earning growth, low debt, good market depth and cheaply price (most important) works for me.  Such stocks like BKN.ax, SEK.ax, MCC.ax, FLT.ax just name a few I bought last year. Also, ASX share market game helps. It's getting hard to find such a stock now.)


----------



## tech/a (3 March 2010)

> Because the real discussion here is where or not R:R can provide an edge




I trade 50% winners.
I have a Reward to Risk of 1
OR
I trade 50% winners
I have a Reward to Risk of 2 or 3 or 10

Let alone 70% winners etc----
OR
40% winners.---example example--etc.

So have I an edge over the first example?

If I work relentlessly at deminishing my actual risk on each trade and maximising my reward on each trade am I not altering my RR by doing so and as such having a considerable edge over someone who doesnt know how to improve his RR.? Speaking Discretionary trading here.


----------



## lukeaye (3 March 2010)

> You question why I think R:R alone does not make for profitable trades. I question why you think R:R alone does produce profitable trades. If it were that simple, why aren't the majority of traders successful?




I have never stated that alone it makes a profitable trader? I have never said that anywhere, my point is, that you pass it off as if it is insignificant, like a passing thought that does not require any thought or signifigance.



> R:R does not turn a 40% loser into a winner. If he wins 40% of the time, I'm pretty confident his average R:R will be about 1.5 to 1, before market bias, commissions and spread are deducted. If you change his reward to 3 to 1, then his winrate is likely to drop to something like 25%.




Where the hell do you pull that from? How could you possibly assume a 40% winner has a R:R of 1.5 : 1? So you are saying people who have an average R:R of 3 to 1 win 25% of the time?


----------



## BBand (3 March 2010)

Hi Mr J,
Like your posts !

I have just checked my trading plan for profit objectives.....

I have a formula which may help others define the R/R required to make their trading system to break even - anything above  - your in profit

Formula:   (100-win rate) / win rate = minimum profit objective

e.g. with 40% win rate

This gives 60/40 = 1.5

So in order for this trading strategy to break even at its current win rate, the risk/reward must be at least 1.5, win rate anything better and your in profit

So whatever your win rate is , just plug it in and find your minimum profit objective

This formula was picked up from some book which I read (think it was Adaptive Analysis)

Hope you don't mind J

Peter


----------



## nunthewiser (3 March 2010)

LOL . agrees with Brty re K.I.S.S .......... Most seem to take great pleasure in making it as complicated and cluttered as they can.

But hey it sounds good 

Blessem.


----------



## tech/a (3 March 2010)

BBand said:


> Hi Mr J,
> Like your posts !
> 
> I have just checked my trading plan for profit objectives.....
> ...




Understand all that.
10% winners you need massive R/R.
So R/R IS important.
If your getting 90% winners and Massive R/R ---take a holiday!

Im not talking theoretical R/R at the start of a trade either.
I'm talking closed trade R/R from your figures of past trades since you started.
You constanly work at increasing R/R and win rate.
If you dont succeed on win rate then yopu need to be increasing R/R
If your not increasing R/R then you better have a high win rate.


----------



## brty (3 March 2010)

Mr J,



> The assumption is wrong, but the general behaviour applies to the real world.




???



> unless you don't follow me (I can't really explain all of this clearly).




That might be an accurate assessment. 

brty


----------



## Mr J (3 March 2010)

tech/a said:


> I trade 50% winners.
> I have a Reward to Risk of 1
> OR
> I trade 50% winners
> ...




Maybe, are we talking about a trader who is hitting 50% at 2:1 or 3:1, rather than a trader who was hitting 50% at 1:1, and has decided to change it?

Do you think that edge came about simply from deciding your R:R would be 2:1 or 3:1?



			
				Lukeaye said:
			
		

> I have never stated that alone it makes a profitable trader? I have never said that anywhere, my point is, that you pass it off as if it is insignificant, like a passing thought that does not require any thought or signifigance.




Fine. I never said MM was insignificant, I said it is irrelevant other than for scaling our return (by choosing how much we risk on a trade). If we include trade management under money management, then it's significant in distribution of wins and losses, but it's still not nearly as important as people make it out to be. The most important thing in trading is to have an edge, and money management does not create that edge.



> Where the hell do you pull that from? How could you possibly assume a 40% winner has a R:R of 1.5 : 1? So you are saying people who have an average R:R of 3 to 1 win 25% of the time?




It's called maths. 1.5:1 is the breakeven performance for a 40% trader. You were talking about using MM to turn that 40% trader into a profitable trader, so I deduced that he wasn't currently a profitable trader.



			
				BBand said:
			
		

> So in order for this trading strategy to break even at its current win rate, the risk/reward must be at least 1.5, win rate anything better and your in profit




Yes. My point here is that adjusting R:R will just change winrate to what is needed to maintain breakeven. So if a 50% trader breaks even at 1:1, chances his reward-risk to 2:1, then his winrate drops to 33%. If he changes it to 1:2, his winrate rises to 66%. We know that the market isn't random, and our trader isn't making random entries, so in the real world they would be a rough estimate, and the breakeven trader may turn into a very marginal loser or winner by adjusting R:R, but nothing significant.

It's the same reasoning as why martingale and other betting strategies won't profit at blackjack.



> Like your posts !




At least someone does . Not many people ever seem to agree with me down here in trading strategy discussion.



			
				brty said:
			
		

> The assumption is wrong, but the general behaviour applies to the real world.




By this I mean markets are obviously not random, but the maths still applies, it just isn't as 'neat' in the real world. Instead of being precise, it becomes an estimate.



			
				nunthewiser said:
			
		

> LOL . agrees with Brty re K.I.S.S




It's simple in my mind.


----------



## nunthewiser (3 March 2010)

Mr J said:


> At least someone does . Not many people ever seem to agree with me down here in trading strategy discussion.
> 
> 
> 
> .




Oh i do................ on the swing tops and bottoms and low % loss on stop point entrys taken at varying support lines before a confirmation of a move in the desired direction .

I use these lines and entrys to give me an instant notification that i am wrong OR right ..... simple really ....... one is either right or wrong and it costs on a minimal basis to prove it.....

But hey im a simple sort of nun and reckon if someone wants to wait a confirmation with a higher % loss to prove there wrong so be it .

It works for me , i couldnt care if it dont work for others


each to there own


----------



## ThingyMajiggy (3 March 2010)

Mr J said:


> At least someone does . Not many people ever seem to agree with me down here in trading strategy discussion.




Is it little wonder when you make your thoughts very well known by posting on most strategy threads, yet there is no _real_ evidence from yourself and your trades.....that journal has gone mighty quiet  

If I wash my car all the time and its nice and clean and looks the part, but my neighbour sees me doing it and tells me every time how he thinks it should've been done, yet I never see his car washed or see him washing it the way he says it should be done, agreeing with him is probably going be hard :


----------



## tech/a (3 March 2010)

J 

Your a theories man.


> Do you think that edge came about simply *from deciding *your R:R would be 2:1 or 3:1?




You/I anyone can manipulate if they actually trade their R/R and if you actually recorded and followed your R/R you wouldnt have posted the above.A trader doesnt decide anything it IS what it IS.



> Im not talking theoretical R/R at the start of a trade either.
> I'm talking closed trade R/R from your figures of past trades since you started.
> You constanly work at increasing R/R and win rate.




This IS the difference a vast chasm!!
Has very little to do with Projected R:R initial trade objectives 
I can double an initial R objective from 3 to 6 by halving the initial risk straight after I take the trade.

Get my drift!!
If not I'll do it diagramatically.


----------



## BBand (3 March 2010)

Hi Tech,

I think you are being a tad unfair

"I can double an initial R objective from 3 to 6 by halving the risk straight after I take a trade"

The initial risk is what the trade was based on, so it should be the risk value used in the final R/R!!

The fact that you reduced it during the trade is good trade management, or money management (whatever you want to call it)

You've learnt too much from your accountant on how to "cook the books"

Peter


----------



## Mr J (3 March 2010)

ThingyMajiggy said:


> Is it little wonder when you make your thoughts very well known by posting on most strategy threads, yet there is no _real_ evidence from yourself and your trades.....that journal has gone mighty quiet




What do real trades have to do with this discussion? Nothing. I've stated my reason for not posting in my journal at the moment. I don't see any evidence on the other side of the topic Sam, and there rarely ever is.

May be your 2 cents, but not every topic has two right answers. The maths is in my favour, as it almost always is since my positions tend to be mathematically based. 

Hopefully we can all agree R:R and winrate have an inverse relationship, that is that increasing R:R decreases winrate, and that decreasing R:R increases winrate. If you don't agree, then consider whether price in a market is more likely to move 10 tick or 20 ticks in a certain direction. Hopefully you will agree that it is more likely to move 10, and then you would be automatically agreeing that winrate and R:R have an inverse relationship.

So now, the question is no longer whether changing R:R affects winrate, but by how much. I've stated that if a breakeven trader changes R:R, the winrate will compensate to continue to give a breakeven expectancy. Why do I say this? We already know this from the Martingale strategy, but instead of applying it to individual events like a coinflip, apply it to groups of events such as half a dozen coinflips. Martingale over 6 coinflips will result in a high winrate, but a poor R:R. 

The reason why simply changing R:R won't produce a profitable trade is the same reason why martingale does not work. If people still don't understand, I can explain why martingale doesn't work, and then tie that into trading. Honestly though, if someone doesn't know why martingale doesn't work, they're not ready to trade.



			
				Tech/a said:
			
		

> You/I anyone can manipulate if they actually trade their R/R and if you actually recorded and followed your R/R you wouldnt have posted the above.A trader doesnt decide anything it IS what it IS.




Of course R:R can be manipulated, it's as easy as setting a stop loss and target profit. This isn't theoretical R:R, this would be someone deciding their R:R. What they can't decide is their winrate.



> Im not talking theoretical R/R at the start of a trade either.
> I'm talking closed trade R/R from your figures of past trades since you started.
> You constanly work at increasing R/R and win rate.




Then we are talking different things, and I'd say you're coming at this in a strange way. Adjusting R:R in the way you are talking about means increasing our skill. This is competely different to what I'm talking about, which is arguing against the idea that predetermined R:R alone can produce a positive expectation. This is the only thing I've debated.

I do work to increase my final r:r and winrate, but again, I'm talking about the people who before the trade think they can turn themselves from a breakeven coinflipper into someone hitting 40% at a predetermined 3:1.


----------



## ThingyMajiggy (3 March 2010)

Mr J said:


> What do real trades have to do with this discussion? Nothing. I've stated my reason for not posting in my journal at the moment. I don't see any evidence on the other side of the topic Sam, and there rarely ever is.




What do real trades have to do with R:R? What has that comment got to do with the price of eggs? Relax, I was just stating a fact from your little tear jerker below. You don't need to over-analyse and come up with a theory/argument for everything you know  



Mr J said:


> At least someone does . Not many people ever seem to agree with me down here in trading strategy discussion..




You may continue your theoretic arguing now ladies.


----------



## professor_frink (3 March 2010)

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


----------



## tech/a (3 March 2010)

BBand said:


> Hi Tech,
> 
> I think you are being a tad unfair
> 
> ...




Peter.
No not at all.
I can have say a position with $1000 risk at say 10c
10000 of them.
I initially think its going to rise 30c thats J's 3R
I get in the trade and notice a volume supported test of the low after 3 hrs trading at B/E so I move the stop there.
Instant No risk.

Which then comes to.


> What do real trades have to do with this discussion? Nothing




Everything!

Lets say I do that with 10 trades and everyone of them work out my R is phenominal.
In real life I you anyone should work at reducing their finally recorded risk that they actually liquidate.
I may start with a 1% risk but in real closed trades be way way lower than that!
Hence my return to risk is much greater in real life as my theorehtical when I place a trade.




> Of course R:R can be manipulated, it's as easy as setting a stop loss and target profit. This isn't theoretical R:R, this would be someone deciding their R:R




See above.
B/B see above. I dont think I'm being unfair just how it is with me.
I know a few others also dont wait for a stop to be met either.

I dunno but perhaps its something you havent thought of??


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## Mr J (3 March 2010)

ThingyMajiggy said:
			
		

> You don't need to over-analyse and come up with a theory/argument for everything you know




I give about as much thought to my theories as I do deciding what to eat - just pops into my head. It's the explanations that are time-consuming .



			
				Tech/a said:
			
		

> Everything!
> 
> Lets say I do that with 10 trades and everyone of them work out my R is phenominal.
> In real life I you anyone should work at reducing their finally recorded risk that they actually liquidate.
> ...




But we are discussing different things. I'm discussing the flawed idea that predetermined R:Rs can turn a breakeven trader into a successful trader, while you're talking about the result of the trades.



> I dunno but perhaps its something you havent thought of??




No, I usually close before I lose the total risk amount. That amount is usually only reached if I'm prepared to give the trade a lot of room, or if it's a tight stop, or if I'm not there to manage it.


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## barney (3 March 2010)

professor_frink said:


> ............




Disagree Prof 

You guys can correct me if I'm barking up the wrong tree, but ...

What Tech is on about is RR in results based stock trading scenarios .... 

What J is on about is  RR in a more theoretical/testing type of sense, but more from more a Forex point of view ?

Both of you are correct in my humble opinion ... Trading stocks is a totally different ball game in relation to assessing the potential RR, than if you are trading Forex ...

If you want to increase your initial potential RR on Forex, you will want to adjust your position sizing accordingly, or have deep pockets to cover the swings .... 

In a stock scenario, you are looking for longer more stable tends to take advantage of, hence the potential for a larger initial position, and tighter stops

Basically any trader needs to understand the *range and behavior* of whatever instrument he/she chooses to trade .... without that knowledge, you are most likely dead in the water .....

