Help needed for beginner

[bullmarket]

Re: Beginner here...

Below is a monthly XAO chart back to 1982.

From it you can see graphically that there have obviously been more up days than down days historically which is consistant with ducati's numbers although I'm not sure what index or criteria his numbers represent or what his source of data is.

Eye-balling values of 1200 and 4700 for XAO in 1991 and 2005, XAO has grown 9.5%pa (compound) for the 15 years between 1991-2005 inclusive.

I suppose a really skillful technical analyst who traded most of the market rallies and either shorted the dips or stayed out alltogether could reasonably have expected to average a win/loss trading ratio of 2 wins out of 3 or even higher in the long term over that period.

But please don't anyone, especially newbies, think that being a successful trader is as easy as the XAO chart suggests it might be. Remember that less that 10% of traders are successful in the long run and the few traders that I have met who have achieved long term win/loss ratios of around 66% have put a lot of time and effort into what they do, certainly a lot more time than I would have available or would even want to spend trading. But the chart shows that the widely suggested aim of 2 winning trades out of 3 is achievable if one puts in the time and effort.

Also, maybe look at it another way. If being successful at trading was easy then everybody would be doing it.

Food for thought

bullmarket

 

[tech/a]

Re: Beginner here...

"But the chart shows that the widely suggested aim of 2 winning trades out of 3 is achievable if one puts in the time and effort."


Suggested aim-----by whom?

If I only achieve 30% winners and 70% losers are you saying I cant be profitable?

Back later to answer Duc's posts and other comments.

By the way it is as easy as the chart suggests in my veiw its only traders that make trading more complicated than it need be.

 

[bullmarket]

Re: Beginner here...

Hi tech/a

The authors I have read are Thornton, McPhee, Guppy, Obrien, Compton and Kendall, so it was in at least one of those. I'm not going to flick through all the pages to find out exactly where for you, so feel free to believe or not believe me - it's of no consequence to me either way

re your question "If I only achieve 30% winners and 70% losers are you saying I cant be profitable?" - if you can't work out the answer to that one for yourself after all you have posted about stop losses, exit strategies etc etc then maybe go back and reread your posts and you'll find the answer

cheers

bullmarket

 

[It's Snake Pliskin]

Re: Beginner here...

Hi tech/a

The authors I have read are Thornton, McPhee, Guppy, Obrien, Compton and Kendall, so it was in at least one of those. I'm not going to flick through all the pages to find out exactly where for you, so feel free to believe or not believe me - it's of no consequence to me either way

re your question "If I only achieve 30% winners and 70% losers are you saying I cant be profitable?" - if you can't work out the answer to that one for yourself after all you have posted about stop losses, exit strategies etc etc then maybe go back and reread your posts and you'll find the answer

cheers

bullmarket

Wow!

I`ve read an investment text by Gitman and Joehnk, and trading/investing books by Guppy, Gilham, Thomsett, O`neil, Cunningham, Bedford, Huntley, Lally, Tharp, McCafferty, Link, Darvas, Alexander, Weinstein, Radge, Damodaran, Beelaerts and Forde, Dolan, Bennetts, Elder on CD, Davey. Oh yes I can`t forget this one: Sammon Not to mention the many printed and filed articles off the internet, including this forum.

Basically looking at a win/loss ratio is not the answer. Looking at what that win loss ratio does to your account is important.

A great trader may have 90 winners to 10 losers. Those 10 may destroy the account! It really is that simple.

A trader may have 20 winners and 80 losers. As a result he/she may be profitable though.

So yes traders can, but a small percent don`t, really destroy themselves in a simple bull market. Just like investers detroy themselves in times of the bear.

 

[Wriggles]

Re: Another damn beginner

Not much selection criteria going on here...
Wbc: just thought it was a reasonable bank and would maybe grow to nab level....thought it was a good buy at around $20

Tts: again....every1 gets tatts etc...thought it could poss take ova unitab..and when it dropped to 2.80 or whateva i thought i would jump on...spose it depends on the liscence etc to whether it will do well...guess we'll c.

Flt....think its still a good company...with the original guy back in charge...again thought it was cheap at under 10$...thought that although a lot of internet bookings r going on...ppl r still out there that want that 1 on 1 service?

