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Pattern observation - can it really be this easy?

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Twiddle

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11 April 2010
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Hi there,

Just looking to get some input from some experienced traders if they wouldn't mind.

I am torn between being very excited and highly sceptical, after 8 nights of trading a demo account. (averaging around 2.5 hours a night)

Basically I signed up for a demo account just to get a feel for the markets and learn how to go about embarking on my journey to become a trader.

In this particular demo account you start with 100k. I have been trading this while trying to get a feel for how things work, suss out strategies and progress my knowledge.

To my surprise, every night (8 so far) I have ended up closing out my trades in positive figures and so far I have made $12,771.80.

To me, making 12.7 percent in 8 days seems very good. Especially 2.5 hour days. (Or nights as the case may be)

So here is my dilemma:

Firstly, is this a decent return in the scheme of things? I.E. is 12 percent in 8 days good, or would i be making a lot more if I was an experienced trader?

Secondly, should it be possible to do this based on constant analysis of charts and pattern observation (which is what i have been doing) or have i just been lucky?

Thirdly, I am aware my trading would differ if this were my own money. Can it be the difference between being successful on paper trading 100% of the time (say nightly, 8 nights so far) and failing over 50% of the time, and therefore losing, with your own money?


I am asking this honestly because I want to approach this in the correct way, and not just sidetrack down a path which will not lead anywhere good in the long run.
 
I'm new to this forum and currently reading up on the advice and information links this site has to offer and I'm quite impressed by the ethical and thorough research recommended. If it was easy, everyone would be doing it.

I'm not an active trader but from the scheme of what I've read, even the best Fund Managers aim for 20% over a year, 12% in past 8 days is decent feat, that is infact my target for the year.

Also, the past 8 days, apart from the last 2, the All Ords have been on consecutive rises for the past 10 days or so.

When dealing with those demo accounts that give you 100k, they really do understate the associated costs with actively trading. Say $20 is nothing to 100k but for even 10k its slowly chipping you away.
 
So here is my dilemma:

Firstly, is this a decent return in the scheme of things?
Click to expand...

Yes

I.E. is 12 percent in 8 days good, or would i be making a lot more if I was an experienced trader?
Click to expand...

Yes
and some do.

Secondly, should it be possible to do this based on constant analysis of charts and pattern observation (which is what i have been doing) or have i just been lucky?
Click to expand...

Re evaluate after 1000 trades than 10,000 trades the answer will be clear.


Thats only a question you can answer. Your Psychological make up.

I am asking this honestly because I want to approach this in the correct way, and not just sidetrack down a path which will not lead anywhere good in the long run.
Click to expand...

The proper approach is to back test and forward test the method you are trading , then Monte Carlo test it. Then monitor your own trading over time to see how it reflects on the blue print your testing returned.
 
tech/a said:
The proper approach is to back test and forward test the method you are trading , then Monte Carlo test it. Then monitor your own trading over time to see how it reflects on the blue print your testing returned.
Click to expand...


My initial thoughts (which I am hoping are wrong) are that the movement of such things would be subject to too many random variables for back testing to give a good indication. I say this as a person with no experience with it at all.

I am guessing from your reply above; your experience contradicts this.

Do you think beyond a doubt it works?
 

This all depends, are you going to start live trading with 100K? What risk parameters/money management are you using? Just jumping in and out of positions with all of your account? Stops? Correct position sizing etc etc?

Just going from personal experience, making 12% on a demo account is fairly easy, I have turned multiple demo 100K accounts into multi-million dollar accounts, but I did it by doing stupid ridiculous trades that would be insane with a real account, you have to do it realistically. Doing it on demo and doing it live are 2 very different things IMO, then once you can, you have to keep doing it.

But if you are doing everything correctly and you are going to start with 100K then good luck to you and well done

 
Twiddle said:
My initial thoughts (which I am hoping are wrong) are that the movement of such things would be subject to too many random variables for back testing to give a good indication. I say this as a person with no experience with it at all.
Click to expand...