And I should know cause Ive been DOA a few times more than I care to remember


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## Mr J (3 March 2010)

Barney said:
			
		

> What Tech is on about is RR in results based stock trading scenarios ....
> 
> What J is on about is RR in a more theoretical/testing type of sense, but more from more a Forex point of view ?




Tech and I were definitely talking about different things, as Tech is talking about the R:R that results from trades, while I'm talking about predetermined R:R. I don't use a predetermined R:R myself and use Tech's method. My r:r is averaging about 6:1 at the moment, but it's not a goal, just the result of my trades.

None of this is about stocks or forex, my 'theories' apply to markets in general. I have another theory in which markets are markets, and that they generally behave in similar ways .


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## barney (3 March 2010)

Mr J said:


> My r:r is averaging about 6:1 at the moment, but it's not a goal, just the result of my trades.
> 
> I have another theory in which markets are markets, and that they generally behave in similar ways .





6-1 is about as good as it gets, so that is impressive ...

I agree that markets (stocks are a bit different) behave similarly, but each market has its own range, and that is what punters should be looking at instead of how the MACD looks or whether the MA's are lining up 

6-1 !!  ..... its all downhill from here J ..   JK ..... well done.


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## tech/a (3 March 2010)

Ok
Now on the same page!


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## nunthewiser (3 March 2010)

Group Hug ?


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## lukeaye (3 March 2010)

nunthewiser said:


> Group Hug?




Only if you have clothes on.


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## Mr J (3 March 2010)

> 6-1 !! ..... its all downhill from here J ..  JK ..... well done.




You're actually right. For me the best trades will come during fast moving bear markets, but there will be fewer opportunities. More opportunities in a bull market, but a lower return per trade. Far more opportunities during ranging, but also a far lower return.

I notice we've gone a fair bit off-topic .


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## lukeaye (3 March 2010)

Mr J said:


> I notice we've gone a fair bit off-topic .




Its still on topic, we are discussing forms of analysis for trading. MM and its importance.

The OP hasnt posted again though ahaha


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## brty (4 March 2010)

I would just like to throw a spanner in the works after the group hug in terms of R:R.

Using Tech/a's example...



> I can have say a position with $1000 risk at say 10c
> 10000 of them.
> I initially think its going to rise 30c thats J's 3R
> I get in the trade and notice a volume supported test of the low after 3 hrs trading at B/E so I move the stop there.
> Instant No risk.




The stock moves 20c in your favour. 

Where do you place your stop, why, and how much are you risking??

brty


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## tech/a (4 March 2010)

brty said:


> I would just like to throw a spanner in the works after the group hug in terms of R:R.
> 
> Using Tech/a's example...
> 
> ...




You may not move your stop.If you didn't and the stock fell from its profit back to its original stop then you would record a $1000 loss which in the scope of things would be added against all other losses and divided by trades closed to then determine Loss V Profit as a % of capital.

But if you did and you moved it to B/E then your risk is basically zero on the trade (Other than Brokerage),if it was to be closed out at the new stop level.
When recording that trades performance it would be B/E no effect on Profit or loss. A Dot Ball.

Why can be any number of reasons,for me technical.
Could well be no other reason than to have a profit and wishing to eliminate risk.


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## brty (4 March 2010)

Thanks Tech.

I would like some other opinions please before I comment about my spanner.

brty


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## tech/a (4 March 2010)

Sidchrome?

Will be away from 2 this arvo back on Tuesday.
Adelaide cup holiday over here---off mountain biking Kangaroo Island!
Ok Ok theyre little mountains!


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## brty (4 March 2010)

Enjoy the trip Tech, perhaps they should rename the activity for those in SA :

You canna hand a man a grander spanner. You can read all about it when you get back...

brty


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## Synergy (4 March 2010)

tech/a said:


> But if you did and you moved it to B/E then your risk is basically zero on the trade (Other than Brokerage),if it was to be closed out at the new stop level.
> When recording that trades performance it would be B/E no effect on Profit or loss. A Dot Ball.




Why not move the stop above break even and get some negative R:R action happening?

Surely the R:R of a trade must use the initial risk, not the decided risk when the trade is closed out?

The Risk on a trade for me is the maximum amount I'm prepared to lose when i take the trade. The reward is the result of the trade. But I do not trade base on R:R, and like Mr J believe that the horse comes before the cart, and changes to the way we trade effect results, in turn effecting R:R. The R:R only changes because you're making a fundamental change to the trade or the way you trade (eg tightening stop).

risk:reward is of little use to me. My risk on any position is around 20%. But in reality my avg loss is around 5%. The initial risk on any trade is still 20%.

I find a profit:loss ratio that incorperates the win rate to be more useful. Risk constantly changes throughout a trade, but the end results are fixed and provide a much more stable benchmark.


----------



## nunthewiser (4 March 2010)

Synergy said:


> risk:reward is of little use to me. My risk on any position is around 20%. But in reality my avg loss is around 5%. The initial risk on any trade is still 20%.
> 
> I .




WTF?


----------



## tech/a (4 March 2010)

Synergy said:


> Why not move the stop above break even and get some negative R:R action happening?




Yes you could it was only one example.



> Surely the R:R of a trade must use the initial risk, not the decided risk when the trade is closed out?




Yes of course and that will normally be a % of capital.



> The Risk on a trade for me is the maximum amount I'm prepared to lose when i take the trade. The reward is the result of the trade. But I do not trade base on R:R, and like Mr J believe that the horse comes before the cart, and changes to the way we trade effect results, in turn effecting R:R. The R:R only changes because you're making a fundamental change to the trade or the way you trade (eg tightening stop).




Yes true of most traders.



> risk:reward is of little use to me. My risk on any position is around 20%. But in reality my avg loss is around 5%. The initial risk on any trade is still 20%.




I would re-phrase "Initial R/R is of little importance to me".



> I find a profit:loss ratio that incorperates the win rate to be more useful. Risk constantly changes throughout a trade, but the end results are fixed and provide a much more stable benchmark.




Agreed.


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## Mr J (4 March 2010)

> Surely the R:R of a trade must use the initial risk, not the decided risk when the trade is closed out?




I don't think so. We're using our average R:R to determine performance, and being able to minimise our risk to be less than our original risk is part of that. If my average loss is less than my original risk, then using the original risk doesn't reflect the performance of the trades. The original risk is just a limit for maximim loss. We could use the same idea for profit and implement a 1000% target profit. Should I start using that for R:R because it's my maximum potential profit? If not, why should I use my maximum potential loss?



> My risk on any position is around 20%. But in reality my avg loss is around 5%. The initial risk on any trade is still 20%




Initial risk yes, but using the 20% figure overlooks your ability to keep losses to far smaller amounts. If we're judging performance, that's information we'd want to include.


----------



## MRC & Co (4 March 2010)

professor_frink said:


> ............




LOL!!!!


----------



## tech/a (4 March 2010)

I know what your doing Synergy and agree.


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## motorway (4 March 2010)

http://www.fullermoney.com/content/...onsFromInconsistentForecastingSkillsNov07.pdf


Nice overview of *many *various aspects of Stops.

SURELY IS an IMPORTANT TOPIC
esp since MARKETS
are not random
But hard to PREDICT

They TREND  but  EVOLVE...

Motorway


----------



## skyQuake (4 March 2010)

motorway said:


> http://www.fullermoney.com/content/...onsFromInconsistentForecastingSkillsNov07.pdf
> 
> 
> Nice overview of *many *various aspects of Stops.
> ...




Cheers for the great link motorway. Now to look up 'Consensus Economics of the UK' and fade their euro plays!


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## Mr J (4 March 2010)

Talking about stops, one analysis that seems to be underused (maybe not, but I haven't seen anyone talk about it) is finding the optimal stop size. A lot of people may use the previous swing high/low, a moving average, previous support or resistance etc, but I think there's a better way to go about it by analysing how much of our stop our previous trades have used. 

If we find our profitable trades rarely go 30 ticks against us initially, why would we use a 50 tick stop? If we dropped it to 30 we'd boost our return by 66% (minus the odd profitable trade that did go past -30). Big boost to be had there.


----------



## motorway (4 March 2010)

Mr J said:


> Talking about stops, one analysis that seems to be underused (maybe not, but I haven't seen anyone talk about it) is finding the optimal stop size. A lot of people may use the previous swing high/low, a moving average, previous support or resistance etc, but I think there's a better way to go about it by analysing how much of our stop our previous trades have used.
> 
> If we find our profitable trades rarely go 30 ticks against us initially, why would we use a 50 tick stop? If we dropped it to 30 we'd boost our return by 66% (minus the odd profitable trade that did go past -30). Big boost to be had there.




What sort of method do we have when we we let market events guide us ?
===> We use a contingent Buy order
an initial Stop
We move to Break even , we adjust to the unfolding market events..
We trail the stop... We use contingent Sell orders etc

We then enter on other market signals.. AS THEY OCCUR .

What sort of method is this ?

It is using a digitalized method ( think in terms of MOVES of % )
an Event driven method
of
Non periodic cycles ( The signals have their INTRINSIC TIME )
THEY are Market Time driven.

A NON LINEAR method  .. A POWER LAW DRIVEN METHOD

what TECH/A would call a METHOD that is in harmony of WHY we make  $$$$

It's old name is POINT AND FIGURE METHOD

In fact that paper on STOP LOSSES
is just another way of describing P&F

IF YOU CAN HOLD IT ALL IN YOUR HEAD you don't need the charts

BUT if you want to filter amongst the best opportunities
and to have revealed before your eyes ( with mathematical PRECISION ) the 
FACTORS you are considering.. ( range etc )

You need to use a method of representation that is
what TALEB would call EMPIRICAL & SKEPTICAL , non linear and POWER LAW DRIVEN... (In his first book he gives a good description of P&F method )

*FOOD FOR THOUGHT
*


TO THE  extent you use a CONTINGENT ORDER MODEL ( stop loss )
you are overlaying A P&F METHODOLOGY  on

Your Linear Time framed ( illusory ? ) etc REPRESENTATIONS. 


*Rule number  1) NEVER DOUBT MARKET EVENTS
*

They make the $$ and take therm AWAY...



Motorway


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## xinyu09 (5 March 2010)

When we finally solves all chess puzzles then the next step is analysis a totally random market and make it rational!  No more emotional buys/sells, we are here to make a profit and we have workout strategies that will work forever.  Then who's going to invest to the prefect world knowning that someone else will always win?!  It's like the prefect sword and prefect shield dilemma 

Anyway, I believe all strategies that make a profit will make a profit and the odd to make a profit is a lot higher than 50% (if not 100%) for a good trade!

Hisitory wise, a good company always make a profit and I guess the odd for investing in such company is 100% profitable in the long run.

Just my opinion, DYOR


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## GumbyLearner (5 March 2010)

xinyu09 said:


> When we finally solves all chess puzzles then the next step is analysis a totally random market and make it rational!  No more emotional buys/sells, we are here to make a profit and we have workout strategies that will work forever.
> 
> Just my opinion, DYOR





Like you xinyu I'm here to make a profit also but I'm also not willing to give away my rights to question the principles of a Westminster Democratic System that currently exist in Australia. So come get me! :


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## Mr J (5 March 2010)

Motorway, sorry but I have no idea what you just said, and it doesn't seem to be anything about analysing the size of the initial stop?



> Anyway, I believe all strategies that make a profit will make a profit and the odd to make a profit is a lot higher than 50% (if not 100%) for a good trade!




All strategies make a profit for someone, even if it's only the broker.



> Hisitory wise, a good company always make a profit and I guess the odd for investing in such company is 100% profitable in the long run.




Even if it were true and that easy, it doesn't seem to have made a lot people much money.


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## motorway (5 March 2010)

Mr J

Just food for thought 

Instead of over laying a time based chart
with a contingent event driven method

Be that STOPS
contingent BUY sells ( SIGNALS etc )

*A SYSTEM*

Just chart the EVENTS themselves and what do you end up with ?
what sort of chart ?

It won't have a TIME FRAME for a start
because you don't know in advance the periodicity of those EVENTS
( and why create lag ? )

YOU  will end up with a chart like this

*A pure EVENT chart
*



> Motorway, sorry but I have no idea what you just said, and it doesn't seem to be anything about analysing the size of the initial stop?




All there are,  are market events of a certain size

A child could work out were to place the stops on this chart

Someone a little older could apply some mathematics
THERE ARE ONLY TWO DIMENSIONS after all
each BOX is a digital unit of 4.43%
 they go up or they go down
producing columns of a certain size and speed
have a characteristic relationship  ==> "RIO"

The digital "FINGERPRINT" of "RIO"

"TLS" "BHP" etc will all have their own "FINGERPRINTS"

You could just call this chart
a contingent order chart
or a stop chart ( in fact an old name for it )

*The events that would trigger an action
are all that are being represented
*

It is only such events that EXIST

Say you were trading between RIO and another stock
you see how the events themselves would time your trades
stop your trades, SWITCH YOUR TRADES ?

What people call systems are an overlay of such event triggers
I am pointing out that you could just chart the events..
with a pure event chart

All the things in that stop pdf
are before your eyes
All the stages 


It is analysed for you
because it is a dynamic history

JUST PLACE THE STOPS
another stocks chart will reveal
that particular  "HOW" in turn..

A whole lot of rubbish is not there because it really does not exist..
Only the events exist...

Just food for thought 

Your question is answered
On this chart
By the size of the columns and their relation to each other..