Tox......was actually a word of mouth thing from a friend. So we'll c what happens.

Bxp: just thought it has potential....some competition there such as aus post and bpay....but still i think has good ground.

Bil...just think its another good company.

Lol...so as u can c.......just all hunches accept 1. The only one imo which i think will be good for the future is wbc.

And snake....lol....guess i will be taking her to the wiggles....shes 6mths old...so ive still got a bit of time up my sleeve. I wont b jumping in to one of those suits in a hurry though.

Thanks.

 

[bullmarket]

Re: Beginner here...

Hi snake

Yes you are right and I agree with what you say.

But let me refer you back to an extract from an earlier post of mine in this thread to put in context where this 2 out of 3 winning trades I have been mentioning comes from and the logic behind it.

Some reputable trading authors have suggested that one should aim for a long term average of 2 winning trades out of 3....ie.....most likely overall, successful traders will experience many small winning trades cancelling out many small losing trades (assuming one is using efficient stop losses to preserve capital) with the occasional 3rd trade out of the 3 going for a reasonable run. The tricky bit is finding this 3rd trade opportunity. But all of this of course also depends on position sizing and other risk management strategies. Some traders will be better at it than others and hence more successful.

Bottom Line: I've met traders/chartists who have averaged 2 out of 3 winning trades over the long term, but they are few. Anecdotal evidence says that less than 10% of traders will be profitable (at least to any significant extent) in the long run, so imo using stop losses and other risk management strategies to preserve capital in losing trades is critical, especially for short term traders.

So yes I agree that obviously even a 10% winning ratio can theoretically be profitable in the long run (but less likely obviously) just as a 90% winning ratio can produce a loss overall if stop losses aren't used on the 10% losing trades.

That 2 out of 3 winning trades target, as I said in a subsequent post to the above extract, is by no means a hard and fast rule but it and even higher win/loss ratios are achievable and 2 out of 3 is just one of an infinite number of targets one can choose to aim for.

In addition to your post, a professional trader will also look at things like profit ratio....ie....how many $ profit he/she makes per winning trade divided by how many $ loss he/she makes per losing trade. This and all sorts of other measurements to measure trading performance/profitability are discussed in many trading books.

cheers

bullmarket

 

[tech/a]

Re: Beginner here...

tech/a does not subscribe, or lend much weight to "entries" as a general trading parametre. I assign a weight of 50/50 to a chart based entry.
However I weight a fundamentally based entry much higher....circa 80%+

Here in lies a basic difference.I can say with good certainty as I have tested extensively for over 8 yrs various technical entry methods,where as i believe duc has not tested as thouroughly fundamental entry analysis.While I'm sure he is very sure that in the longterm---and in some universes of stock he could be right----fundamentally he will get an 80% win rate.
But as has been noted even an 80% win rate wont guarentee success.

tech.........baby

I'll play.

Technical trading, is really trading sentiment, psychology, momentum, call it what you wish. The results are thus generated not by the methodology of technical analysis, but from the methodology of capitalizing on momentum, or money management by any other name

So how then does a trade entered fundamentally make profit if not be exactly the same forces?

At the exit when an actualised return has been banked.

Have covered this one. As I can liquidate in seconds (better than holding a house with equity) I believe a measure of entry success is when a trade is in profit to the amount of risk on that trade.To a point where a stop can be raised to break even plus brokerage.
Further it could be argued that 2x risk + brokerage is more appropriate.

When you exit with an actualized loss. The timeframe is, or should be predetermined.

Two parts to this. I have seen many arguements to this.Maybe suprisingly I dont necessarily agree with some technical opinion.Some will argue at the time of a technical point where clearly the analysis has failed---eg price breaking support which was used as an entry,or any of 1000s of entries--good arguement.So why then do we set a stop point below the entry point which most agree is proven wrong if it fails???? (Note at this point logic says that the technical reason for entry is found to be incorrect at some future time so its no longer valid).

My veiw is that technical analysis alerts us to setups which have a better chance of finding a stock which out performas than simple random selection,Particularly when stocks that are not displaying a bullish tendancy are removed,an INITIAL entry signal may not be the FINAL entry signal that sees the stock pull away from the purchase price.

