What analysis do you use for trading?

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.

These events are often physical and observable and they tend to cluster around the middle.

Most people are near the average height and no adult is more than nine feet tall.

But in Extremistan, the right-hand tail of events is thick and long and the outlier, the seemingly wildly unlikely event is more common than our experience with Mediocristan would indicate.

Bill Gates is more than a little wealthier than the average. The civil war in Lebabon or the events of 9/11 were more worse than just a typical bad day in the Beirut or New York City. Taleb's contention is that we often bring our intuition from Mediocristan for the events of Extremistan, leading us to error. The result is a tendency to be blind-sided by the unexpected.

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.
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

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.

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

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.

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.

brty

Taleb did not write about "random", but rather about "randomness". 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.

What analysis do you use for trading?

pixel

DIY Trader

Synergy

nunthewiser

motorway

lukeaye

Mr J

lukeaye

Mr J

brty

lukeaye

wayneL

VIVA LA LIBERTAD, CARAJO!

mazzatelli

lukeaye

Mr J

motorway

barney

motorway

brty

So_Cynical

The Contrarian Averager

wayneL

VIVA LA LIBERTAD, CARAJO!

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