Because it is only those that matter
that make the $$$
If the chart stops moving .. No more $$$ 



> But I think there's a better way to go about it by analysing how much of our stop our previous trades have used.






motorway


----------



## motorway (5 March 2010)

Here is a TLS chart

9.05% with TLS is equiv to 4.43% with RIO

The events
trigger the trades
SWITCH THE TRADES
STOP the trades

so why chart anything extra ? ( anything extra is noise and lag )

could you use 4.43% with TLS too
SURE==> But there is no more relevant signal on it just longer columns...


( mentioned back in the thread )

AGAIN
you can see what stops to set and where


Motorway


----------



## motorway (5 March 2010)

> ( mentioned back in the thread )




And on that POST..

TRENDS ARE NOT SUBJECTIVE
when defined objectively

On that TLS chart
the move down from the top
ANY one doubt what they see ?

So who was buying ? 

Those who think trends are SUBJECTIVE  !
==which is ==>Who think trends are whatever they think or want them==> HOPE them to be !

ONLY the EVENTS matter ( and they do , LOOK AT THE CHART )

The chart has no indicators 
It is as naked as you can get.

*Pure events
*

So some idea
of 







> What analysis I  use for trading




Motorway


----------



## Mr J (5 March 2010)

I did see P&F chart mentioned, I see what you're getting at. However, I've gone through phases with different charts - range, volume, tick, time etc - and came to the conclusion that they're all the same, it's just a matter of getting used to reading it. I'm tempted to try P&F out of curiousity, but Amibroker doesn't support it. There looks like there's some code out there for it though.

As for knowing where to place stops, I think that is best decided by analysis of previous situations, not by the chart that is used.


----------



## brty (5 March 2010)

Back to R:R.

When you are learning to trade you learn pretty quickly that a paper loss is a real loss. Holding on for the stock to turn is a mugs game.

However with the opposite occurring, a paper gain is often not treated as a real gain.

Personally I think money is money.

In Tech/a's example of a 3R trade , risking 10c to make 30c, the risk reward ratio changes during the trade, even when the stop is brought to 'break-even'.

When the trade is 20c in your favor, with the stop at 'break-even', you are still effectively risking 20c to make 10c. Unless of course 'won money' is different to 'lost money'.

Making any changes to a system immediately means changing the results of that system, so that employing a trailing stop to keep the loss at no more than 10c from the peak equity of a trade, means that there will be many times that the trailing stop takes you out of a trade before the 30c profit is hit.

My question is why do people treat an initial stop differently to a stop within a trade, ie only give it 10c to begin with, but happy to let it have up to 29c when trying for the 30c??

To me the notion of a trade being 'no-risk' just because the stock went in your favor, is not correct. You are still risking the gain.

brty


----------



## Mr J (5 March 2010)

brty said:
			
		

> In Tech/a's example of a 3R trade , risking 10c to make 30c, the risk reward ratio changes during the trade, even when the stop is brought to 'break-even'.
> 
> When the trade is 20c in your favor, with the stop at 'break-even', you are still effectively risking 20c to make 10c. Unless of course 'won money' is different to 'lost money'.




Yes, which is why I disagree when people talk of "free trades" when moving the stop to break even. It's not free, because the unrealised profits are still at risk. 

However, I wouldn't agree that in your example the reward-risk has changed to 1:2 at all. We're not risking that 20c to lock in a 10c gain, we're risking it for further gains. Once a profit is realised, it can be ignored for the rest of the trade. The 10c is irrelevant as soon as we lock it in, it's the 20c currently at risk and the potential gains that are important.


----------



## It's Snake Pliskin (5 March 2010)

Mr J said:


> Yes, which is why I disagree when people talk of "free trades" when moving the stop to break even. It's not free, because the unrealised profits are still at risk.



But at breakeven there is no profit realised, nor unrealised.

Are you referring to opportunity cost?


----------



## Mr J (5 March 2010)

> But at breakeven there is no profit realised, nor unrealised.




Sorry, you're right in that there's no realised profit, but there is certainly unrealised profit because when people move the stop to breakeven, the trade is in profit. I said realised profit when talking of the 10c locked in, because I wanted to distinguish it from the 20c of unrealised profit that isn't locked in.


----------



## pixel (5 March 2010)

As this thread is about "analysis", I hope you don't mind me describing a method that works best with a computer that has some suitable trading software loaded.

When I consider buying a share, I calculate R:R as the ratio at which my buy price splits the "likely" range support <-> resistance.
Both these levels are uncertain and can only be guessed - eitrher from precedents, trading ranges on recent history, or whatever one's favourite crystal ball suggests.

Take ESG as an example. It moved today from 66.5c to close at 72c. If I set my stop loss a tick below today's Open, at 66c, buying at 72c (assuming I decide to get set on Monday) gives me a risk of 6c or 8.333%.
Those 6c also determine my position size: If I'm happy to risk the loss of $600 (to make it simple), I can buy 10,000 ESG.
Reward requires even more of a guess. Obviously, 81c is the first hurdle as ESG has met resistance thereabouts on a number of occasions in recent months. If my crystal ball were to suggest it's likely to stop there again, I had to apply 81-72 = 9c profit expectation, a ratio of 1.5 over 1, so I'll pass.
However, taking the precedent into account, which was set between 31/12 and 4/01, I might expect a breakout for a 20% rise (again in round figures: 83c to $1); in that precedent, ESG traded inside a 4c (5%) trading range; Based on that precedent, my start calculation would now suggest 5% risk vs 20% gain = 4:1, quite acceptable odds (for me - others may again differ.)

As soon as I'm in the trade, however, my focus changes from entry calculations - entry is now history - to managing the trade.
Every day, I recalculate the new trailing stop - always moving it up or leaving it steady; and keeping the discipline to stop out when the stop is broken.

Again, everybody may have their own rules as to how they calculate the stop level: 5% off the previous High is one such rule, meaning you preserve at least 95% of your "best paper value". 
I don't belieev the Market cares about my paper profit, but trades the share as if I didn't exist. Therefore, I calculate the daily volatility and set my stop depending on the volatility-based risk that the trend changes and I have to "give back" one or two days' "average gain".


----------



## Synergy (6 March 2010)

brty said:


> My question is why do people treat an initial stop differently to a stop within a trade, ie only give it 10c to begin with, but happy to let it have up to 29c when trying for the 30c??
> 
> To me the notion of a trade being 'no-risk' just because the stock went in your favor, is not correct. You are still risking the gain.
> 
> brty




very interesting question brty....

I think there are a couple of reasons people think like this...

For some, their analysis tells them that once a trade is in profit, the trade needs more room to move around. If a stock falls initially after buying, often the initial analysis has been proved wrong, so the trade is sold. Once a trade has moved in the right direction and the initial analysis proved correct, the trade then needs to be given space and time to play itself out. This doesn't mean the stop has to be left at breakeven though...

I also think there are people who are just happy to not lose on a trade. This is their primary goal. So once a trade is in profit and they feel they were right, a stop at breakeven will avoid any disapointment. The rest doesn't really matter to them because they know they were 'right' on that trade and are preventing that from changing.

Which leads me to my question, and I've posted this before:
It's likely that the point of breakeven holds little importance to anyone but yourself, yet it's treated like a magical number that holds more importantance than those either side of it.

For fundamental traders I can understand using BE as a stop point. They don't really have too much in terms of decision making tools if they are placing a stop based on fundamentals alone.

But technical traders have unlimited information to use in placing their stop. Why is it so many people put their stop at breakeven at some point in a trade. We buy a position based on technicals, and sell it based on technicals, but put its stop at a point where we feel safe, and know we're avoiding any hurt. 

If the logical place for a stop is just below the entry point when we buy the position, why do we ever move a stop to BE? It's not a technically logical place to put it, but we do anyway? 

Some would argue that losses should be avoided if possible, but if you're being stopped out at BE and then missing large gains because you put the stop at technically irrelevant palce, then it seems emotions are getting in the way of logical trading.


----------



## nunthewiser (6 March 2010)

Synergy said:


> But technical traders have unlimited information to use in placing their stop. Why is it so many people put their stop at breakeven at some point in a trade. We buy a position based on technicals, and sell it based on technicals, but put its stop at a point where we feel safe, and know we're avoiding any hurt.
> 
> *If the logical place for a stop is just below the entry point when we buy the position, why do we ever move a stop to BE? It's not a technically logical place to put it*, but we do anyway?
> 
> Some would argue that losses should be avoided if possible, but if you're being stopped out at BE and then missing large gains because you put the stop at technically irrelevant palce, then it seems emotions are getting in the way of logical trading.




Very good .

I personally do not subscribe to this "breakeven" theory as i originally placed my stop where i placed it based on MY interpretation of the definative stoploss point . At that point i am proven right or wrong .My amount of risk that i have already put on the table for MY stoploss point is the cost of doing business on that trade IF proven wrong, this amount is already factored in by myself BEFORE i even enter the trade.

I dare say your post will cause some disagreeance as this "move stop to breakeven" lingo does like to get bandied around here .

Good post Synergy


----------



## motorway (6 March 2010)

Synergy



> Nassim Taleb talks about the challenges of coping with uncertainty, predicting events, and understanding history. Taleb, the author of Fooled By Randomness and The Black Swan, imagines two countries, Mediocristan and Extremistan where the ability to understand the past and predict the future is radically different.
> 
> *In Mediocristan, events are generated by a underlying random process that is normally distributed.
> *
> ...





Ok



> Prediction is a kind of therapy.  You have to look at your error after the fact. Forecast error is central to decision-making.
> 
> Traveling to France, you know the size of suitcase for a given time of year; but need much bigger suitcase if traveling to Mars. There are degrees in your ignorance about what you don't know.
> 
> The Enlightenment.  "I want to turn knowledge into action"



  =   I KNOW HOW TO PLACE THE STOPS )



> Taleb--*"I want to turn lack of knowledge into action." We should embrace the phrase "I don't know." We like experts, but not all domains have experts.
> *



 = I only KNOW where THE  BREAK EVEN  IS 

Ok what is the market ? Can you PREDICT ?

You say you know a logical place for a stop ===> Prediction ?

But if you can not PREDICT ( or Rely on Prediction ) YOU CAN ONLY CONTROL LOSS

* I want to TURN LACK OF KNOWLEDGE into ACTION... EMBRACE the PHRASE I DON"T KNOW   ==>  TALEB *



> The first rule in successful trading and investing is: Cut losses short.
> E. H. Harriman, who was once a broker on the floor of the Stock Exchange, said: "If you would be a successful trader in stocks, kill your losses."






> The element of risk is present in every commitment. There is
> no such thing as a "permanent" investment.




To profit form uncertainty . From what we don't know
*The First Rule is to Limit Losses
*

The break even Stop is maybe then THE MOST IMPORTANT STOP.
maybe it is the ONLY one that is LOGICALLY Grounded 


And Yes Open PROFIT is No different to Closed profit..


It is always  your money at RISK...

Motorway


----------



## lukeaye (6 March 2010)

> Motorway
> 
> 
> The break even Stop is maybe then THE MOST IMPORTANT STOP.
> ...





As always motorway, very informative valuable post. Makes perfect sense actually. thank you.


----------



## Mr J (6 March 2010)

Synergy said:
			
		

> why do we ever move a stop to BE?




Because it makes us feel good, as most people seem to do it to get a "free" trade. The problem is that it is not a free trade, and I think that idea is dangerous.



			
				Motorway said:
			
		

> The First Rule is to Limit Losses




Of course.



> The break even Stop is maybe then THE MOST IMPORTANT STOP.
> maybe it is the ONLY one that is LOGICALLY Grounded




Sorry, but I don't think the aim to minimise losses justifies moving a stop to break-even. Why break-even? Why not a few ticks above or below? Why precisely break-even? For psychological reasons.

And it is not the most important stop in any case; the original stop is the most important and should be the most logically grounded.


----------



## lukeaye (6 March 2010)

Mr J said:


> Sorry, but I don't think the aim to minimise losses justifies moving a stop to break-even. Why break-even? Why not a few ticks above or below? Why precisely break-even? For psychological reasons.
> 
> And it is not the most important stop in any case; the original stop is the most important and should be the most logically grounded.




Your missing the point.

The intial stop should be the most logically grounded, but based on YOUR logic. Who is to say that it is a point of any importance? You, the charts, who? Ultimately the markets decide and you can be quite often wrong.

You are basing the stop on an expectation, and expectation that it is the point at which, your subjective analysis is wrong. Your analysis is prone to failure, and your stop level can just as easily be wrong.

A breakeven is significant, and the most logical, in that you are reducing potential losses for your account. If you goal is to reduce your costs(losses) and increase profit, then this point is of the most importance. There is no subjectivity at this point. You dont lose any money.


----------



## Mr J (6 March 2010)

> Your missing the point.




I don't think I am, I think others are missing the point.



> The intial stop should be the most logically grounded, but based on YOUR logic. Who is to say that it is a point of any importance? You, the markets, who?




If our logic doesn't hold any significance in the markets, then our logic is groundless.



> You are basing the stop on an expectation, and *expectation that it is the point at which, your subjective analysis is wrong*. You analysis is prone to failure, and your stop level can just as easily be wrong.




Not at all. My stop is the point at which I'm not willing to give the trade any further room. It doesn't mean I'm wrong, it just means I'm not willing to go any further. Given that I trade by probability, I can't actually be proven wrong on any trade.



> A breakeven is significant, and the most logical, in that you are reducing potential losses for your account.




Logical, why? Is that point any more significant than something 10 ticks above or below it? Very likely not. It's chosen precisely because it is break-even. Reducing losses on the account? Any stop does that, so why is break-even the most logical? Why not place the stop to lock in some profit? A stop in profit is certainly far more logical given that our aim is to profit.


----------



## brty (6 March 2010)

> Nassim Taleb talks about........




