THE WHAT that will make you consistantly PROFITABLE?

[tech/a]

So far we have had some good discussion and some sound suggestions.

But lets look at them a bit closer. Are they the What of profitable trading?

THE TRADING PLAN.

No plan and your like a ship at sea without a rudder.
No point in having a rudder and not knowing where your going.
Even worse when your plotted course ends up to be incorrect.

Without knowing WHAT makes your plan profitable your trading with a Plan that MAYBE profitable NOW but long term could be disasterous or may not be profitable at all..

This is where many are.
They have a plan (read Theory) they have some loose ideas on stops entries,no idea or very little idea on exits (read gut feelings) a handfull of cash and off we go. (sounding Familair?)

Profits are inconsistant---there is a level of anxiety----there is a need to know a desire to be predictive---to have an idea that your plan WILL/COULD/WOULD/SHOULD work tommorow----its often altered and rehashed---when plan "a" "b" or "c" dont perform to expectations.Your constantly on a computer, or ringing for price,pager beeping,mobile alerting (Sounding Familar?)

Does the Plan work---Dunno Ill tell you once Ive traded it!
Or yeh it is now.

Nope plan on its own isnt "THE" answer.

DISCIPLINE

Discipline comes with confidence.
Ask anyone who has a losing streak----any losing streak and see if discipline isnt questioned.
BLIND DISCIPLINE can be extremely dangerous just ask the victims of the George Town massacre.
Purchasers of most Black Box systems.

Nope not Discipline on its own.


Money Management.
Yep weve all heard about it and many have a loose understanding of it.
Means minimising loss------ doesnt it!!? The 2% rule.Why 2% why not 1% or .5% or 4%?
Let your profits run ---- weve all heard that.
But RUN TO WHERE------When should I exit----how do I know--when has it run enough.

Place a stop,Take a profit--- cant lose!! -------------RIGHT!!
Ive got Money Management firmly in place---a sound trading plan (in my mind) and come rain hail and shine IM GONNA BE DISCIPLINED!---cant loose Ive done EVERYTHING.

WRONG---VERY WRONG

While there maybe a few of you out there that CURRENTLY are running a profit because the WHAT to your trading is CURRENTLY returning you a profit,(and you dont know what that what is---and its certaintly happening if your making a profit!) unless you KNOW what your WHAT is longterm there is a very very good chance youll at best UNDER perform and at worst die a painfull financial death!

Id say that the vast majority of traders who are short term profitable and dont know what its is (and its not any of the 3 above singularly or COMBINED)---(thats got ya) that has and will maintain profitability will suffer substantially and question their trading as the market or commodity bends and twists as it invariably will.

The WHAT is subtle and Im sure will be argued that its just a part of the above-------and that it is--------- but it IS THE ONLY COMPONENT that GUARENTEES (to the very best of our ability) CONSISTANT PROFITABILITY


Now last chance anyone like to hazard an educated guess.?

tech

 

[RodC]

Ok, here's my guess.

Making sure that you win on your winning trades more than you lose on your losing trades, consistently.

This can be by either having more winners than losers, or having bigger wins than losses (or preferably both).

Rod.

 

[tech/a]

Ok, here's my guess.

Making sure that you win more on your winning trades than you lose on your losing trades.

This can be ONLY achieved by having more winners than losers, and/or having bigger wins than losses (or preferably both).

Rod.

Rod BRILLIANT I have altered your post slightly.

Simply.
The What is

POSITIVE EXPECTANCY


Most have no idea what their positive expectancy is.
And/or how to find out.

If you dont know the expectancy of the Plan your trading.
Your only guessing/hoping its profitable long term even if it is profitable NOW.

 

[Fleeta]

Do you mean mathematical expected value calculations, taking into account your stop level and profit taking level?

i.e E(x) = E(xi) + E(xii) + E(xiii)....

Do you have to be really good at maths or just good on Microsoft Excel?

 

[tech/a]

Fleeta.

Ive recieved an email which I think will sum up a lot of peoples (Including yours)general feelings.