Fundamental analysis alerts a trader to a value based stock which at sometime would be expected to return to a higher value.At the time of Fundamental entry my observations are that those Fundamentalists I know and have worked with have no idea "When " the stock will return the the value estimated by them or their advisors.Nor do they know if the market agrees with them on value as of now---as stocks still decrease in value despite opinion that it is undervalued.

The technical analyst for most part derives at value from price action,and sets parameters in their trading that "For them" demonstrates value (entry) or over value (exit).

Bringing us to Predetermined value,Fundamentalists attempt to determine it and tech analysts let price do that.Both get it right and wrong.
To me the worst "wrong" is an early exit as we have not let a stock run enough. To do that you cannot have tight exits,you have to understand to gain a 100% + move you may need to give back 25% to the market.

Assuming you exit and realize the loss, yes, the entry is a failure.
If you remain in the trade, and it returns to a 50% profit, and you realize the profit, it becomes a successful entry.

I personally believe all entry signals both technically and fundamentally have an expiry.Technically I feel that as soon as an entry fails to stay above its initial starting point AND a singular even of bearish price action CONFIRMS that the entry is wrong its done.The process then starts again.Minimise the loss and look for another opportunity.Lets take a fundamental buy--say an announcement where price sky rockets 20%---a price spike technically.
When is that entry deemed WRONG from a Fundamental view.

My response would be when price fails to to advance past or returns to below the price at the highest point of the spike.(you dont need to be technical to determine that) at which point it is obvious that new buyers are not as impressed with the news as expected.But like technical entry it maybe that this is a pre curser to bigger things.Unlike the fundamentalist I would have a point of "Im no longer waitin" and that should be at a point well before----bugger I cant afford to lose x$ so I'll have to hang in there!!

No. Technicals are a complete nonsense.

I wish I could find more ways of cranking a buck with pure nonsense.Its the incorrect use and more so the incorrect EXPECTATION of technical analysis which has many like Duc looking at it as if it is VOODOO.

Nick Radge in his book Adaptive Analysis put it the best way I have seen.
Analysis simply Proves--then dis proves---so it either proves a setup or point of analysis or disproves it now or a point in the future.

Now HERE is where I feel the strenght of this "Prove--disprove" comes into play for the techanalysts and not available to the Fundamentalist.

Youve all heard take small losses and let profits run.
Technically we look for setups that will get up and go---NOW.If we are wrong we train ourselves to admit this as early as we can--we have no attachment to that which we are trading--at a point we will gladly close a losing position and take another in a setup for a possible winning position.
Those like me who trade longerterm will happily take 5 or more 1% loses in a row to find ourselves eventually on a stock that keeps positive.

Exactly what happened with T/T what Duc failed to mention is that for many many months we held 10 stocks ALL very positive.THATS THE AIM---thats the reason for tight stops and taking them.
Thats alos the reason to exit stocks that are not performing (Ranging) either in profit or most definately between entry and stop!!


Fundamentals can be desighned to tell whatever story you want.Accountants are good some exceptional.


See all of the above, same as same as.


I often ask questions to gain answers from others to see at what level of understanding they are at.Helps me when offering up opinions.
Thanks for your reply Bulldust---investment is a wise move for you I agree.
But another question for you and those like you.
If your capital appreciation is non existant or at worse eroded by a fall in the
instrument your holding how then can you justify no interest in capital gain?
Ive also noticed that you advocate a trading plan often.
A trading plan by itself is of little benifit as you have no idea generally until you implement it wether your plan has a positive expectation.Often it will be months or years before you'll be proven or disproven to have designed a profitable plan. To be as certain as possible you'll need a "blueprint" of a trading methodology that you KNOW has a positive expectation.

Snake.
Spot on.

 

[bullmarket]

Re: Beginner here...

Hi tech/a

If you look back through my posts in various threads you will see that I often suggest paper trading a trading plan and fine tuning it until it consistantly returns a profit you are happy with.

Whether that paper trading takes 1 week, 1 month or 1 year or even longer is solely at the discretion of the trader until he/she is happy with the plan.

You will see that I also suggest reviewing the plan periodically to fine tune it, especially if expected returns are not being generated.

Now I see CSI has started so I must go.