I don't give a toss about his opinions on random, he is clearly wrong.



> The First Rule is to Limit Losses




My first rule is to trade something with a positive expectancy. You could probably come up with a highly profitable system averaging down ETF that are index based, that does not limit losses.

Using break-even as a stop point means that you are treating each trade as an entirely separate event that 'needs' to work, rather than just another step along a journey.

Any stop used needs to be far enough away from the more than likely spike in price that is attracted by stops in today's markets. If using some breakaway point as an entry, bringing the stop to breakeven leaves it in no-mans land and likely to be hit.  

brty


----------



## lukeaye (6 March 2010)

Mr J said:


> Not at all. My stop is the point at which I'm not willing to give the trade any further room. It doesn't mean I'm wrong, it just means I'm not willing to go any further. Given that I trade by probability, I can't actually be proven wrong on any trade.




Why are you not willing to give the trade any further room? because you dont want to potentially loose anymore money. Why take a loss, when it can cost you nothing?

What probability are you trading off? You state in your thread you dont have evidence to back up your expectancy, so how do you even know what to expect?



> Logical, why? Is that point any more significant than something 10 ticks above or below it? Very likely not. It's chosen precisely because it is break-even. Reducing losses on the account? Any stop does that, so why is break-even the most logical? Why not place the stop to lock in some profit? A stop in profit is certainly far more logical given that our aim is to profit.




Its significant for many reasons. Its the point at which the trade costs you nothing any longer so you have preserved capital and cut costs. Its also the point, at which you can have the highest expectancy of riding the trend relative to the trade costing you nothing. You set it 10 pips higher you decrease the expectancy of the trade going in your favour for chance of being stopped out to early. No doubt you may trial the stop higher based on another expectation as the trade develops. 

To me after reading motorways post, it really does make sense.

What are our stops really based on that gives it more significance then cutting costs completely. Our stop is based on a subjective analysis of what we think to be a defining point on the chart, a point at which our analysis is wrong. Or depending on your trading as you stated, a point where we wish to cut our losses.

It would be really interesting to see some statistics on, the trades that do go against us, what percentage come good? Or what is has the greatest expectation to failure based on a trade against us to say 20% of our risk, 50% of our risk etc


----------



## wayneL (6 March 2010)

brty said:


> I don't give a toss about his opinions on random, he is clearly wrong.



Perhaps you can clear this up for us plebeians then. Why is he clearly wrong?


----------



## mazzatelli (6 March 2010)

brty said:


> I don't give a toss about his opinions on random, he is clearly wrong.



Its a matter of perspective
Some option market makers would disagree with you in approach and treat the market as a Geometric Random Walk


----------



## lukeaye (6 March 2010)

brty said:


> I don't give a toss about his opinions on random, he is clearly wrong.
> 
> 
> 
> ...




What gives the point you pick, any significance what so ever? Why does the market care about your stop?

You have an expectation of failure, and so an expectation of loss, does a breakeven have an expectation of loss?

Whether you like it or not, your sotp loss point is a point in randomness relative to the equity you are trading, relative to everyone trading it, a breakeven point is objective to one of your main goals, cutting costs.

The point is, can you say with evidence, that your intial stop point has anymore significance then a breakeven point? Sure your framework may suggest so, but it isnt a given. The trade may go right through it, find a different point of signifigance, and then rocket back in your favour


----------



## Mr J (6 March 2010)

brty said:
			
		

> My first rule is to trade something with a positive expectancy. You could probably come up with a highly profitable system averaging down ETF that are index based, that does not limit losses.




I know a couple of people have mentioned it lately (about it being the most important thing), but it should really be a given. If we have positive expectancy, we want to improve it, which in relative terms means either winning more often, decreasing losses, increasing gains, or any combination of these. These are all critical, so the statement that limiting losses is most important is true.



> Any stop used needs to be far enough away from the more than likely spike in price that is attracted by stops in today's markets.




I can only talk about the situations I look to trade, but more often than not there is no spike, and the increase in stop to allow for a spike is not cost-effective. If a spike was more likely than not, I wouldn't increase the stop but delay the entry, again, allowing for a tight stop.



			
				Lukeaye said:
			
		

> Why are you not willing to give the trade any further room? because you dont want to potentially loose anymore money.




I don't give it more room because I don't deem it to be a cost-effective strategy. The majority of my profitable trades don't use up much of the stop, and it's worth sacrificing the trades that do in order to tighten the stop.



> Why take a loss, when it can cost you nothing?




Every trade costs me. Not only every trade, but every action has a cost. The cost of moving the stop to break-even is less breating room for the trade. That doesn't mean moving it up is a bad decision, but the fact is there is a cost in every action, and _nothing_ is free. 

While I don't subscribe to the "move stop to break-even and have a free trade" or "don't let a profit turn into a loss", it doesn't mean I don't move my stops up. My aim is to maximise my expectation (within reason), not to lock in a profit.



> Its significant for many reasons. Its the point at which the trade costs you nothing any longer so you have preserved capital and cut costs.




While preservation of capital is important, if any individual trade risks that, it's a trade that shouldn't be made. I'm quite willing to lose my initial risk; if I wasn't, I wouldn't have risked it. 

Moving the stop to break-even does have a cost, like I said before. That doesn't mean it's a bad decision, but there may also be better decisions.



> Its also the point, at which you can have the highest expectancy of riding the trend relative to the trade costing you nothing.




Not true at all. As Brty said, the break-even point could be in the middle of no man's land. And as I've said a few times now, the trade always costs you something.



> You set it 10 pips higher you decrease the expectancy of the trade going in your favour for chance of being stopped out to early.




No, this action decreases our winrate for the rest of the trade, but it may actually increase our expectancy. Likewise, a stop 10 ticks below break-even may allow for a higher expectancy than a stop at break-even. This is actually a very strong arguement against blindly moving stops to break even.



> Our stop is based on a subjective analysis of what we think to be a defining point on the chart




Might be subjective to you, but my is not. Why? Because I trade off other's ideas and actions. If I pick a point on a chart, it's because there's a high probability that others will find it important. I have no opinion on it.



> It would be really interesting to see some statistics on, the trades that do go against us, what percentage come good? Or what is has the greatest expectation to failure based on a trade against us to say 20% of our risk, 50% of our risk etc




Obviously we'll all perform differently and must do our own analysis, but I think most people will find that most of their profitable trades don't use up too much of their stop, and that it's more profitable to sacrifice a few winners in order to significantly reduce the size of the stop.



> What gives the point you pick, any significance what so ever? Why does the market care about your stop?




Because the market does find particular points to be significant. What the market does not find significant, however, is someone's break-even stop. It could be anywhere.



> Whether you like it or not, your sotp loss point is a point in randomness relative to the equity you are trading,




No it's not. No point is random, and points will very in significance. Generally, most mean virtually nothing, and the occasional point is significant. Why is it significant? Because people behind enough capital find it significant.



> does a breakeven have an expectation of loss?




For me it suggests no expectation at all. In this case I mean idea of the possibilities of the trade, rather than expectancy.



> The point is, can you say with evidence, that your intial stop point has anymore significance then a breakeven point?




My stop point is based on probability. The break-even point is not - it's only picked because it is break-even.


----------



## motorway (6 March 2010)

Just refining some scans 


> Re: What analysis do you use for trading?





Observations

when the XAO has had a good run
*Absolute signals  rule
*Everything is giving BUYS and those on relative strength buys
are often ready for corrections 


When the XAO is in correction
RELATIVE STRENGTH then rules

Everything is giving sell signals except on a relative basis
These seem to be large gainers if the index resumes UPWARDS

maybe like NOW


Just compared the same criteria on
an a absolute basis VS a  comparative relative  strength basis
At significant congestion periods
at the ends and beginnings of  legs..

Comparative strength and weakness


A  stock like TLS has never appeared as a buy ( in relevent history any way )
RIO on occasion
BUT not now

The NON PERIODIC CYCLES


*LEVY FLIGHTS are RANDOM
*BUT can provide a positive expectancy

JUMPS lead to trends  ( JUMP===> DIFFUSION )
BUT who knows when ?

UNCERTAINTY

Do not underestmate the importance of mental POISE 
( The break even STOP ..ALLOWS  Profit from uncertainty--- OPPORTUNITY COST )

Motorway


----------



## barney (6 March 2010)

brty said:


> Any stop used needs to be far enough away from the *more than likely spike in price that is attracted by stops in today's markets*. If using some breakaway point as an entry, bringing the stop to breakeven leaves it in no-mans land and likely to be hit.
> 
> brty




Just on that note ... The best entries are often found at the spike extremities.... and a high percentage of the 'obvious" Stop loss levels are more often than not *the best entry points* ..... From my experience, rushing entries through impatience creates the most unwanted "heat" in any given trade situation.


----------



## motorway (6 March 2010)

barney said:


> Just on that note ... The best entries are often found at the spike extremities.... and a high percentage of the 'obvious" Stop loss levels are more often than not *the best entry points* ..... From my experience, rushing entries through impatience creates the most unwanted "heat" in any given trade situation.




http://www.olsenblog.com/2010/01/how-to-trade-butterflies-cause-cascading-margin-calls/



> Herding behavior is a frequent phenomenon during periods with strong price trends. Contrary to general belief, these price trends do not signal an excess of long positions but an overhang of counter-trend positions instead. How does this happen?





Motorway


----------



## brty (6 March 2010)

Random,



> Of or relating to a type of circumstance or event that is described by a probability distribution.






> proceeding, made, or occurring without definite aim, reason, or pattern






> without definite aim, purpose, method, or adherence to a prior arrangement; in a haphazard way:




I always thought that all market participants were there to make money, made definite decisions about when to buy and sell and didn't just put in 'random' entries and exits.

I don't believe in random anything, I do believe in many things currently unpredictable, but this is different to random. Many people seem to have a belief that random and unpredictable (to them) are the same thing. With enough information everything is predictable.

brty


----------



## So_Cynical (6 March 2010)

brty said:


> I don't believe in random anything, I do believe in many things currently unpredictable, but this is different to random. Many people seem to have a belief that random and unpredictable (to them) are the same thing. With enough information everything is predictable.
> 
> brty




I cant help but think that's a crock...with enough information you can put percentages to likely out comes but there's always a random element that can determine the final outcome...depending of course on the nature of the event.

The more complex the event the more potential for a random 'happening' to determine the outcome....dumb luck is real.

Also think you guys are over complicating something that is in essence very simple.


----------



## wayneL (6 March 2010)

brty said:


> Random,
> 
> I always thought that all market participants were there to make money, made definite decisions about when to buy and sell and didn't just put in 'random' entries and exits.
> 
> ...



Taleb did not write about "random", but rather about "random*ness*". Hence, one must look further than the dictionary definition of "random".

Wikipedia sheds some light - http://en.wikipedia.org/wiki/Randomness#In_mathematics



> With enough information everything is predictable.




Hah! The rub comes in the inconvenient fact that we will never have enough information to predict systems like the stock market - enter chaos theory.

Ergo, Taleb is clearly correct in his writings on the topic.


----------



## motorway (6 March 2010)

So_Cynical said:


> I cant help but think that's a crock...with enough information you can put percentages to likely out comes but there's always a random element that can determine the final outcome...depending of course on the nature of the event.
> 
> The more complex the event the more potential for a random 'happening' to determine the outcome....dumb luck is real.
> 
> Also think you guys are over complicating something that is in essence very simple.




Simple things are simple but complex to  *really understand*

eg LIFE , GOODNESS , EVIL & LOVE....

brty==>

How does EVOLUTION WORK
WHY is there such beautiful "design"

RANDOM & SELECTION, and a negative selection at that ... the use of a Stop loss.

It is not that the fittest survive ( that just is result like survivor-ship bias ).. It is because  the unfit don't --They get STOPPED OUT

LEVY FLIGHTS are random.. but are used in nature for optimal foraging , predation , and escape..

How do you balance a baton on a finger ?
Not by prediction , but by error correcting and by a levy flight..

And the best balancers delay their corrections
They can keep the baton unbalanced and create smooth movement ( TREND )

A lot of things in nature look like prediction
But is just good ERROR CORRECTION

If I have a coin and it has a small bias to heads
What will turn up on the next TOSS ?
how much would you bet ?
And still is it possible you only get TAILS ? Till you go broke no matter what your MM ?

Will it rain Tomorrow ?

Will the market finish UP on MONDAY ?

Difference between PREDICTION and FORECASTING / ANTICIPATION..

The Bias on that COIN
is not fixed either

It is a LEVY FLIGHT TOO

But yes , THERE ARE MEMORY EFFECTS so HERDING etc

TRENDS VERY IMPORTANT

ANTICIPATION , FORECASTING YES..

Motorway



> Previous studies have suggested that there is an element
> of predictive control in human stick balancing at the
> fingertip. However, the fact that survival statistics for stick
> balancing can be reproduced by a stochastic delay equation
> ...




Mandelbrot suggests the market moves as a LEVY FLIGHT TOO

*If so we need an OPTIMAL FORAGING STRATEGY 
*

Wyckoff did not have that term
But his description of market action and how to FORAGE 
I see as similar  ..

*Waves of buying and selling last as long as they do*



Motorway


----------



## It's Snake Pliskin (7 March 2010)

> Sorry, but I don't think the aim to minimise losses justifies moving a stop to break-even. Why break-even? Why not a few ticks above or below? Why precisely break-even? For psychological reasons.



I like your enthusiasm for the topic. But anything other than limiting losses is about being right. Limiting losses is part of the numbers. Being right is about being right. 


> And it is not the most important stop in any case; the original stop is the most important and should be the most logically grounded.