Here it is it really bought a smile to my face.Ive Played with the type styles etc for effect.

GREAT

I cant afford the expensive software and I cant afford to trade the higher priced stocks and Im not that mathamatical,and your telling me Im screwed!! Unless I know how to put all this together.
True my trading could do with some consistancy

Is there an easy way?

Well to tell you the truth from what Ive seen over 11 yrs you can develope and trade a plan and make a profit despite poor management statistics.
But your returns will be eratic and spasmotic.Infact I doubt that youd have the confidence to trade say $100,000 of your Super.Infact many will not even come close to profitable and will lose interest.Pity because everyone CAN make a profit consistantly from trading!

Personally the more you know about your method/methods the more successful youll be, but like all business there needs to be sizable investments in TIME and MONEY.Trading is NO different.

But THERE IS HOPE I think there are certain things that can be inplemented to give you a greater chance of trading with a POSITIVE EXPECTANY even if you cant Finitely PROVE IT.

If you get to that stage and you are making a reasonable profit and want it tested with good software then give me a yell!

If there are enough out there interested in going further Im happy to continue with some suggestions.Let me know.

tech

 

[stefan]

If you get to that stage and you are making a reasonable profit and want it tested with good software then give me a yell!

YELL! I stick my head up and say that my way of trading is what I was looking for, currently making what you call a reasonable profit. I'm always interested in testing it against whatever scenarios or analysis your software will come up with. So, what next?

Happy trading

Stefan

 

[Porper]

Well, count me in Tech, I am more than intrigued to see what your "WHAT" is.I think like many following your thread, maths was definately not my subject at school, and it was nearly 20 yrs. ago

I am always willing to try and learn though, if your theory seems like a goer to me I will do my best to understand it, but only if I don't need to be a mathematician

 

[tech/a]

Stef and Porper.

To be able to test with software we need to be able to code what it is that is the "HOW" of your method .

In Stefs case and many others here it is a fundamental "HOW" which cant be coded with my software anyway!---dont know of any.

But we can and will go through the components of getting to Positive expectancy and how to measure it.

While doing it long hand is pretty agricultural and hardly exhaustive (as we cant run 1000s of simulations) I think atleast we can get the basics so you know what to aim and look for so you can recognise a breakdown/underperformance and indeed be able to calculate wether there is a positive expectancy.

More later when more time.

 

[stefan]

In Stefs case and many others here it is a fundamental "HOW" which cant be coded with my software anyway!---dont know of any.

But we can and will go through the components of getting to Positive expectancy and how to measure it

Tech, lets focus on the positive expectancy then.

One thing, I know it shouldn't be here but I don't know if you follow all threads. If you have some spare time at hand, can you produce one of your charts for SES and post it in the SES thread? Would be much appreciated as I'm currently holding SES from the low 20s. It fits perfectly into my plan being a company that just turned cash flow positive, with lots of good fundamentals. I'm just wondering what your chart has to say as I do have something else in mind with it.

Just if you can spare a second, really.

Happy trading

Stefan

 

[crashy]

they say:

"winners hold on to their winners, losers hold on to their losers"

Most traders I know have trouble holding onto winners, and although they cut losses early, they get nowhere overall.

My problem has been cutting losses quick, and I have no problems letting winners run, and thats why I dont trade much anymore.

totally disagree with this statement:

"Discipline comes with confidence."

In my 'trader psychology' post I explained how discipline and confidence are opposing forces. Think back to 1999. Every trader was a genius. Confidence was high. Was discipline?

perhaps what tech means here is that you will feel more comfortable when disciplined..... which I agree with. But that would be: "confidence comes with discipline" not the other way round.

 

[tech/a]

Crashy.

What you say is indeed very true.Im sure many here will associate with Holding Losers and liquidating winners.

Even worse

I often read here---Yes XYZ is now fantastic value at (x-40) bought a heap a while ago while it was (x-20) cant believe its this cheap---hope the next report/drill hole/director shuffle/wind change/xmas present gets this baby into profit for me/us/them.