See you all in the soup during the week.

take care

bullmarket

 

[Knobby22]

Re: Another damn beginner

Flt - I can't see a good growth story for this company. I would look elsewhere.

 

[Bobby]

Re: Beginner here...

Hi tech/a

If you look back through my posts in various threads you will see that I often suggest paper trading a trading plan and fine tuning it until it consistantly returns a profit you are happy with.

Whether that paper trading takes 1 week, 1 month or 1 year or even longer is solely at the discretion of the trader until he/she is happy with the plan.

You will see that I also suggest reviewing the plan periodically to fine tune it, especially if expected returns are not being generated.

Now I see CSI has started so I must go.

See you all in the soup during the week.






take care

bullmarket

Sheeze Bullm - Did you miss the point or What in Techs last post? You're out of your depth mate!
Keep your comments in track.

Bob.

 

[It's Snake Pliskin]

Re: Another damn beginner

Bxp: just thought it has potential....some competition there such as aus post and bpay....but still i think has good ground.

And snake....lol....guess i will be taking her to the wiggles....shes 6mths old...so ive still got a bit of time up my sleeve. I wont b jumping in to one of those suits in a hurry though.

Thanks.

No worries Wriggles. I don`t like the management structure of BXP and I felt the effects of it in November.

Cheers
Snake

 

[ducati916]

Re: Beginner here...

tech/a

Here in lies a basic difference.I can say with good certainty as I have tested extensively for over 8 yrs various technical entry methods,where as i believe duc has not tested as thouroughly fundamental entry analysis.While I'm sure he is very sure that in the longterm---and in some universes of stock he could be right----fundamentally he will get an 80% win rate.
But as has been noted even an 80% win rate wont guarentee success.

Interesting point, and blurring somewhat the important point.
Is extensive testing over 8 years a technical methodology any more or less relevant to the testing of long periods of market history?

While I have been involved in the markets just approaching five years now, I have "tested" or researched the markets (US markets only) back into the 1870's and into the present day.

Now you will not get data sets for your charting programs much before the mid 1980's, therefore, in reality, my research far exceeds anything that is technically based.

As for an 80% win rate not being a guarantee of success, no agreed it won't be a guarantee of success, however it will certainly skew the probability positively in your favour.

So how then does a trade entered fundamentally make profit if not be exactly the same forces?

And herein lies the fundamental difference when technicians debate fundamentalists, the former really do not understand the underlying difference in how risk is assessed and assumed.

The short answer is that the technician is quantifying and assuming market risk as the sole criteria, therefore they must within their risk management follow the market............or by another name, Efficient Market Theory.

Fundamentalists by way of contrast do not quantify market risk.
We quantify Business risk, and utilize the volatility of the market (as does the technician) for one aspect of return, viz. capital growth.
We do not subscribe to EMT, but rather Inefficent Market Theory.

Have covered this one. As I can liquidate in seconds (better than holding a house with equity) I believe a measure of entry success is when a trade is in profit to the amount of risk on that trade.To a point where a stop can be raised to break even plus brokerage.
Further it could be argued that 2x risk + brokerage is more appropriate.

Disagree.
You do not daytrade, and your exits are mandated on EOD.
In theory (and theory is what we are discussing) your position could gap against you, and incur a loss. In the US this is a more common occurance, as the volatility is far greater. However there have been some examples in Australia just recently, HSP was I believe an example.

http://lightning.he.net/cgi-bin/suid/~reefcap/ultimatebb.cgi?ubb=get_topic;f=8;t=000410;p=3

My veiw is that technical analysis alerts us to setups which have a better chance of finding a stock which out performas than simple random selection,Particularly when stocks that are not displaying a bullish tendancy are removed,an INITIAL entry signal may not be the FINAL entry signal that sees the stock pull away from the purchase price.

Which is the entire philosophical base on which technical analysis is built.
Unfortunately the foundations are sand, the entire edifice doomed to sink back into the mire, as 50/50 is the prevailing statistic with technical analysis as practice.

Fundamental analysis alerts a trader to a value based stock which at sometime would be expected to return to a higher value.At the time of Fundamental entry my observations are that those Fundamentalists I know and have worked with have no idea "When " the stock will return the the value estimated by them or their advisors.Nor do they know if the market agrees with them on value as of now---as stocks still decrease in value despite opinion that it is undervalued.

