How much analysis is enough? Does complexity equal profitability?

[nizar]

Hi Nick,

At the risk of extrapolating what you're are saying a wee bit too far, are you suggesting that you would be able to duplicate the level of performance that you have been demonstrating in your power setups by using your trade management procedures on say, a randm entry ?

At the end of the day, a random entry is pretty much 50/50 and if there aren't any TA techniques that offer above 50/50, then one should theoritically be able to generate returns approaching the levels reached by your power setups using trade management techniques alone.

Would appreciate your clarification.

Good question, I too am looking forward to the response from Nick.

 

[Trembling Hand]

At the risk of extrapolating what you're are saying a wee bit too far, are you suggesting that you would be able to duplicate the level of performance that you have been demonstrating in your power setups by using your trade management procedures on say, a randm entry ?

At the end of the day, a random entry is pretty much 50/50 and if there aren't any TA techniques that offer above 50/50, then one should theoritically be able to generate returns approaching the levels reached by your power setups using trade management techniques alone.

T/A setups are not about achieving higher than 50/50. A T/A edge comes from the favourable R:R not the win:loss.

Cannot speck for Nick but its about finding patterns that have probable targets larger than any expected loss.

 

[bingk6]

T/A setups are not about achieving higher than 50/50. A T/A edge comes from the favourable R:R not the win:loss.

Cannot speck for Nick but its about finding patterns that have probable targets larger than any expected loss.

TH,

I hear what you are saying, and pretty much agree with all of it. However, even with a random entry, isn't it possible to manage your trade in such a way that if the trade goes against you, to cut it off quickly and if it goes for you, to let it run, which is the essense of achieving a favourable R/R ?

I guess my question is, in the case of a really successful system, how much of the success is attributable to the setup (or the pattern) and how much of it is attributable to the on-going management of the trade once a position has been initiated.

 

[Trembling Hand]

TH,

I hear what you are saying, and pretty much agree with all of it. However, even with a random entry, isn't it possible to manage your trade in such a way that if the trade goes against you, to cut it off quickly and if it goes for you, to let it run, which is the essense of achieving a favourable R/R ?

I guess my question is, in the case of a really successful system, how much of the success is attributable to the setup (or the pattern) and how much of it is attributable to the on-going management of the trade once a position has been initiated.

What about this,

Maybeconfused one of TAs overlooked qualities is identifying that something is about to happen. That the punters are coming in.
It may not be the direction or magnitude you expect, but at least you will have an answer soon.

With a random entry you will still need a catalyst to get some action. Most TA will be based on some sort of movement or pattern.

 

[peter2]

Is an entry into a pre-existing trend a random entry?
I think not. I look for impulsive moves and presume that they will continue.

Is it 50:50 that price will continue in the direction of the trend?
Not for me, I want to trade with the trend as I think there is a higher probability that price will move in the direction of the trend than reverse.

The direction of the next tic may be random but is the direction of the next 100 tics still random?

 

[Temjin]

TH,

I hear what you are saying, and pretty much agree with all of it. However, even with a random entry, isn't it possible to manage your trade in such a way that if the trade goes against you, to cut it off quickly and if it goes for you, to let it run, which is the essense of achieving a favourable R/R ?

I guess my question is, in the case of a really successful system, how much of the success is attributable to the setup (or the pattern) and how much of it is attributable to the on-going management of the trade once a position has been initiated.

While I can't say for those who are more experienced here, my understanding is that a profitable system (with long term expectancy) is largely attributed to the on-going management of the trade and how that trade is exited. Obviously, entry also contribute to the overall system's profitability but the theory from the more "successful" traders is that they tend to place more priority toward managing their trade than finding a 80+% chance entry setup.

It's the exit that determines how much profit (or loss) you get per trade. Not the entry.

 

[It's Snake Pliskin]

Heh, I agree with the emotion part. So much involved in here right now.

Wasn't there a research article (from Van) saying the higher the IQ a group of traders are, the worse results they get. It seem "intelligence" is an impediment to successful trading. Of course, some complex PHD guru will disagree with me otherwise.

Also, isn't it true that simplicity is the key to successful trading and that humans often have a bias for doing "complex" things because it give them some sort of intellectual satisification?

Temjin,

You have raised some valid points in the discussion.

I agree things are best left simple. Let the market be your ultimate dominator. Now it takes some form of intelligence to realise what it is all about without still not knowing. So why is intelligence any worse than arrogance, or even worse, gullibility when they will all clearly be inferior to the whole? (rhetorical)

I like T/A and it makes sense for what I see it as being able to help me with. Nothing else. Regardless of setups, catalysts, opportunities, whatever, luck is still a part of the reality because the only thing we can control is ourselves.

 

[MRC & Co]

You may wish to read Van Tharp.

 

[tech/a]

In my opinion, no. The only reason I am a successful trader using TA is because I am a good manager of bad trades. I am yet to find any TA that offers any kind of edge above a 50/50 bet.

I will not get into a discussion on the fact that FA is any better. Its simply not. I can provide a weeks worth of reading as evidence.

The goal of participating in the markets is to make profits.

We all need each other to facilitate liquidity.

Taking the above.
Strings.

Wins 10
Losses 15
Wins 20
Losses10
wins 5
Losses 10
Wins 10
Losses 10

50/50

All losses 1 unit.

10 wins 2.5 unit
1 win 8 units
10wins.5 of a unit
9 wins 3.5 units
15 wins 1.6 units.

Do I care if my technical analysis/any analysis is 50/50

It's the exit that determines how much profit (or loss) you get per trade. Not the entry

In my view a very important place in a trade from an M/M view.
This is where initial RISK is found and can be controlled.
Here you have to opportunity of adjusting your anitial risk or watching it get taken out slowly.