Never hear.
ZYX is powering risen 20% in 4 weeks bought more last week and again today.That news of a new nickel separation (JRV) technique really has ZYX
in the sights of investors.

Re---Confidence.
Think your refering to a broad use of the word and I to a specific.

I maintain (and happy to hear another veiw).That if you Know your method and its limits,what to expect (from exhaustive testing) as you trade your method then the discipline to stick to your trading "Plan or Methodology" becomes easy/ier.
WHY.
Without this information(and even if you have partial information) you have no idea if a string of 15 losses or an initial drawdown of 12% or your Risk Reward Ratio of 3.5 is going to return a profit.
With partial or at worst NO information the ability to stick with a plan WHEN LOSING dissolves!!
100% of Traders go back to their method and abandon the way they are now trading--forever tweeking,altering,theorising,re introducing---why---they have no idea of the LONG TERM viability of their methodology------NO CONFIDENCE (And rightly so) hence no / little discipline to trade their method.

They are Trading Blindly.

If you know exactly what to expect with a method then you can and will trade it with confidence---youll let it do its thing---thats what its designed to do and the end result if you do it is X.If you dont then YOU will have failed due to lack of discipline not the method.If the method trades outside of those know parameters you can have the confidence that something isnt right with your methodology.A stop in trading will then be a logical/quantified call not a discipline issue.

Back nearly 12 mths ago while we were trading CTX on the TechTrader thread one of the traders asked.
"CTX is $5.00 I cant see this going any higher we have had it since $3.65 we should sell it!!"
My reply was that we hadnt an exit yet and I have no idea what CTXs value was $3,5,10,(Today its $10) our method had us in this trade for another 8mths and an exit was triggered at $8.20.It was easy to ride this as I knew and Know that the OVERALL result from testing tells me I can achieve 20-80% annually from TechTrader---if I follow the method.
I have 100% confidence as I have traded in testing 20000 portfolio combinations over the last 8 yrs and not a single portfolio combination lost.100% win rate.

CONFIDENCE = DISCIPLINE.Or perhaps the ability to apply it----or the REASON to stick with it


Crashy in your example above Confidence in the Market without the HOW,WHY and WHAT of trading it--------certaintly equates to lack of discipline--traders dont have anything to use as a bench mark

no blue print[/SIZE]

Blind Discipline/Faith is as dangerous if not MORE DANGEROUS than none at all.

(Friend of mine had Breast cancer--was a health nut but there was a family history.She owned a health store and was the healthiest person Ive every known.Oncologists said there was a 70% chance of cure with removal of around 50cc of tissue-----NO WAY Laetril----juices---Positive attitude-------DISCIPLINE--2 yrs and she died!! I did ask SHOW ME 1 survivor using natural therapy! Not a Book or someone who knows someone,a real bonifide,quantifiable survivor---Im still waiting.The Oncologist has 7/10 he can show me.)

Thanks for your veiws

tech

 

[Tric]

really interesting thread you guys.
great that you are spending time posting and trying to help us to all grow as investors.

thnx from all of us reading

 

[markrmau]

Tech, this is all very interesting, but you have never actually specified what signals you use to trade (as far as I have read). I have seen spreadsheets showing your risk/reward ratios etc. but not the actual signals you use for entry and exit.

Cheers, Mark.

 

[tech/a]

Mark there are 300 + posts on TechTrader here and a great grounding for the method.

http://www.reefcap.com/ubb/Forum8/HTML/000091.html

Im happy to use the Method as a live case example as its been released for public scrutiny for 2.5yrs.I do have another method I trade which will remain proprietry.For those with Metastock here is the code.