But the initial stop guarantees a loss if hit. That affects the numbers.


----------



## lukeaye (7 March 2010)

Motorway, does you head get sore? You clearly have far to much information stored. You are like a walking encyclopedia


----------



## brty (7 March 2010)

I did not wish this topic to disintegrate into a debate on random, that has been discussed in other threads. Suffice to say that random is a concept that occurs in the minds and theories of Mathematicians and Statisticians.

Motorway..



> LEVY FLIGHTS are random..




They are also only theoretical, and don't exist in the real world..

http://www.nature.com/nature/journal/v449/n7165/abs/nature06199.html



> If I have a coin and it has a small bias to heads
> What will turn up on the next TOSS ?




Coin tosses are clearly not random, biased coins or not, not a smart example to use. I can toss a coin and get 20 heads in a row, with the first 20 tosses. I can take the same coin and toss it another 20 times and get 20 tails in a row. I'm a good tosser  .

Wayne,



> Hah! The rub comes in the inconvenient fact that we will never have enough information to predict systems like the stock market - enter chaos theory.




Speak for yourself, personally I have found definite sequences of events that make trading profitable, consistently. So did a number of Market Wizards in Jack Schwagers book, which is why they left the academic world to be traders.
In the academic world they see the market as random, because no-one can accurately tell where individual share prices will be at a future point in time, yet they do not study how a common series of events lead to certain outcomes with monotonous regularity (certain, as in high probability).

Now where were we in relation to stops??

brty


----------



## wayneL (7 March 2010)

brty said:


> Wayne,
> 
> 
> 
> ...




Of course. But I think that is exploiting randomness rather than disproving it. The point I am trying to make is that random <> randomness. 

There is still order in randomness and chaos that a trader can exploit, but randomness is still always in play.


----------



## Synergy (7 March 2010)

brty said:


> In the academic world they see the market as random, because no-one can accurately tell where individual share prices will be at a future point in time, yet they do not study how a common series of events lead to certain outcomes with monotonous regularity (certain, as in high probability).
> brty




I think you've hit the nail on the head.

It's amazing how so many people doing basically the same thing can have so many varying views on topics that likely play a vital role in what we're trying to achieve.


----------



## brty (7 March 2010)

Wayne,



> But I think that is exploiting randomness rather than disproving it.




In a random/randomness world of academia, repetitive patterns, sequences of events should not be happening, so I don't think we (you included  ) could be doing what we do by 'exploiting randomness'.

I think that most traders/investors believe in elements of randomness in the market, how do 'most' go??

brty


----------



## Mr J (7 March 2010)

barney said:


> Just on that note ... The best entries are often found at the spike extremities.... and a high percentage of the 'obvious" Stop loss levels are more often than not *the best entry points* ..... From my experience, rushing entries through impatience creates the most unwanted "heat" in any given trade situation.




Exactly. If we feel we need to increase a stop to allow for a likely spike, we should just delay the entry.



			
				brty said:
			
		

> I always thought that all market participants were there to make money, made definite decisions about when to buy and sell and didn't just put in 'random' entries and exits.




I find it amazing that anyone could think the markets are random. As you say, there is reason behind every action and every participant - they're not monkeys throwing darts (even if the result is the same!), and even then, monkeys don't throw darts randomly either.



			
				So Cynical said:
			
		

> I cant help but think that's a crock...with enough information you can put percentages to likely out comes but there's always a random element that can determine the final outcome




The percentages are irrelevant. The outcome is decided by human action, and if we were completely informed, we know what these actions are and how they will move the market.



			
				WayneL said:
			
		

> we will never have enough information to predict systems like the stock market




Of course not - we'd have to know what every participant is going to do. They're not going to tell us, especially not so far in advance that we could do something about it.



			
				Snake Pliskin said:
			
		

> *I like your enthusiasm for the topic*. But anything other than limiting losses is about being right. Limiting losses is part of the numbers. Being right is about being right.




I feel like I'm getting a trophy for 4th place now . I disagree, I've made adjustments other than limit losses that make me less 'right', but they significantly increase my expectancy, and that is what trading is about. If my risk amount is already at an amount that is acceptable for me, why should I lower it? Why would I want to lower it? The goal is to make money, not to limit losses to minute amounts.  A good trader has such an edge that the issue of trade size is not risk, but comfort.



> But the initial stop guarantees a loss if hit. That affects the numbers.




Not sure what you mean? Are you suggesting other stops may be more important because they can 'guarantee' break-even or profit?



			
				brty said:
			
		

> Coin tosses are clearly not random, biased coins or not, not a smart example to use. I can toss a coin and get 20 heads in a row, with the first 20 tosses. I can take the same coin and toss it another 20 times and get 20 tails in a row. I'm a good tosser  .




Of course it's all random, otherwise it would all be too much to think about :.



			
				WayneL said:
			
		

> The point I am trying to make is that random <> randomness.




Isn't randomness just a noun? The trouble I have with debating 'random' is that most people assume equal chance for any outcome. My understanding is for it to just follow a probability distribution, and then this brings up the problem of perspective. If we say coinflips are 50% and I win 80%, it's not random. However, if we correctly measure _my_ coinflips at 80%, then it is random. Then when we compare my flipping to the flipping of others, my result then becomes non-random again, since we are now applying the original assumed probabilities.

So we end up having situations where people are suggesting coinflips are random (meaning 'equal'), some people suggesting that they are not random because coinflips are not 'equal', and then a few other people arguing that coinflips are random, although in a completely different way to the first group. The first group are wrong, the second are technically wrong but right to argue against the first group, and the third group are technically right but not doing either of the first two groups any favours.

It actually brings up a big issue with people using incorrect definitions. Another one I reguarly come across is 'gambling', and the debate over whether participants are 'gambling'. They are, by the proper defintion, and most people are just arguing with a popular (but incorrect) definition, or just fighting the negative connotation.


----------



## wayneL (7 March 2010)

Mr J said:


> Isn't randomness just a noun?




Yes it is a noun. Nouns can have more than one meaning however.

e.g. Chaos is also a noun, but has a different meaning in science and mathematics than it does in the vernacular of the common schmuck.

So it is with randomness.

DYOR


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## barney (7 March 2010)

Mr J said:


> Exactly. If we feel we need to increase a stop to allow for a likely spike, we should just delay the entry.




Agree 100% ..... the hardest part (for me, and I assume many traders) is not having the discipline to wait, even though the potential risk is recognized. Over trading without a proven positive expectancy is a recipe for mediocrity at best ..... and I'm tired of being mediocre  




Mr J said:


> A good trader has such an edge that the issue of trade size is not risk, but comfort.




  Absolutely ...... and the main reason for me, that I keep trying to hone my trading skills  .... A successful trader needs do no more than increase the size of his starting bank to prosper ..... something we all should have recognized in the 'Nothing to Something' thread from the *"T" man*


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## nomore4s (7 March 2010)

Mr J said:


> If my risk amount is already at an amount that is acceptable for me, why should I lower it? Why would I want to lower it? The goal is to make money, not to limit losses to minute amounts.




By reducing risk and losses to minute amounts does this not make it easier to achieve the goal of making money?

If a trade moves in my favour why wouldn't I move the stop to reduce my risk? Or even more importantly if a trade doesn't move in my favour or the way I expect it too, why wouldn't I move the stop to reduce my risk? Or close out the trade for a less then 1R loss, which is essentially the same thing as moving my stop?



> Why would I want to lower it?




Why wouldn't you want to lower it?


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## Mr J (7 March 2010)

> e.g. Chaos is also a noun, but has a different meaning in science and mathematics than it does in the vernacular of the common schmuck.




But the definitions for chaos are legitimate, but the common understanding of 'randomness' is not?



			
				Nomore4s said:
			
		

> By reducing risk and losses to minute amounts does this not make it easier to achieve the goal of making money?




Wouldn't it be easier still to increase gains?



> Why wouldn't you want to lower it?




We already do that when we keep our risk amount constant. Why? Because any action that increases our edge - such as increasing the size or frequency of wins, or decreasing the size and freqency of losses - mathematically justifies a larger risk amount. By keeping it constant we're risking less relative to our edge than we were before.


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## wayneL (7 March 2010)

Mr J said:


> But the definitions for chaos are legitimate, but the common understanding of 'randomness' is not?




So you think the common schmuck's understanding of chaos in the scientific senseis _au fait_ while their understanding of randomness is rooted in the common vernacular?

Oh please! You are just arguing for the sake of it ffs!

Excuse me while I go and chastise myself for indulging in futile discussion.


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## sinner (7 March 2010)

I reckon everyone interested in this debate should read "Trading in the Zone" by Mark Douglas.

He points out:

The market is a paradox: You cannot define any given outcome from the moment you place your trade - but at the same time events are occuring in the market every day (these events are called waves or trends) which would be extremely rare occurences if the markets were truly random.

The five truths:
1. Anything can happen.
2. You don't need to know what is going to happen next in order to make money.
3. There is a random distribution between wins and losses for any given set of variables that define an edge.
4. An edge is nothing more than an indication of a higher probability of one thing happening over another.
5. Eveiy moment in the market is unique.

I think it's always important to remember those points.

However. There is one method we can always trade on, there is one thing that is always consistent about the market, and that is the market structure. What do I mean by that?

Well, random or not the price action of any chart is always in one of three phases:

1. Consolidation/Range (equal or similar highs and lows)
2. Fakeout -> Breakout -> Re-test (new high or low outside of consolidation)
3. Trending (higher highs and higher lows or lower highs and lower lows)
4. Wash, rinse, repeat.

So, all you need to do is to figure out:

1. Which of the above phases you are in.
2. What is the simplest, most profitable way to make money from that phase (incl possibly not trading that phase).
3. Grind the setups you have until the phase changes.

If you trade the market structure, the question of "random" becomes mostly moot.


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## nomore4s (7 March 2010)

Mr J said:


> Wouldn't it be easier still to increase gains?




lol, Do you find it easy to increase gains, do you?

By reducing risk and losses to minute amounts I'm actually increasing my gains by improving my overall R/R ratio, and improving the overall gain to my account on my next winner.



> We already do that when we keep our risk amount constant. Why? Because any action that increases our edge - such as increasing the size or frequency of wins, or decreasing the size and freqency of losses - mathematically justifies a larger risk amount. By keeping it constant, then - relative to our edge - we're risking less than we were before.




Great in theory but not so great in application imo. $1 risked is still $1 risked and still affects your profitability and capital base when lost no matter how your edge is improved, so if you can reduce it to 50c why wouldn't you? 
Any opportunity to reduce my risk without compromising my edge is taken, as reducing my risks and losses is easier to control then trying to get another 1R out of a trade - because no matter what my edge, once I'm in a trade I have no control over whether the market will give me a winning trade or not. Having an edge is not about the current/next trade it is about the next 100 trades and by reducing the risk (if possible) on the current trade I'm actually exploiting my edge even further.

A lot of your posts are great in theory but highlight just how inexperienced you are in the practical application of those theories. You sprout on about how easy trading is but we all saw in your journal thread that when it actually came to trading & applying these great theories you have, you didn't find it that easy at all. Having or finding an edge and being able to trade & profit from that edge are 2 different things


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## mazzatelli (7 March 2010)

Mr J said:


> I find it amazing that anyone could think the markets are random. As you say, there is reason behind every action and every participant - they're not monkeys throwing darts (even if the result is the same!), and even then, monkeys don't throw darts randomly either.




https://www.aussiestockforums.com/forums/showthread.php?p=538385#post538385


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## barney (7 March 2010)

nomore4s said:


> *By reducing risk* and losses to minute amounts *I'm actually increasing my gains* by improving my overall R/R ratio, and improving the overall gain to my account on my next winner.
> 
> Great in theory but not so great in application imo. $1 risked is still $1 risked and still affects your profitability and capital base when lost no matter how your edge is improved, so if you can reduce it to 50c why wouldn't you?




Howdy NM4 ..... appreciate and respect your comments etc, but .....

Is there any evidence that moving an initial stop point to B/E actually "increases" gains simply because it makes a given trade a no loss trade?

For eg. Who is to say that if the original stop had been left in place, (and just missed being taken out) that the trade may not have continued on for a 2,3 or 4R winner ............ 

Basically it looks like a judgment/experience call to me, and for that reason I see no bias to support either argument ............ just an observation

Cheers.


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## motorway (7 March 2010)

brty said:


> I did not wish this topic to disintegrate into a debate on random, that has been discussed in other threads. Suffice to say that random is a concept that occurs in the minds and theories of Mathematicians and Statisticians.
> 
> Motorway..
> 
> ...





Sometimes I think I know what but WHEN doesn't oblige


How many types of loss is there to guard against ?

OPPORTUNITY LOSS is probably the BIGGEST


Is there anything as important as TIMING ?
STOPS are really part of entry technique

I see not much point getting out AGGRESSIVELY
If that is not letting you enter something BETTER placed
with better timing

and I do not toss the coin
or control the fluctuations

But markets do trend have memory that is  TRUE.
 Have structure

 & PHASES

But in aperiodic and random way
else there is no use for SYSTEMS
or contingent orders
for stops

Just need to  FLIP heads on demand...

When the sun shines
and the hay is there to be made
The first secret is having the money to make the money..



Motorway


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## sinner (7 March 2010)

PS: I believe anyone using the terminology of "free trade" to mean moving stops to BE is using the terminology incorrectly.

A free trade is one where you commensurately reduce your risk as the market makes profit available to you. The most commonly implemented free trade strategy is to take half your lots off when the trade reaches the same units of profit as the same units risked. This leaves your original SL in place, but still allows you to continue opening new positions with the same capital you had before entering the trade.