If you have a set of buy/exit/stop/position size/etc conditions you use for every trade and they reamain the same then you can(or have someone) code and test it (No not me I havent the time).
If your "Method" has many entry/exit/stop/positionsize variable which alter infinitum depending on the wind direction then no you wont be able to backtest.

This leaves you with only being able to record your trades as they happen and then analysing your results.
For those results to be meaningful you need a sample size of 100s-1000s the larger the better.

I am guessing from your reply above; your experience contradicts this.
Click to expand...

No not at all but I can and still trade in a discretionary manner profitably without definative proof or results to compare against.
HOW? WHY?

Because I know that there are only 3 ways I can guarentee income will be greater than expenditure.
(1) I will trade more aggregate winning trades than Aggregate losing trades.
OR
(2) I will have higher aggregate winning trades to higher aggregate losing trades,in terms of amount gained against amount lost.
OR
A combination of 1 & 2

Do you think beyond a doubt it works?
Click to expand...

No doubt about it that in BLUE works 100% of the time.
 
ThingyMajiggy said:
This all depends, are you going to start live trading with 100K? What risk parameters/money management are you using? Just jumping in and out of positions with all of your account? Stops? Correct position sizing etc etc?
Click to expand...

This is what I am trying to figure out at the moment. Money management seem to be the most important and I am playing around with stops trying to figure a system that works. So far I have found that my stops have turned many trades that would have turned positive a few minutes later into negative trades. Which obviously indicates I had the stop level wrong. But, I was not prepared to lose more than where I put the stop had the trade turned bad.

Picking the trends seems to be the easy part, making sure you don't close before you end up where you anticipated appears to be the hard part.

But, it seems like a certain amount of this is necessary to manage risk?


This is what I suspected, hence why I am asking. I am not sure how much credence I can put into my methodology and success in paper trading.
 
What are your entry and exit criteria?
 

1) 12% for 8 days is pretty damn good return. That is not unusual if you're paper trading. In my case, I had experienced 18 days of wiinning streak only to bomb out on the 19th day - giving back more than half of my winnings (real money). Now, I would be happy if I can make 10% in a month.

2) Yep, for me, that's essentially what I do.

3) Paper trading teaches you only how to operate the trading platform and test your trading methods. It doesn't teach you the MOST important ingredient in successful trading - and that is how to control your EMOTION.
IMO, controlling fear & greed is the main reason why so many traders fail.

Here's an analogy.
In paper trading, its like a trainee soldier firing at the enemy without the enemy firing back. Trading with real money is totally a differrent thing. When live bullets are also being fired at you, you begin to think about your life. Because there is now a real possibility of you getting killed. As a trainee without much experience in battle, the way you think clearly is affected, and that all those battle tactics that you've learned from training will be thrown out the window.

In real money trading, say if you have an ongoing trade and the market went against you and you find yourself $2000 underwater - emotion sets in. You will begin to think of so many things. You feel pressured to decide quickly on what to do and this will cloud your trading decisions.
"Sh$t, my two weeks pay down the drain, my wife will kill me for this", etc, etc.

The way you overcome this hardest part is to gain lots and lots of experience. Once you're confident with your trading methods or setups, start trading them with real money. Use only a very small percentage of your account, or if your trading futures, start with only 1 or 2 contracts. I recommend you do this for a solid 6 months, preferrably 1 year, (ie. to test your methods and gain experience under varying market conditions - this is important) .

I think you're in the right track. I'm sure you will win this game.
 
Thanks for the input Baby Swallow. I get the feeling it is going to be hard work learning how to get an efficient system in place. But I look forward to the challenge.
 
Wysiwyg said:
What are your entry and exit criteria?
Click to expand...

Initially I wanted a system of very close entries and exits, triggered by a fall of a quite a few points from the current level on a rising trend. So on a rising trend, enter a few points down and exit a few points further down (selling rather than buying of course ). But the entry would be down far enough as not to be just a small decline from the current upward trend, so as to make sure if I entered the position it would be on a definite decline.