ENTRY

Cross(H,Ref(HHV(H,10),-1)) AND H > Mov(C,40,E) AND HHVBars(H,70)=0 AND C < 10.00 AND C > O AND Fml("Liquidity") > 500000;

[In English,Todays high is greater than the highest high of the last 10 periods,AND the High is greater than the moving average of the close over the last 40 periods,AND todays Bar is the Highest High value of the last 70 periods,AND C is Less than $10,AND Close is Greater than the open,AND the average trading turnover for the last 21 periods is $500000]

The liquidity formula which should be placed in the INDICATOR BUILDER is

Mov(V * C,21,S) [call it Liquidity]

The system has a INITIAL SET STOP of

If(Ref(C,-1)>0.90*EntryPrice,0.90*EntryPrice,Ref(C,-1));

This is code for TRADESIM and should not be entered in Metastock.
However in English.[If the last close falls below 90% of the entry price then exit]

EXIT

Cross(Ref(Mov(L,180,E),-1),C);

[English. If close Crosses the 180 day moving average of the low on the previous bar then sell this bar.]

ALL BUY,STOP and EXIT signals are traded NEXT DAY on OPEN

tech

 

[markrmau]

Thanks for this Tech. I will study the thread tonight. How often to stocks meet the entry criteria (a few per week?).

 

[tech/a]

Mark you need to know that the Universe of prospects is the BT Margin list.
The method was designed for these stocks.(Im lazy happy for BT to do the Fundamentals).

There are around 300 in the list.
Works well on the ASX 200 and 500 but not good for Smalls.

There are way more prospects than you need generally a few each day.

Thats the beauty of a method like this you dont need to take every trade.Regardless of which you buy Montecarlo analysis tells us that youll still have a winning method.

sure if your lucky some will return more than others.

EG the testcase is returning more than my own portfolio!!
Bugga.

 

[RodC]

I've been playing around with the techtrader formula on Amibroker (modified to include the stocks >$10) and using the comsec margin list as the "universe of stocks". I usually get 3 to 5 buy signals per day - more than I need.

Rod.

 

[markrmau]

Wow - that is a truly impressive system. Thank you for sharing it. I see that I have been loosing the bigger picture of making a long term profit, by jumping in and taking a series of smaller profits. I guess this is because of my extremely limited 'pain' threshold. (I dump whatever is not going up almost immediately eg HDR, MRL and unfortunately QBE).

Now, just supposing we go through a period like the March 2002 - March 2003 period. How did back testing go here?

 

[tech/a]

Ah.

Mark at least you have identified your problem and its a very wide spread problem of taking profits way to early and taking losses way to late.

When you understand the impact it has on your top line youll all of a sudden enjoy your trading and become more relaxed.When I get started on Positive Expectancy Im sure youll follow.Many like you will associate with much that I will walk you through.

Now to backtesting and specific periods and of course equity curves (The visual record of your test results.)
Equity curves only record closed trades.Long term methods (particularly like TechTrader which on average holds trades for 360 days) will generate an equity curve which looks very eratic.If we had accurate data for 50 yrs then the curve would look a lot smoother.Unfortunately I only have 12 yrs of data.
I use 8 for testing.

The nature of the beast is that at anyone time there will be open trades with open equity so when testing I set the end of the test period to be a sell.Youll then notive a sharp rise at the end of the test period as all positions are liquidated.
I can answer your question about March 2002/3 in 2 ways.
The actual results of the method we are trading and the tested results.

Firstly a pick of the bar chart showing the actual growing equity of the method being traded this is actual equity not just closed trades.

Ill then post the test results for the same period but Ill start it in 1998 and close out on March 2003.
Ill also do March 2002 start March 2003 finish but doubt this will have much meaning.

Back in a minute

OOPs sorry period is 2003/2004 Ill leave it anyway and run the simulations.
Pollogies!!

 

[markrmau]

Also, one other thing. I am intrigued by which is the most discriminating (profitible) part of the decision making process - is it the entry or the exit? Or are both the entry AND the exit points REQUIRED to make this a profitible system?

Are you able to do backtesting where you:

1. First randomly select entry stocks / dates -> then use your defined stop loss and exit points.

2. Use your defined entry point -> then randomly select an exit date.

How do the results compare with system where you use both your defined entry/exits? (This may be too much work to do however).

Also, how well does your system work on more liquid markets such as the NYSE? (can you define a universe of stocks which are on margin loan lists)?