Moving your stoploss limit to breakeven is not a "free trade", in fact it is adjusting the original parameters of your trade against yourself. If you are willing to be stopped out at your entry price - why enter there in the first place? Never give a contract back to the market unless you have to (i.e. as defined in your rules): take off half your lots at 1:1 R:R and hold the remaining trade as a risk free asset on your book.


----------



## brty (7 March 2010)

Motorway,



> WHAT IS RANDOM TO US




Finally getting to the point, and reality. Why would anyone trade something that appeared random to them?? Simple answer is that this is a straight gamble, real traders, winning traders do not play in something that appears random to them, they wait for the setup their experience has shown has an edge.



> So you will not bet on my coin at all ?
> Only one you toss yourself... So application is that you only trade shares where you control all the fluctuations / tosses ?




Please do not belittle your arguments by playing the man instead of the ball. When I was talking about coin tosses, I was talking about coin tosses, not a colloquialism for something else.

brty


----------



## nomore4s (7 March 2010)

barney said:


> Is there any evidence that moving an initial stop point to B/E actually "increases" gains simply because it makes a given trade a no loss trade?
> 
> For eg. Who is to say that if the original stop had been left in place, (and just missed being taken out) that the trade may not have continued on for a 2,3 or 4R winner ............




Hi Barney,

None of my discussions talked specifically about moving the stop to B/E only about reducing the risk of the trade once I have entered.

For me it depends on what market I'm trading and over what time-frame.

When trading the SPI on 1min bars I will move the stop to b/e as soon as possible - sometimes when the trade has only moved 2-3 points in my favour. My testing has shown that this dramatically improves my overall profitability in this market on this time-frame for a number of reasons.

But....

When trading ASX shares on EOD charts my techniques change to suit the market and type of set up I'm trading.
For instance I have one particular set up that once the trade is triggered if price reverses after my entry and then reverses again and manages to break back through the entry level I know that if price comes back and breaks that latest low, price then has around a 90% chance of either flopping around doing nothing or taking out my original stop, either way I know do not want to be in the trade anymore once that level is breached so that is where my stop is moved to. On average this level is somewhere around 50%-75% of my original stop, so I can therefore move my stop and reduce the risk of the trade without affecting the winning potential.

There are times when both these methods might cost me a profitable trade by stopping me out early but there are also plenty of times these methods have saved my full stop being hit which in the long run makes me more money then allowing my full stop to be hit.

The way I look at it is one less dollar I lose by controlling my risk once in a trade is one less dollar I have to make back to be profitable. The majority of my trading is solely about controlling my loses so when I have that good day, week or month I'm not just making back my losses.

This is where I believe the difference between theory and application comes in. A experienced successful trader learns the hard way that protecting capital is the key to longevity in the markets, there are times when conditions suit and there is plenty of money to be made but the majority of time it is about protecting capital and reducing loses - treading water really, so when the good times come you can take full advantage of it.


----------



## barney (7 March 2010)

nomore4s said:


> Hi Barney,
> 
> None of my discussions talked specifically about moving the stop to B/E only about reducing the risk of the trade once I have entered.
> 
> For me *it depends on what market I'm trading and over what time-frame*.





Thanks for that NM4 .... I'm glad you replied with the highlighted  point above, cause that is exactly what I was going to mention in my original reply  ...

As you have mentioned, the time frame/instrument,  and the way it is traded often requires a totally different approach.

Trading the 1 minute Euro while its in a mid week "waffle zone" may be a totally opposite trade to trading the Euro an hour or day later when it hits a 24 hour or weekly low/high etc etc ...... 

Good thread, and good on "Mr J" for taking some heat which often helps get some good info out ..... 

Cheers.


----------



## motorway (7 March 2010)

brty said:


> Motorway,
> 
> 
> 
> ...







Motorway


----------



## It's Snake Pliskin (8 March 2010)

sinner said:


> Moving your stoploss limit to breakeven is not a "free trade"



Especially if you are paying outrageous brokerage rates.



> > But the initial stop guarantees a loss if hit. That affects the numbers.
> 
> 
> 
> Not sure what you mean? Are you suggesting other stops may be more important because they can 'guarantee' break-even or profit?



Mr J,

The initial stop guarantees a loss if hit. The effect is a minus to the results table. I'm not suggesting anything.


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## motorway (8 March 2010)

sinner said:


> If you are willing to be stopped out at your entry price - why enter there in the first place? Never give a contract back to the market unless you have to (i.e. as defined in your rules): take off half your lots at 1:1 R:R and hold the remaining trade as a risk free asset on your book.




Ok so a PRICE is just a  PRICE ?
So ==>49. 50. 51 .52. 51. 50 

50 is just 50 and if it was good enough then it is good enough now ?

But



> 5. Every moment in the market is unique.




OH so PRICE is not JUST PRICE ?

It is a unique moment (*a momentum *) which maybe needs a unique response ?

 Even if it looks like the same price / moment / momentum ?

So 50 is not just  50 ?

and just because then does not mean NOW


*5. Every moment in the market is unique.
*



> Motorway, does you head get sore? You clearly have far to much information stored. You are like a walking encyclopedia




Get a long STICK
and balance it on your finger

Tell me what makes the STICK FALL ( or even just move in the first place )
How do you make the stick Stay relatively still in a _range_

How can you keep the Sticks movements smooth and walk or even run in one direction.  _TREND_.

*It is not predicting what the stick is doing
*

But you can produce all sorts of non random behaviour just the same.
and yes there is intention.

Two movements ==>your hand ( THE HALFWAY POINT )
and the end of the Stick ( The swings ).


When a car gets in a skid ?
What causes you to lose it ?


Motorway


----------



## Boggo (8 March 2010)

> Originally Posted by sinner
> Moving your stoploss limit to *breakeven* is not a "free trade"




My understanding of breakeven is that it takes all the costs, ie. buy and sell etc into account !


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## lukeaye (8 March 2010)

Boggo said:


> My understanding of breakeven is that it takes all the costs, ie. buy and sell etc into account !




That would be the definition of breakeven, so if something doesnt cost me anything, it must be free!


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## pixel (8 March 2010)

Boggo said:


> Si Hoc Legere Scis Nimium Eruditionis Habes




Numquam habes nimium eruditionis! Vivis ac discis, aut non vivis longiter.


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## sinner (8 March 2010)

lukeaye said:


> That would be the definition of breakeven, so if something doesnt cost me anything, it must be free!




Unless it is part of a systematic approach I disagree. If the market has moved to a point you deem safe for "breakeven limit" to be put in place on your order, why/how is your original stoploss limit price level invalidated?


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## tech/a (8 March 2010)

sinner said:


> PS: I believe anyone using the terminology of "free trade" to mean moving stops to BE is using the terminology incorrectly.




Remove your initial capital in the trade + brokerage and let the profits run with or without stops = Free trade.



> Is there any evidence that moving an initial stop point to B/E actually "increases" gains simply because it makes a given trade a no loss trade?




Of course if you understood the concept then you wouldnt be asking.
Think over the next 500 trades.


----------



## nunthewiser (8 March 2010)

tech/a said:


> Of course if you understood the concept then you wouldnt be asking.
> Think over the next 500 trades.




Yes the number of false shakout exits would zoom astromically i would say therefore proving that perhaps ones original entry stop was indeed the correct place to stay with ones stop giving the trade space to move ESPECIALLY in a channel situation ..

But hey each to there own , if it works for you in the long run , more power to ya .


----------



## ThingyMajiggy (8 March 2010)

_When_ to move a stop to B/E is my problem, every time I seem to try it, I get stopped out, gives me the heeby geebies, so I don't tend to, I just leave my stop where I originally set it, but I can see the upside to it, I think its just me that is stuffing it up


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## barney (8 March 2010)

tech/a said:


> Of course if you understood the concept then you wouldnt be asking.
> Think over the next 500 trades.




Can you elaborate on that please Tech .... I have no access to backtesting facilities, but the stats which give a definitive bias either way would be interesting .... Cheers.


----------



## tech/a (9 March 2010)

ThingyMajiggy said:


> _When_ to move a stop to B/E is my problem, every time I seem to try it, I get stopped out, gives me the heeby geebies, so I don't tend to, I just leave my stop where I originally set it, but I can see the upside to it, I think its just me that is stuffing it up




Sam.
I use 2 distinct times with my discretionary trading.
(1) When the trade looks under threat and I have "Some Profit" I'm not a subscriber to sitting on a pre determined stop watching it get taken out when clearly my original reason for taking a trade is either under threat or negated. As an example a trade bar which rises sharply only to be sold off on extreme volume.



barney said:


> Can you elaborate on that please Tech .... I have no access to backtesting facilities, but the stats which give a definitive bias either way would be interesting .... Cheers.




Barney you dont need to backtest this.
If you can deminish your initial risk over 500 trades your closed trade R/R will be improved relative to someone who didnt.


----------



## barney (9 March 2010)

tech/a said:


> If you can deminish your initial risk over 500 trades your closed trade R/R will be improved relative to someone who didnt.




I'm not actually arguing against this point Tech (I love getting trades to B/E ), but I often wonder whether it is as cut and dried as many traders make it out to be. 
As Nun pointed out, how sure can we be that the higher percentage of shakeouts/hit stops are not costing us those 5% of outliers trades that actually make the E/curve positive ........ 
My gut feel is it is the individual traders call, and not something that can be measured accurately

NM4 gave an excellent breakdown of how he approaches different instruments/time frames, which I thought summed it up well, and I assume you work along similar lines.

Cheers.



nomore4s said:


> For me it depends on what market I'm trading and over what time-frame.
> 
> When trading the SPI on 1min bars I will move the stop to b/e as soon as possible - sometimes when the trade has only moved 2-3 points in my favour. My testing has shown that this dramatically improves my overall profitability in this market on this time-frame for a number of reasons.
> 
> ...


----------



## sinner (9 March 2010)

tech/a said:


> Remove your initial capital in the trade + brokerage and let the profits run with or without stops = Free trade.




Like I said. Unless you are systematically and consistently doing this on every trade which meets some criteria in some method of your trade plan, then I disagree strongly.

Having done my own backtesting, I found (as barney just mentioned) taking half off at 1:1 to reduce your risk to 0 has a much better expectancy in terms of outliers.



> Of course if you understood the concept then you wouldnt be asking.
> Think over the next 500 trades.




I understand the concept very well thankyou, but have yet to see any evidence which was requested. My own backtests of various instruments on various methodologies over thousands of data points showed me that moving SL to BE instead of taking half off at 1:1 (and thus keeping the original trade parameters intact) removed most chances of catching the fabled outlier trade.

If we are thinking over the next 500 trades as you say, you should be able to show some systematic approach. Otherwise how can you quantify it? If you can't quantify it how does it fit into your plan?


----------



## tech/a (9 March 2010)

barney said:


> I'm not actually arguing against this point Tech (I love getting trades to B/E ), but I often wonder whether it is as cut and dried as many traders make it out to be.
> As Nun pointed out, how sure can we be that the higher percentage of shakeouts/hit stops are not costing us those 5% of outliers trades that actually make the E/curve positive ........




We cant.
Woulda coulda shoulda has no place in business.
I know what my win or loss is on a trade the only control I have is minimising loss---nothing more.I cant eliminate it and I cant pick the exact top or bottom but I can continually work on my restriction of loss and maximisation of open profit.
I cant wonder what if its like having 5 trades to trade we pick 3 and they fail and the other 2 boom. You can only trade what you have and live by the decisions you make. Your bottom line is YOUR bottom line.



> My gut feel is it is the individual traders call, and not something that can be measured accurately




In hindsite yes--I would have bought 1 million BRM at 10c!



> NM4 gave an excellent breakdown of how he approaches different instruments/time frames, which I thought summed it up well, and I assume you work along similar lines.




In some ways yes.

Cheers.[/QUOTE]


----------



## sinner (9 March 2010)

Here is a perfectly valid real world example of a trade I took late last year:

Short EURJPY at 135.691 with a 10 pip SL.

I took half my lots off at 135.591 and kept my original SL in place.

SL to BE traders would have missed out - big time.

Meanwhile I cashed my remaining lots out for +1000 pips earlier this year.


----------



## ThingyMajiggy (9 March 2010)

tech/a said:


> Sam.
> I use 2 distinct times with my discretionary trading.
> (1) When the trade looks under threat and I have "Some Profit" I'm not a subscriber to sitting on a pre determined stop watching it get taken out when clearly my original reason for taking a trade is either under threat or negated. As an example a trade bar which rises sharply only to be sold off on extreme volume.




Yeah, I agree. 

Do you tend to move stops up as the trade goes in your favour, or wait for clear spots to move the stop to, like low volume pull back etc or do you just move it to B/E and thats it?


----------



## tech/a (9 March 2010)

sinner said:


> Here is a perfectly valid real world example of a trade I took late last year:
> 
> Short EURJPY at 135.691 with a 10 pip SL.
> 
> ...




Sinner.

Exiting at B/E doesnt exclude a trader from taking part in any further trades.

I like your long term trade method.


----------



## sinner (9 March 2010)

tech/a said:


> Sinner.
> 
> Exiting at B/E doesnt exclude a trader from taking part in any further trades.
> 
> I like your long term trade method.




Yes but it does exclude you from your original trade. e.g. You entered a long on ABC contracts for $1 and the price moves to $2 so you move your SL to BE. I entered long on ABC contracts for $1 and the price moves to $2 so I take half my lots off. The price retraces to $1 and you get stopped out. You are not thinking about reloading your trade at the same level (why would you, you are a BE trader - your trade parameters have been modified to indicate $1 is now the level at which your trade is incorrect). I am very much thinking about reloading my trade. See the difference?