 

[Nick Radge]

At the end of the day, a random entry is pretty much 50/50 and if there aren't any TA techniques that offer above 50/50, then one should theoretically be able to generate returns approaching the levels reached by your power setups using trade management techniques alone.

Basically yes, thats what I'm saying.

TA is scorned by academics because it, that is a price pattern, has no statistical predictive power. I agree. A company whose earnings continue to grow offers predictive power over time but one will need to wear the price volatility in between.

Many of the most successful traders in the world use basic breakout models, after all, every trend starts from a breakout of some type. A fundamentally strong stock will only offer profits if the share price increases and trends higher. A breakout will capture that without the need to read mega amounts of data to assess the fact.

 

[bingk6]

What about this,

Maybeconfused one of TAs overlooked qualities is identifying that something is about to happen. That the punters are coming in.
It may not be the direction or magnitude you expect, but at least you will have an answer soon.

With a random entry you will still need a catalyst to get some action. Most TA will be based on some sort of movement or pattern.

TH,

I like your answers and I suspect that you're pretty close to the mark.

Personally, I too believe that exit and the trade management side of the equation is by far the more critical side. However, what I cannot reconcile (at lease within myself) is that if the exit and trade management side is so critical, why is it that most traders are not prepared on enter their trades on a random basis and just depend on trade management?

Putting it another way, if I were to generate 1000 different random entries. how may traders would be prepared to say OK, I'll run with these 1000 random entries and would be confident enough to say they would expect their performance to be on par with their existing systems ? I suspect not many. So therein lies a potential problem. Therefore, for the traders that truely believe that trade management and exits are the key and that entries (via T/A or F/A or voodoo or whatever else) offer no better than 50/50 (and I include myself in this category) why would they not be prepared to trade on random entries ???

 

[Nick Radge]

You have answered the question for yourself. You won't be prepared to run with a random entry because you are not comfortable with doing so, even though you know it probably be a profitable exercise so long as you manage the trade. However, if one is not comfortable when pulling the trigger then they won't trade.

 

[MRC & Co]

I find the trouble with random entires, is that a lot of stocks simply chop around.

This is why it is preferable to find stocks with strong, longer term momentum behind them, as even though they may still chop around even after breaking a pattern, of which you may loose 1%, they will most likely keep running in the longer term (but you will not be around to see that if it continues to chop around, as you will not hold onto hope).

However, if it does break your way straight away (40% of the time in Radge' case), it is far more likely to keep running, due to past momentum and the breakout, and it is ultimately these runners that you need to create far more winning $ than loosing $, despite any win/loss %. This is where I don't think Nick gives himself enough credit, in finding the 'right' charts to trade, not only his trade management.

If you simply trade choppy stocks, I think it would be very hard, regardless of trade management, to make any decent profits after data, commissions etc.

Just my humble opinion. Feel free to correct me.

 

[_ExY_]

Hi Nick,

At the risk of extrapolating what you're are saying a wee bit too far, are you suggesting that you would be able to duplicate the level of performance that you have been demonstrating in your power setups by using your trade management procedures on say, a randm entry ?

At the end of the day, a random entry is pretty much 50/50 and if there aren't any TA techniques that offer above 50/50, then one should theoritically be able to generate returns approaching the levels reached by your power setups using trade management techniques alone.

Perhaps...

Although your method has 50/50 win/fail the TA(method for choosing entries) may still be a critical part of the system as the nature of the entries can only be profitably managed by nicks' trade management system. Or you could say for nicks' trade management system to be profitable it has to manage trades that perform in a specific manner, which are chosen by the TA system.

 

[sleepy]

TA is scorned by academics because it, that is a price pattern, has no statistical predictive power. I agree. A company whose earnings continue to grow offers predictive power over time but one will need to wear the price volatility in between.

Or if you are really smart you could combine TA and FA

For example, Dan Zanger primarily focuses on chart patterns, company earnings and volume.

sleepy

 

[theasxgorilla]

I like the idea of testing random entry and using it as a benchmark and then trying to beat it. If you can beat those results you have an edge, and if you can't you might still be winning in spite of yourself.

 

[nizar]

I like the idea of testing random entry and using it as a benchmark and then trying to beat it. If you can beat those results you have an edge, and if you can't you might still be winning in spite of yourself.

Is the word "edge" only related to entry?

 

[Nick Radge]

ASXG,
You've done a lot of work on Edge Ratio. Its not something I agree with specifically in regard to Curtis Faith and the Turtle system. What's your thoughts?

As for Zanger looking at earnings, I struggle with that relationship. Lets face it, since when will a 2-week view on a stock be impacted by earnings alone. I appreciate increasing earnings will to a stock price appreciate over the longer term, but tying that relationship together on a smaller time frame brings in randomness and market noise as well.

 

[Shane Baker]

ASXG,
You've done a lot of work on Edge Ratio. Its not something I agree with specifically in regard to Curtis Faith and the Turtle system. What's your thoughts?

As for Zanger looking at earnings, I struggle with that relationship. Lets face it, since when will a 2-week view on a stock be impacted by earnings alone. I appreciate increasing earnings will to a stock price appreciate over the longer term, but tying that relationship together on a smaller time frame brings in randomness and market noise as well.

Hi Nick

In the literature DZ sent me a couple of years ago, he claims that he filtered his universe of stocks using the earnings before applying his pattern analysis techniques.

Cheers

Shane

 

[Nick Radge]

Shane,
There is no doubt he uses it. I have subscribed to his services in the past and its clear he's influenced by earnings growth. From a filtering perspective it makes complete sense - a stock with earnings growth will be pursued more than one without, however, my point is, will that be enough to overcome short term aberrations? Maybe...its been awhile since I made $22 mil in a year! Still learning...