BTW, I realise this sounds backwards. I was basing it on logic that if it trends up and I never end up entering, oh well.... but the entry is far down enough that if i do enter the position, the chances of it being on some type of a decline, even if temporary are very high, and since the overall trend is up to capture the temp decline the entry and exit must be very very close.

This would be very small profits, but I was looking at doing lots of trades. I have not tested this thoroughly yet, but have had some initial success with it.

Most of my entries and exits have been discretionary, which is probably a mistake. For example, yesterday I made quite a bit trading the DAX index, because I knew after its huge tumble early on, there had to be a small comeback at some stage. Overall the markets are doing well lately, and the decline was an anomalous response to bad news about greece etc. After such a steep decline, i felt there had to be at least some small upward movement at some stage, after such great recent rises people are not just going to sit on their hands for the rest of the day. So I waited till I thought it was a good time, entered, exited a few minutes later after I had made a decent amount and when I got the impression it was going to fall again based on watching 1 minute charting.

This is the type of trading that I'm sure will lead to financial ruin in the long run, yes?
 
That is counter-trend trading and something I didn't have success with because I tried to fade the spikes (when the price rises to extremes) Invariably entered too soon and got stopped out often. Your method could be worth investigating.
Most of my entries and exits have been discretionary, which is probably a mistake.
This is the type of trading that I'm sure will lead to financial ruin in the long run, yes?
Click to expand...
I assumed the trading strategy was based on chart pattern observation which was my reason for the question. Also I can't determine whether you will succeed or fail. Only you can with market participation.
 
This is the type of trading that I'm sure will lead to financial ruin in the long run, yes?
Click to expand...

Why do you ask this question again?

The answer is above in Blue.

It doesnt matter what your/entry/exit/stop/money management/position size/instrument you trade/ method you use,the answer IS IN BLUE.
 
Twiddle said:
... and I am playing around with stops trying to figure a system that works.
Click to expand...

I think the above says a lot. You have done very well whilst "playing around". I may have it wrong but it sounds like you are still working things out. So how much is luck vs skill vs plan vs ???

If it was that easy then many many more would be doing it. And using yr own money is definitely not the same.

But I may have misread it all.
 
Suggests sticking to demo/sim program for now until you can work out the issues with stops etc etc .. You have been trading in a nice bit of bull of late and think i that maybe a more serious approach to how you control your losses is your next footstep.

control ones losses first as thats what keeps you in the game.

IF one is inclined to take them results as an indicator of how you think you will perform in the market and you decide to use real cash, i suggest one starts with smaller position sizeing (but viable)j to dip toe into the water in an effort to learn how to deal with your losses in a pressurised and often murky scenario.

tech/a summed up the nuts and bolts of the game in his BLUE post
 
Because I know that there are only 3 ways I can guarentee income will be greater than expenditure.
(1) I will trade more aggregate winning trades than Aggregate losing trades.
No doubt about it that in BLUE works 100% of the time.
Click to expand...
Before I post my doubt about way (1) above, I will welcome any civil reply.

In a situation where out of 100 trades executed there are 60 winning trades and 40 losing trades.

Of the 60 winning trades the gain from each trade is 3 points giving an aggregate of 180 points.

Of the 40 losing trades the loss from each trade is 5 points giving an aggregate of 200 points.
A loss on aggregate has occurred due to the ratio of points won to points lost per trade.
 

Yes of course.

Aggregate winning trades (What you win) must exceed
aggregate losing trades (what you lose).
 
tech/a said:
Yes of course.

Aggregate winning trades (What you win) must exceed
aggregate losing trades (what you lose).
Click to expand...

Okay good. I interpreted it as the aggregate (amount/total) of winning trades. That being 60 in the case I presented rather than the sum total of all winning trades.
 
The "Blue" Statement is just stating the bleeding obvious. You have to profit more than you lose.
 
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