If trading is a business, then taking half off at 1:1 is how you make assets. I just simply can't see any case where moving SL to BE is the more appropriate action to take.

For the third time in one page, if you have any systematic way to show this "over 500 trades", then I request that you please do show it. Or at the very least, please explain how you quantify "moving SL to BE" over 500 trades as part of your plan.


----------



## tech/a (9 March 2010)

sinner said:


> Yes but it does exclude you from your original trade. e.g. You entered a long on ABC contracts for $1 and the price moves to $2 so you move your SL to BE. I entered long on ABC contracts for $1 and the price moves to $2 so I take half my lots off. The price retraces to $1 and you get stopped out. You are not thinking about reloading your trade at the same level (why would you, you are a BE trader - your trade parameters have been modified to indicate $1 is now the level at which your trade is incorrect). I am very much thinking about reloading my trade. See the difference?




Yes but the case you make is extreme.
In YOUR case you had a 10pip risk and made 1000pips.
Had I been stopped out at B/E and taken another trade later I could well have gained a majority or mor of your pips.



> If trading is a business, then taking half off at 1:1 is how you make assets. I just simply can't see any case where moving SL to BE is the more appropriate action to take.




I'm not suggesting moving every trade be moved to B/E at 1:1 but thats where I will consider a time to look at risk reduction. Sometimes a logical point for raisng the stop will be between the stop and B/E other times above B/E.



> For the third time in one page, if you have any systematic way to show this "over 500 trades", then I request that you please do show it. Or at the very least, please explain how you quantify "moving SL to BE" over 500 trades as part of your plan.




For the third time (evidently) in One page.
I dont have records of my last 500 trades with records of how those trades would have performed had I not moved my initial stop at some later date to deminish my risk.
What I do know is that my Risk begins with 1% but in completed trades is less.

I see your arguement that without statistical varification we cannot be sure if having let trades go as in your example we would not have been better or worse off.

What I will do though is go back over say the last 30 and see how they would have performed when I have time and have stuff all to do.
Quickly looking back on the last 10 I see 6 would have been stopped at the initial risk and only 2 were stopped there the other 4 had 3 at B/E and 1 at a little more 2 were closed for profit and 2 remain open.


----------



## sinner (9 March 2010)

tech/a said:


> Yes but the case you make is extreme.
> In YOUR case you had a 10pip risk and made 1000pips.
> Had I been stopped out at B/E and taken another trade later I could well have gained a majority or mor of your pips.




It isn't an extreme at all, it is how I trade almost every day! How can you say for certain this next trade with a 10 pip SL that I'll take tonight during London won't be the next 1000 pip runner? I don't, you don't, but you are the one modifying your trade parameters like you know for certain.



> I'm not suggesting moving every trade be moved to B/E at 1:1 but thats where I will consider a time to look at risk reduction. Sometimes a logical point for raisng the stop will be between the stop and B/E other times above B/E.




This sounds more like a trailing stop than move stop to BE, which is different again, and nothing to do with the "free trade" concept I thought we were discussing.



> For the third time (evidently) in One page.
> I dont have records of my last 500 trades with records of how those trades would have performed had I not moved my initial stop at some later date to deminish my risk.
> What I do know is that my Risk begins with 1% but in completed trades is less.
> 
> ...




Let me put it another way might make it simpler to see the difference:

1. Long ABC contracts at $1, the market moves to $2. I say to the market, thankyou very much for providing me $1 profit on my $1 risk, I will use what you have provided to backstop the trade by taking the profit you have made available on some pre-defined % of my trade amount. Thankyou for the asset, I will now proceed to look for my next asset.

2. Long ABC contracts at $1, the market moves to $2. You say to the market, thankyou very much for providing me $1 profit on my $1 risk, but I do not want it. I would prefer you keep my $1 profit in return for reducing my risk to $0. Maybe we can talk about $2 profit later, but only as long as my entry level was perfect. Otherwise, you can have my contract back Mr Market, even though you left $1 on the table for me and have no idea or care about my entry level. Even though I have not produced any assets yet, I will look for the next one.

See the difference yet?


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## tech/a (9 March 2010)

sinner said:


> It isn't an extreme at all, it is how I trade almost every day! How can you say for certain this next trade with a 10 pip SL that I'll take tonight during London won't be the next 1000 pip runner? I don't, you don't, but you are the one modifying your trade parameters like you know for certain.




Not at all.
Im using my discretion. Im not trading a system. I dont know.
How do I know that it wont go straight down to my stop I dont but at that point I can do something about it.
If Im standing in the middle of the road and a trucks coming at me---Ill move,others may sit there and expect the truck to swerve.




> This sounds more like a trailing stop than move stop to BE, which is different again, and nothing to do with the "free trade" concept I thought we were discussing.




If a trailing stop hasnt been placed above the initial stop then yes it is of sorts.





> Let me put it another way might make it simpler to see the difference:
> 
> 1. Long ABC contracts at $1, the market moves to $2. I say to the market, thankyou very much for providing me $1 profit on my $1 risk, I will use what you have provided to backstop the trade by taking the profit you have made available on some pre-defined % of my trade amount. Thankyou for the asset, I will now proceed to look for my next asset.
> 
> ...




Yes see the difference and both are fine both will reduce loss if a trade falls back to B/E.
One will remain open with less of the initial trade and the other closed.
The trade off is that 50% if thats the amount used remains in the read until the stop is hit where by the trader has zero loss.Hedging your initial position and a good way of doing the same.


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## sinner (9 March 2010)

tech/a said:


> doing the same.




Can you explain how they are doing the same thing?

I agree, both reduce your risk to 0. But risk is not all of a trade: there is also reward, opportunity cost, and the bold fact that for some reason you are now willing to sell your entry level price for no further profit potential where moments/hours/days/weeks before (depending on your trading timeframe) you were willing to buy it for infinite profit potential.

I'll quote Mark Douglas again, and that is it for me on this thread:



> When I first started trading, especially during the first three years (1979
> through 1981), I would thoroughly and regularly analyze the results of my trading activities. One of the things I discovered was that I rarely got stopped out of a trade for a loss, without the market first going at least a little way in my direction. On average, only one out of every ten trades was an immediate loser that never went in my direction. Out of the other 25 to 30 percent of the trades that were
> ultimately losers, the market usually went in my direction by three or four tics before revising and stopping me out. I calculated that if I got into the habit of taking at least a third of my original position off every time the market gave me those three or four tics, at the end of the year the accumulated winnings would go a long way towards paying my expenses. I was right. To this day, I always, without reservation or hesitation, take off a portion of a winning position whenever the market gives me a little to take.


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## lukeaye (9 March 2010)

sinner said:


> Let me put it another way might make it simpler to see the difference:
> 
> 1. Long ABC contracts at $1, the market moves to $2. I say to the market, thankyou very much for providing me $1 profit on my $1 risk, I will use what you have provided to backstop the trade by taking the profit you have made available on some pre-defined % of my trade amount. Thankyou for the asset, I will now proceed to look for my next asset.
> 
> ...




Sinner, you move your sotp to b/e, and dont take half your positions off the table, you still pick up the 1000 points, how much more profit have you made?

Why would you want to now cut your profit short? The objective is quite clear, reduce losses maximise profit. You are minimizing profits, you are reducing the same risk, for a greater price, the potential for much much more profit.  A conservative approach, not saying its an upforitable approach, just not one i would opt for in my trades.

Of course there will be situations where the sotck moves past your breakeven, but if you have proper trade management, defined rules, i think you will find that most of the time it does occur, you are going to lose anyway. If im trading a breakout, and it breaks out of a range on correct volume etc, then i move my stop to breakeven (the bottom of the range/support) then its fails the breakout and goes through my entry, it will continue lower 9/10 anyway. So for my style of trading, its not logical.


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## sinner (9 March 2010)

lukeaye said:


> Sinner, you move your sotp to b/e, and dont take half your positions off the table, you still pick up the 1000 points, how much more profit have you made?




Err, exactly *none* because as you can plainly see in the chart the price re-tested the entry level, but *never* invalidated my analysis by going above my SL level.

I only show the H4 chart for illustration, I took the trade off an M15 chart, during the original H4 bar my entry level price was tested multiple times even though the price went +50 in my favour first and then re-tested my entry level price after going +400 pips in my favour.

For the trade:
EURJPY 1:1 traders: +1000 pips on half lots and 1 opportunity fully capitalised.
EURJPY SL->BE traders: +0 pips on full lots and 1 opportunity lost.

Still have no idea why traders are willing to relinquish their contracts to the market for the price they originally paid.

As for the rest of your post, I am truly curious to know how you have identified breakouts that never re-test before moving, but not curious enough to take another ride on this roundabout.

Good day.


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## ThingyMajiggy (9 March 2010)

sinner said:


> Err, exactly *none* because as you can plainly see in the chart the price re-tested the entry level, but *never* invalidated my analysis by going above my SL level.
> 
> I only show the H4 chart for illustration, I took the trade off an M15 chart, during the original H4 bar my entry level price was tested multiple times even though the price went +50 in my favour first and then re-tested my entry level price after going +400 pips in my favour.
> 
> ...




Good illustration sinner, this is what happens to me every time I've tried it, hence my earlier post about when to do it. Move it to B/E, comes back up stops you out, I never usually enter again either, because I think of it as a failed trade so I move on, but thats just me and my my experience with moving stops to B/E, so I tend not to do it, but I have seen some do it and its worked well for them, I've seen trades that tech has made which have been great, using the B/E method. I think, as with most things in trading, it depends on the individual, instrument traded etc.


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## lukeaye (9 March 2010)

sinner said:


> Err, exactly *none* because as you can plainly see in the chart the price re-tested the entry level, but *never* invalidated my analysis by going above my SL level.
> 
> I only show the H4 chart for illustration, I took the trade off an M15 chart, during the original H4 bar my entry level price was tested multiple times even though the price went +50 in my favour first and then re-tested my entry level price after going +400 pips in my favour.
> 
> ...




No, i mean given a different scenario, you have obviosuly picked a scenario to suit your arguement, as i can also pick. there are points on that chrat where breakeven will work.

I identify a breakout in a different way. Its really quite simple. Let me show you by illustration, i will grab one that i was in.


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## tech/a (9 March 2010)

> but not curious enough to take another ride on this roundabout




True it does become tedious.
Back to your example.
One trader may well have taken 5-15R from the original trade before the 
re test.
Another may have used the retest AS THE REASON to move his stop to B/E.
Yet another may have moved his stop to B/E and been taken out.

Many ways to achieve better performance which you have shown.
Good stuff.


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## lukeaye (9 March 2010)

Consider this chart.

Molopo. My entry is at 1.35 and my stop loss is at 1.27. 

For 1R i need to get 1.48, which just so happens to be the top. 

Lets just say no brokerage is involved. I Take half my position off the table, and leave the oroiginal stop loss. I have now, a free trade. Now the trade has gone against me, returned to my entry, but no matter i have the lower stop. It breaks it, but once again no matter, i lose what i made, i had a free trade. Now you have succesfully controlled risk.

But consider the other scenario. The stock doesnt pull back to 1.35, it has legs and keeps going, you have half the positions on the table, you are now making half as much profit as i am. If i exit the trade for 8R, you have made 4R, i have made 8R. You have just controlled the same risk, for half as much profit?

That trade was a breakout of resistance, which i dont usually do, but i will show you another example of the way i usually trade.

Rio tinto (by the way these are in my trade journal if you have doubts).

Bought at 69.91
Stop loss 69.00

The stock moves in my favour, i use your method and take half the position off at 70.81. original stop loss in place. Free trade. What a big mistake that was. 

I use my method, and move to breakeven after breaking the range $74.48. Or i could have moved it up after 1R, either way. I exited this trade at 79.80. Thats 10R. You have made 5R.

So why would i want to cut my profit short? I dont get it?


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## sinner (9 March 2010)

tech/a said:


> True it does become tedious.
> Back to your example.
> One trader may well have taken 5-15R from the original trade before the
> re test.
> ...




Herr Hans: "Alright traders I am the big boss of Deutschebank Zurich Forex Department, it is the first day of the new financial year, let's see your statements from last year."

Trader Jorge: "Hey boss, here's mine. I took 1:5 trades all year and came out about 20% on top just like I told you I would. There are a few 1:15s in there, where's my bonus!"

Trader Sabine: "Hey boss, here's mine. I've been moving my stoploss to breakeven on all re-tests just like I told you I would. As you can see I still have a few % short from the 1.7 trendline break on GBPUSD."

Herr Hans: "Great work Sabine! Here, have a raise."

Trader Phillippe: "Hey boss, here's mine. I took over 200 trades this year and not a single loss! What do you think?"

Herr Hans: "What the F*** is this S***? You took 200 trades and exited them all for +1? You are F****** S**** FIRED!"


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## sinner (9 March 2010)

lukeaye said:


> If i exit the trade for 8R, you have made 4R, i have made 8R. You have just controlled the same risk, for half as much profit?




I am only going to say this one last time. Seriously.

The difference is that I can hold my trade FOREVER as long as my original analysis remains valid because my stoploss remains wherever my trading plan dictates it should.

You have changed your trade parameters, and probably not in a systemic way. The market does not know or give two craps about your entry price, and unless you are the big dog moving the markets through your IGmarkets account, there is a very very very low probability that you picked the perfect entry. I mean, which part of your analysis dictates to you that the market is now beyond any chance of re-testing your entry price? Did it magically become a support zone or something because you went long there? You are willing to exit the market before your analysis has been proven incorrect on every single trade. If you don't believe your stoploss level reflects your trading parameters why did you put it there in the first place?