As previously detailed, market risk is an irrelevancy to fundamental analysis.
As too "When" correct, it is no more possible to predict the "When" as to predicting any other future event.

Bringing us to Predetermined value,Fundamentalists attempt to determine it and tech analysts let price do that.Both get it right and wrong.
To me the worst "wrong" is an early exit as we have not let a stock run enough. To do that you cannot have tight exits,you have to understand to gain a 100% + move you may need to give back 25% to the market.

Timing the market = Technical Analysis
Pricing the market = Fundamental Analysis

"Tightness" is a major problem that needs to be overcome.
Tight stops, will increase your losses, tight exits will decrease your %return

I personally believe all entry signals both technically and fundamentally have an expiry.Technically I feel that as soon as an entry fails to stay above its initial starting point AND a singular even of bearish price action CONFIRMS that the entry is wrong its done.The process then starts again.Minimise the loss and look for another opportunity.Lets take a fundamental buy--say an announcement where price sky rockets 20%---a price spike technically.
When is that entry deemed WRONG from a Fundamental view.

An expiry date.
Yes, fundamentally speaking, if the business, as reflected within the financial reports indicate a deterioration of a material nature within the operating results, and serious enough to effect damage to the balance sheet, a revision and exit may very well be on the cards.

Unlike the fundamentalist I would have a point of "Im no longer waitin" and that should be at a point well before----bugger I cant afford to lose x$ so I'll have to hang in there!!

Surprising opinion, especially after much of the criticism that was directed towards TT was in essence of this nature, viz. its just to slow.
Patience is one of the great attributes within the markets, and why character will win out over algorithms.

I wish I could find more ways of cranking a buck with pure nonsense.Its the incorrect use and more so the incorrect EXPECTATION of technical analysis which has many like Duc looking at it as if it is VOODOO.

That's because it is predicated on exactly the same basis as voodoo.
That is faith, belief & hope. What is required is "Canon Law" for technicians, which is precisely what TT delivers to the lost souls who cannot exercise discipline in the face of temptation from Satan, Lord of the Market.

Youve all heard take small losses and let profits run.
Technically we look for setups that will get up and go---NOW.If we are wrong we train ourselves to admit this as early as we can--we have no attachment to that which we are trading--at a point we will gladly close a losing position and take another in a setup for a possible winning position.
Those like me who trade longerterm will happily take 5 or more 1% loses in a row to find ourselves eventually on a stock that keeps positive.

And I would rather have 8/10 winning, with 2/10 losing.

Exactly what happened with T/T what Duc failed to mention is that for many many months we held 10 stocks ALL very positive.THATS THE AIM---thats the reason for tight stops and taking them.
Thats alos the reason to exit stocks that are not performing (Ranging) either in profit or most definately between entry and stop!!

Not really.
What I said was that closed trades show a 50/50 result.
If your % in closed trades rises, I shall take note of that result also.

Fundamentals can be desighned to tell whatever story you want.Accountants are good some exceptional.

No, the fundamentals are the fundamentals.
Accountants can manipulate the reported results, and attempt to mis-represent, obfuscate, or present outright fraudulent results.
It is the job of the analyst to display to the light of day the "fundamentals".

If your capital appreciation is non existant or at worse eroded by a fall in the
instrument your holding how then can you justify no interest in capital gain?

If investing for "Income" capital appreciation while always welcome, is not the primary motivation. Credit risk is.
If credit risk poses no threat, then price volatility is irrelevant.
If bought at a high yield, or good value, almost certainly at various points, capital appreciation will be available in addition.

A trading plan by itself is of little benifit as you have no idea generally until you implement it wether your plan has a positive expectation.Often it will be months or years before you'll be proven or disproven to have designed a profitable plan. To be as certain as possible you'll need a "blueprint" of a trading methodology that you KNOW has a positive expectation.

Another can of worms has just been opened.
Could you not argue that your "blueprint" should be a stipulation within the trading plan? A trading plan is more of a philosophical approach to the market.

jog on
d998

 

[bullmarket]

Re: Beginner here...