So please, for the fifth time today. If you have some systematic way of moving your stop to breakeven I would love to hear it. Otherwise, this is all just bla bla to me. All I wanted to discuss was the semantics of "free trade". So far none of the SL->BE proponents has convinced me of anything that I haven't heard before and disagreed with.


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## lukeaye (9 March 2010)

sinner said:


> I mean, which part of your analysis dictates to you that the market is now beyond any chance of re-testing your entry price? Did it magically become a support zone or something because you went long there? You are willing to exit the market before your analysis has been proven incorrect on every single trade. If you don't believe your stoploss level reflects your trading parameters why did you put it there in the first place?
> 
> So please, for the fifth time today. If you have some systematic way of moving your stop to breakeven I would love to hear it. Otherwise, this is all just bla bla to me. All I wanted to discuss was the semantics of "free trade". So far none of the SL->BE proponents has convinced me of anything that I haven't heard before and disagreed with.




Sinner, that is the point entirely. Why are any of those points significant? Thats just it, we can speculate that it is an important support zone, or it is a retracment level, but in the end these are just probability based price points, where behaviour has been previously noted to move in a probable way. The market doesnt give a toss about my entry or stop, and it doesnt give a toss about yours either!

But, what i can give a toss about, is the fact i have reduced my possible loss, and given myself the greatest profit potential. In every single case, you have halfed your profit potential. But i guess this comes down to your style of trading. As you have demonstrated, on your 4h chart on that particular currency, its worked so maybe your take half off the table approach is appropriate in that case. But in mine, time and time again, it demonstrates that all i am doing is halving my profit potential.


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## Synergy (9 March 2010)

Taking half of a postition off the table is something that confuses me. I don't understand why it's done.

Once you buy a position it will either move into profit or loss. It will move up or down. Your analysis or experience has shown that the position you've bought, on average, will be profitable, which is why you bought it.

At any time after you buy the position, it could move up, or down. You don't know either way for sure, but probability or experience says that you'll be in the position until it's not likely to move up. So, you've entered when you think it's going to go up, and sold when you think it's going to go down. All makes sense...

But, at some stage you thought you'd sell 50% of it. Where was the analysis at this point? What was the position likely to do at the point you did this? It's still likely to either move up or down from this point. It's still something you have the ability analyse. 

I can't see room for fence sitting when analysis and probabilities can give a definate answer (on average) as to whether you should be holding or selling.


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## Knoxy (9 March 2010)

Guys, depends on the strategy and what you're doing. Sinners leaving the stop loss where it started will work as the further the price action moves in the right direction the less relevant the 'disaster stop' becomes. When you test them most strategies will do better with no or very wide stops. Risky yes but giving more breathing room to the trade will usually improve returns. I guess Sinners point is the loss is controlled as it is no worse than when you entered the trade.

I trail my stop but only put it where the chart tells me to, BE is no magical point.

Like Sinner I exit the trade when the trade idea is invalid, rather than wait for it to hit the stop. Very rarely get stopped out, more common that I exit on a reverse signal or profit protection stop.

Trailing means you can ride trends and make the odd killing. However, in day trading in say, EURUSD, I use profit targets and take half off the table. Otherwise I'd spend all day watching price action bounce around without making a buck. I may get 5 signals in a day, make 20 points each through scaling out giving 100 pt profit. Doing things the other way may result in 0 pts. I make a steady income yet still have half there to catch the big ones. 

So I think you're being harsh luke, there are good reasons to take profits consistently than dream of the big one all the time.


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## lukeaye (9 March 2010)

Knoxy said:


> I trail my stop but only put it where the chart tells me to, BE is no magical point.




Knoxy, where is the magical point? BE is not a magical point, neither is my intial stop, neither is my intial entry. From a Risk v reward scenario, the break even is the most relevant point in terms of my main objective as a trader. That is, reducing losses, increases profits. The B/E stop is the most logical stop, as it helps me in an objective way, to best acheive my goal. Its is really my only 100% certainty in trading.

As motorway said, price points become significant/insignificant as price/time/trend change. So What you perceive as your "magical point" intially may change quickly. You Break even point doesnt change, it does not vary, it does not change between significant or insignficant, it always remains significant to your long term goal.

I think the real debate here, as im sure sinner will agree, is whether moving to breakeven given a set of systematic rules, will dramtically change your expectancy, so much so it does not reflect in your R:R. He seems to think that it does, where i seem to think that it doesnt.

My strategy is probably much different to his though, so based on my strategy maybe it is. Based on sinners strategy maybe his is better. I guess at the end of the day, you need to find what works best for your style of trading. Find what gives you the greatest equity cruve.


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## barney (9 March 2010)

lukeaye said:


> I think the real debate here, as im sure sinner will agree, is whether moving to breakeven given a set of systematic rules, will dramtically change your expectancy, so much so it does not reflect in your R:R. He seems to think that it does, where i seem to think that it doesnt.
> 
> I guess at the end of the day, you need to find *what works best for your style of trading*. Find what gives you the greatest equity cruve.





Hi Luke, (I think that (highlighted) is the bottom line)

For me, and my humble trading exploits, I don't doubt that all the extrapolated methods have merit from each users point of view .... 

Tech is more than happy with his method. You (Luke) are happy with yours ..

Sinner (for me) makes sense for a long term positive equity curve ( ie even a mediocre trade takes 50% off the table and gives potential for more if the trade runs)  .... 

Of course, this also requires a double "lot size" on entry ......... (but if you are trading currencies, that double lot size can also be "split up" into more suitable sizes to suit the traders "initial bank", due to the leverage available etc etc

Bottom line for me here is ...... The traders ability to read the market is paramount to his/her success ...... Personally, I am reading the market pretty well nowdays (FX), but I still stuff up on a lot of my entries due to impatience/lack of confidence/ etc etc etc    ..... 

I have a strategy in place to try and eliminate my biases, which is working ok atm, but that is up to the individual trader to work out their weaknesses. and formulate a trading strategy which still works because it minimises those weaknesses  ............ 

for me, that     *is*    the analysis I work on to improve my trading   .....

(apart from the weekly/daily/minute range of the Euro ... lol )

Cheers all.


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## sinner (9 March 2010)

lukeaye said:


> Rio tinto (by the way these are in my trade journal if you have doubts).




Yeah I just read your journal.

If I had known who I was arguing with wouldn't have wasted my time.

Please guys, somebody wake me up when the quantifying starts.



> neither is my intial stop, neither is my intial entry.




Absolute rubbish.

In a range there are clearly two magical points.

In a trend there are clearly three.

During a fakeout/breakout/retest there are four.

These are all unique price levels which the market cares about immensely and *always* reacts most strongly to. 

I completely and utterly disagree with the above quoted statement.


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## lukeaye (9 March 2010)

sinner said:


> Yeah I just read your journal.
> 
> If I had known who I was arguing with wouldn't have wasted my time.
> 
> Please guys, somebody wake me up when the quantifying starts.




When somebody runs out of intelligent things to say, they usually result to personal attacks.

I didnt say i was a perfect trader.

Your magical point is magical point until it isn't.

As your previous graph shows, what you "think" will be the magical points, quite often isn't.


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## $20shoes (9 March 2010)

psychology of the b/e trader - "I'm probably wrong...I'm probably wrong...gotta minimise the risk as soon as i can". 


psychology of the "set stop and forget" - "I'm probably right...I'm probably right...gotta minimise that risk as soon as i can".


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## tech/a (9 March 2010)

$20shoes said:


> psychology of the b/e trader - "I'm probably wrong...I'm probably wrong...gotta minimise the risk as soon as i can".




There seems to be a misconception about when a stop is raised to B/E bought about possibly by my mentioning that I look at this from 1R and on.
I agree there are times when my stop moves to B/E then higher and turns into a trailing stop.Shorter timeframes.
Longer timeframes the B/E stop can be set after a trade is well on its way witha wider stop initially in place.Eventually the protective stops are not required and managing the exit becomes more the issue.

So I cant agree with the above analogy. 




> psychology of the "set stop and forget" - "I'm probably right...I'm probably right...gotta minimise that risk as soon as i can".




Short term stops are *generally* closer than longterm.
Wider initial stops do tend to remain valid longer My stats showed (Ive tossed them out was many years ago) that the sweet spot was 8-12% of the initial price as a stop on the ASX 200/300
Below 8% tended to bring a high risk of being stopped.
Above 12% gave rise to finding yourself often in a trade which traded within the initial buy and the stop.So opportunirty cost became an issue.

So I cant agree with the second statement either.


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## tech/a (9 March 2010)

Sinner.
As for a free trade in stocks if I buy say 5000 BHP at $30 and they rise to $50 I sell 3000 and then let the rest run with or without a stop then I have a free trade---from the point of risking only my open profit.To lose it all it has to be de listed. I can go on and trade whatever else I like and do this infinitum.


Dont know how youd do it with futures.


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## $20shoes (9 March 2010)

Just being facetious tech. 

But there is a some method behind my misplaced humour. 

If you are moving your stops to breakeven, for whatever reason and in whatever timeframe, surely your thinking is that you cannot discount the market moving against you. You may have timed your entry nicely; it has some legs and now, if it shows signs of fading, the original assumptions you held upon your entry no longer hold creedence: the market has moved on since you made your original entry so why is your original stop still appropriate? It's just a mark on a chart. You hope your trade maintains legs for a good R win, but if it doesn't you're covered. You're maximising your R and your opportunities. Aren't we just talking about trailing the market anyway albeit in a more aggressive manner? You're trading like the market can't be trusted - which is good. 

If you set and forget aren't you saying you'll forgo some opportunity and instead will maximise your time in one trade in the hope of that you can ride some swings and eventually ride them out? That is, you believe in your original stop like it still has some relevance, 5 bars, 10 bars , 50 bars later. Whereas the breakeven trader feels that his stop holds no currency in the market, you respect your stop placement and hope the market does to. The market may have done all manner of things in the meantime - shot up 20%, ranged for a bit, collapsed to a few ticks of your stop; and who knows what it will do next and do you really care anyway?


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## $20shoes (17 March 2010)

Interesting results in this paper. I personally couldn't handle the equity swings which would surely ensue  - even if I implicitly trust in my overall system's positive expectancy. 

*Abstract*

 A great many traders use stop-loss rules in their everyday trading. In  addition, during periods of high volatility, many traders attempt to  protect their downside by moving their stops closer to the price action.  However, there appears to be little real justification for doing this.  There is a shortage of evidence that demonstrates that stops are  actually providing the benefits that traders believe they are. This  paper is an empirical study of the use of stops within a defined trading  strategy. The methodology used within this paper can easily be ported  to any individual traders’ strategy. In the specific case studied in  this paper, the results suggest that initial stops degrade long-term  portfolio performance.             *Suggested Citation*

                 Bruce Vanstone. "Do initial stop-losses stop losses?" _Information  Technology papers_ (2008).
                                       Available at: http://works.bepress.com/bruce_vanstone/15


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## tech/a (17 March 2010)

$20shoes said:


> Interesting results in this paper. I personally couldn't handle the equity swings which would surely ensue  - even if I implicitly trust in my overall system's positive expectancy.
> 
> *Abstract*
> 
> ...




Would help if he ran a test on a system which was profitable in the first place.


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## brty (18 March 2010)

$20shoes,

Ahh, thanks for bringing stops back into the limelight. In an earlier discussion in this thread I was heading in this direction when we got sidelined with randomness, or was that random??

I trade without an initial stoploss, or should I say anything that is within cooee of the action. If something goes drastically against me with an initial move, I will plan my exit based on what the market will give.

For example a recent trade that went wrong was a long on AJL at $3.20. This had been in uptrend and then suffered a sideways pattern, then pullback of something like 14 days in a row, meandering back to support, on high volume, on the day I bought. As soon as my trade was executed, the stock went into a trading halt, a couple of days later they announced a suspension of dividend, and the stock opened something like 30 cents lower, then ran another 20 cents on thin volume. 
Having a stop in place, would have triggered an immediate large loss of over 10%, (which is why those who think their 2.5 cent stoploss is going to save them, really don't understand how markets work). 
My game plan was to purchase more stock into the panic, however as I was not on the computer at the time, this did not occur. After the panic had subsided the stock retraced its ground and a couple of days later I exited at $3.18. The price went higher than $3.20 a few times but there was no liquidity there. I lost only .6% plus brokerage rather than 10-15%.

My thoughts about initial stoplosses are that they are not that important provided you have a plan, which includes what you will do in a variety of market actions. However this probably depends on how you are trading, ie bottom picking, breakouts or range-trading and the probability of winning or sideways action after you have entered. 

Make no mistake about what I am saying about getting out of a trade when wrong, just differences on how to do it. I also would normally,( I can't never), have more than about 10% in any one stock, so that the ultimate disaster never costs too much.

brty


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## Wysiwyg (18 March 2010)

> Bruce Vanstone. "Do initial stop-losses stop losses?" _Information  Technology papers_ (2008).




A large proportion of stop outs with this strategy ....



> The following results form the benchmark for comparison. They are created by the following rules:
> a) buy when price closes above a 50 day EMA and stock was a constituent of the ASX200
> b) sell when price closes below a 50 day EMA




is because price frequently pops above the EMA 50  for a few bars and then drops below again. I would say even more so on a sideways and down trend. *Hence 15000 + trades over the time tested. 

1) Exit strategy fatally flawed
2) Trend selection non-existent (the killer)


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## Synergy (18 March 2010)

I think it depends on what you're trading and the volatility involved. I trade volatile stocks where there is a lot of intra day price movement. Because of this I don't trade with on market stops. If my initial stop is broken intra day, I'll then sell on open the next day. I've found this works best for what i'm doing.


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