Hi Bobby

I have posted on numerous occasions here and elsewhere that a robust and extensive trading plan will include a 'methodology', or whatever you would like to call it, which states how you will determine entry/exit points (technically and/or fundamentally or whatever else suits the trader).

I, like many others, have also suggested to consider paper trading the plan for however long it takes and fine tuning it until you are happy with the returns before committing real funds.

And even after real funds are being committed it's probably a wise move to periodically review the trading plan and fine tune it again if necessary, especially if the expected returns are not being generated.

In my case, my plan is more of an investment plan rather than a trading plan but imo the concepts behind a plan are similar for both traders and investors.

I hope this clears up what I meant earlier

cheers

bullmarket

 

[wayneL]

Re: Beginner here...

Duc

I cannot believe you have revisited this whole fa vs ta argument once again. Have all our discussions come to nought?

You obviously view this as some sort of sport....but just to revist a selection of points:

As for an 80% win rate not being a guarantee of success, no agreed it won't be a guarantee of success, however it will certainly skew the probability positively in your favour.

Disagree, not in and of itself it doesn't. The probability skew has no relevance unless risk verses reward is included in the calculation.

The short answer is that the technician is quantifying and assuming market risk as the sole criteria, therefore they must within their risk management follow the market............or by another name, Efficient Market Theory.

Lets have a look at a definition of EMT

Efficient Market Theory
Definition

The (now largely discredited) theory that all market participants receive and act on all of the relevant information as soon as it becomes available. If this were strictly true, no investment strategy would be better than a coin toss. Proponents of the efficient market theory believe that there is perfect information in the stock market. This means that whatever information is available about a stock to one investor is available to all investors (except, of course, insider information, but insider trading is illegal). Since everyone has the same information about a stock, the price of a stock should reflect the knowledge and expectations of all investors. The bottom line is that an investor should not be able to beat the market since there is no way for him/her to know something about a stock that isn’t already reflected in the stock's price. Proponents of this theory do not try to pick stocks that are going to be winners; instead, they simply try to match the market's performance. However, there is ample evidence to dispute the basic claims of this theory, and most investors don't believe it.

As I look at the above definition, it strikes me as an anathema to what the technician is trying to achieve. The journeyman technician does try to pick winners, and he certainly believes he can beat the market...and does LOL.

This seems to be a direct contradiction of EMT, according to the above...and I have consistly maintained in our discussions on RC that this is indeed so.

Which is the entire philosophical base on which technical analysis is built.
Unfortunately the foundations are sand, the entire edifice doomed to sink back into the mire, as 50/50 is the prevailing statistic with technical analysis as practice.

Incorrect...50/50 (win/loss ratio) is not the prevailing statistic in TA, it is only half of the picture. The profitability od any TA method is certainly not predicated on the win loss ratio alone...never! One must include the risk/reward ratio also. This will give us a resultant mathematical expectancy equation expressed as thus:

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

As you can see, win/loss ratio, by itself is not relevant. However, I like to add in a further factor into this equation, which is simple to multiply the result by the opportunity, or frequency of trades. This gives a more accurate picture of ultimate profitabilty. I like to call this equation "Ultimate Expextancy"

This would be evident in arbitrage plays (to use an example that would relate to you). If opportunities to arbitrage arised once every 12 months, the ultimate expectancy (presuming all other things equal) would be a hell of a lot less than if opportunities arised once per week.

Suddenly probability skew and statistics aquire additional imperitives...suddenly TA aquires a foundation underneath a thin layer of sand...suddenly, the illusion that TA detractors have laboured under, evaporates. Ultimately the charge that TA is only a 50/50 proposition loses relevance, because it's not....relevant.

"Tightness" is a major problem that needs to be overcome.
Tight stops, will increase your losses, tight exits will decrease your %return

Once again, the lack of all applicable vectors make this assertion pure bilge.

Tightness of stops must have context within a technical system. Tight stops will not decrease returns in the right context. The journeyman technician knows this, even if novices have not yet realised it.

A tight stop with a breakout entry will chop you out of trades all the time, however in a pullback/support entry, a tight stop will be the only logical technical stop, decreasing the trade risk and allowing a larger position size, increasing profits.

That's just a couple of points I noticed and should do to start with...although it is old territory

Cheers

 

[ducati916]

Re: Beginner here...

WayneL

I cannot believe you have revisited this whole fa vs ta argument once again. Have all our discussions come to nought?

I know, just can't seem to help myself, the contempt that I hold technical analysis in, just seems to have no boundaries.

Disagree, not in and of itself it doesn't. The probability skew has no relevance unless risk verses reward is included in the calculation.

And I would be forced to disagree right back at you.
Lets examine the proposition from the two extreme examples to really find the logical perspective.

If the trade success = 100% I think we could agree that this would skew the likelihood of success our way.

If trade failure = 100%, we could also agree that the skew would favour loss.

In both examples reward/risk has no application, as there exists no risk, and no reward.

Therefore, logically, the % of winning trades is independant of the reward/risk calculation. If it is independant, then an 80% skew in % winning trades, will provide a skew within the results once you start adding further components, in this case risk/reward calculations.

This leads to an interesting question;
Can adverse risk/reward reverse, or destroy a positive skew in the %winning trades........yes.
The same way that a positive risk/reward skew can improve a poor %winning trade skew.

That the software developers seem to have brainwashed the users of backtesting, monte carlo, yada, yada, does not alter the fact that two sets of calculations exist, and seeking maximum results from both is the way forward, blending them into one single outcome measurement can be hazardous to your wealth.

As I look at the above definition, it strikes me as an anathema to what the technician is trying to achieve. The journeyman technician does try to pick winners, and he certainly believes he can beat the market...and does LOL.

This seems to be a direct contradiction of EMT, according to the above...and I have consistly maintained in our discussions on RC that this is indeed so.

Incorrect.
Simply illustrated with a short example.

Technical entry based on chart support.
Stoploss placed 5% below support (the value of the stop can be whatever)
Price trades down through the stoploss.
Trader dutifully exits position, incurring 5% loss + brokerage.

Price then rises, unmitigated for 6years.

Since everyone has the same information about a stock, the price of a stock should reflect the knowledge and expectations of all investors. The bottom line is that an investor should not be able to beat the market since there is no way for him/her to know something about a stock that isn’t already reflected in the stock's price.

This example = Efficient Market Theory
Price = Efficiency
Price = the reflection of the knowledge and expectations of all investors
Price = all there is to know about a stock

That summarizes Technical analysis, and the complete nonsense that it represents........also commonly described as "Price Action" & commonly combined with that insanity of analysis...Volume.

Fundamental Analysis = Inefficient Market Theory

Fundamental entry based on valuation
No stoploss utilized
Price trades below entry price
No action taken
Price trades to fair value 8 months later, stock is sold and profit banked.

Incorrect...50/50 (win/loss ratio) is not the prevailing statistic in TA, it is only half of the picture. The profitability od any TA method is certainly not predicated on the win loss ratio alone...never! One must include the risk/reward ratio also. This will give us a resultant mathematical expectancy equation expressed as thus:

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

Already covered this above.

As you can see, win/loss ratio, by itself is not relevant. However, I like to add in a further factor into this equation, which is simple to multiply the result by the opportunity, or frequency of trades. This gives a more accurate picture of ultimate profitabilty. I like to call this equation "Ultimate Expextancy"

This would be evident in arbitrage plays (to use an example that would relate to you). If opportunities to arbitrage arised once every 12 months, the ultimate expectancy (presuming all other things equal) would be a hell of a lot less than if opportunities arised once per week

Yes, here I agree.
And this is in point of fact what I have found.
I am able to execute an arbitrage on average once per month, on a spread of between 1%-2%. This can be leveraged to 800% of your account, as it is a risk free trade, thus you will realize an 8%-16% return in 1 day (duration of trade) annualized it looks impressive at 1760%-3520%, but in reality is still a staggeringly successful 48%-192% compounded.

This simply buries other leveraged methodologies returns, and is a direct consequence of the positive skew of the winning % trades, which lies at the heart of the entire discussion.

Suddenly probability skew and statistics aquire additional imperitives...suddenly TA aquires a foundation underneath a thin layer of sand...suddenly, the illusion that TA detractors have laboured under, evaporates. Ultimately the charge that TA is only a 50/50 proposition loses relevance, because it's not....relevant.

Unfortunately, only in a scenario where there is only one trade available per year. So TA remains largely a losers game. Yes there are exceptions, always will be. However the "edge" does not reside in mastery of technical analysis, but in mastery of oneself.

A tight stop with a breakout entry will chop you out of trades all the time, however in a pullback/support entry, a tight stop will be the only logical technical stop, decreasing the trade risk and allowing a larger position size, increasing profits.

So in one example, you accept that a tight stop will stop you out of a potentially winning trade, so immediately I am 50% right.
See how often 50/50 crops up in technicals........uncanny

Now, tight stops in relation to a pullback entry.
My favourite daytrading technique, when I was a misguided daytrader.
I can categorically state, and I have the statistics from my trading records, tight stops will increase your number of stopped out positions.

The reason for maintaining a tight stop, is, that you never know which one will pullback and resume an upward trajectory, and those that will not, and continue further south.

As a daytrader, this is a way to a quick and certain financial death.
The lesser of two evils, is, to run tight stops, even though they increase your losses, they are not IMMEDIATELY FATAL. This is true, for many will be trading leveraged instruments, that are marked to market at close.

jog on
d998

 

[Knobby22]

Re: Beginner here...

Duc

I mainly use fundamental analysis however that does not mean I do not respect or even ignore technical analysis.

Technical analysis in my view works due to the fact that the markets
(a) are not efficient and
(b) humans are not "Vulcans".

Technical analysts see a trend, be it from insider trading, behaviour of crowds or fundamental investor behaviour and act on it. This gives an advantage of being able to trade more often with less knowledge of the stock. What's more it works! I don't personally like trading this way as I prefer more long term gains where I beleve I fully understand the company but in this world of leaks and big institutional buying there is definitely a place for people to make a profit from stock price behaviour.

 

[Prospector]

Re: Beginner here...

Technical analysts see a trend, be it from insider trading, behaviour of crowds or fundamental investor behaviour and act on it. This gives an advantage of being able to trade more often with less knowledge of the stock. What's more it works! I don't personally like trading this way as I prefer more long term gains where I beleve I fully understand the company but in this world of leaks and big institutional buying there is definitely a place for people to make a profit from stock price behaviour.

Yes, have to agree with that because that it what I do and it does work!

 

[happytrader]

Re: Beginner here...

Hi Ducati

We are all suitably impressed here by your riskfree trade. No one actually minds in the least what method you use. We are however, interested in results. I've never asked our very own Son of Baglimmit what his methods are because with results like his its irrelevant. Why not share your riskfree trade with us in our monthly stock tipping comp?

Thanks in advance

Cheers
Happytrader

 

[wayneL]

Re: Beginner here...

Tsk tsk at myself....

You have introduced some rather tenuous argument which will require considerable effort to de-construct.

I just shouldn't have bothered...ne'er the 'twain shall meet.

There is one notable theme here which I will make note of:

Technicians really don't have a problem with fundies doing their thing.

Some fundies have considerable problem with techies doing their thing. Why is that? TA is mathematically undeniable.

Both camps will have considerable satisfaction in the perusal of their respective p/l statements at the end of each year.

Why must fundies attack techies, manufacturing faulty logic to support their contentions? Self justification perhaps...something only beginning techies ever indulge in LOL

Cheers

 

[ducati916]

Re: Beginner here...

Knobby22

I mainly use fundamental analysis however that does not mean I do not respect or even ignore technical analysis

Oh dear, a hybrid.
Actually I'm kidding, sort of.
I firmly believe that you should pick one or the other.

Technical analysis in my view works due to the fact that the markets
(a) are not efficient and
(b) humans are not "Vulcans".

Markets fluctuate between inefficiency and efficiency.
The key is to have the analytical ability to differentiate between the two states.

The profitable ones are however Vulcans.

Technical analysts see a trend, be it from insider trading, behaviour of crowds or fundamental investor behaviour and act on it. This gives an advantage of being able to trade more often with less knowledge of the stock.

An interesting point and one close to my heart.
Focus on the words that you have written.

"trade more often with less knowledge"

By increasing your exposure to RISK....(more trades)....
with less knowledge,

You are really setting yourself up for less than satisfactory results.
I would advocate your alternate methodology,

I prefer more long term gains where I beleve I fully understand the company

jog on
d998