What analysis do you use for trading?

[Client]

It is interesting to me what kind of analysis you use to make a trading decision. If it's technical methods, tell us what exactly, like Bill Williams methods, candlesticks, classic methods or Elliott Wave Principle, etc.

 

[Whiskers]

Re: What Do You Use For Trading?

It is interesting to me what kind of analysis you use to make a trading decision. If it's technical methods, tell us what exactly, like Bill Williams methods, candlesticks, classic methods or Elliott Wave Principle, etc.

Well, I'll start this off!

Wake up, check my commitments for the day... hmmm, got a bit of spare time... how's the bank account... ohh dear, let's see now!!!

How's my stars looking! :

If I decide to trade, I'll scratch my head for a bit to see what FA sounds good and see if that will line up with a bit of TA and EW.

If I get a good vibe I'll trade otherwise I'll go and do some gardening, have a camp or somethin.

 

[Naked shorts]

http://www.amazon.com/Complete-Idiots-Guide-Trading-Like/dp/0028636538

 

[PrudentInvestor]

It is interesting to me what kind of analysis you use to make a trading decision. If it's technical methods, tell us what exactly, like Bill Williams methods, candlesticks, classic methods or Elliott Wave Principle, etc.

Pardon me, but your question, while interesting, is so deep that I will have to answer it in a rather abstract way.

I use systems based on mathematical models only, but will not delve into their details here. Instead, let me point out that during the years I've traded, I have come to the conclusion that systems based on mathematical models work the best on very long and very short time frames. On the short time frames, these models can identify relative supply-demand inequilibria and on the long time frames (talking about investing, not trading per se) they allow one to stay rational while taking risk and anticipating return in compensation.

I've never had much success picking bottoms and tops on medium time frames (weeks-months), but luckily I've also been wise enough to realize it and focus on the more profitable strategies.

 

[nunthewiser]

and a calculator

 

[ThingyMajiggy]

and a calculator

What do you use her for? :

 

[James58209]

Hi,

I would have posted this in the "Technical Analysis: Useless?" thread, but it has been closed. I know people get tired of discussing the philosophical differences between different approaches to trading, but I'm just wondering whether anyone can point me to any rigorous backtesting of claims like "the trend is your friend". For example, if a stock's price has been increasing by at least 0.1% per day on average over the past 3 months, is it more likely to increase or decrease in price over the next 3 months (ignoring all other information to try to determine if the claim "the trend is your friend" has any value in isolation)? Has anyone done any backtesting of this type?

I follow trends sometimes without having any strong empirical evidence for why I am doing that. The reason I don't worry about not having a strong positive expectancy for my stock picking is that I believe that my trading plan for how I manage the trade after the initial stock picking is far more important.

I know some tech analysis fans will say that it doesn't matter whether picking stocks based on trend gives you a positive expectancy, what is more important is how you frame your risk/reward plan based on that trend. But I suspect that a lot of beginners see claims like "the trend is your friend", and assume that it does give them an edge in stock picking.

Cheers,
James

 

[tech/a]

James

Explain for me how you make a profit or a loss for that matter (Other than arb and some options spread) without a trend?

If your a technical trader with analysis which anticipates a move from $X to Y
OR a Fundamental trader who believes the same stock at X is worth at least Y both are anticipating a trend in a positive direction.

The reason I don't worry about not having a strong positive expectancy for my stock picking is that I believe that my trading plan for how I manage the trade after the initial stock picking is far more important.

This statement really interests me,I'm absolutely riveted to hear how your Trade management helps your positive expectancy (Indeed Profit) after you take a trade without a positive EXPECTATION. Not saying you cant do it but cant understand why you'd take a trade that hasn't a positive expectation and then try to manage it into one??

I know some tech analysis fans will say that it doesn't matter whether picking stocks based on trend gives you a positive expectancy, what is more important is how you frame your risk/reward plan based on that trend. But I suspect that a lot of beginners see claims like "the trend is your friend", and assume that it does give them an edge in stock picking.

Clearly you like most "beginners" don't understand positive expectancy how to calculate it and how you come about knowing you have it
But I could be wrong---the above statement certainly doesn't give me confidence!!.
Question
Framing your Risk/Reward based on a trend what is it that you are trying to achieve?

 

[Mr J]

but I'm just wondering whether anyone can point me to any rigorous backtesting of claims like "the trend is your friend".

I can't provide any backtesting, but then I don't need it. If it weren't true, trends would not be as significant as they are. Consider that human behaviour drives markets, not monkeys flipping coins.

I believe that my trading plan for how I manage the trade after the initial stock picking is far more important.

It's all important. You didn't specifically mention the entry though, which in my opinion is the most important part of a trade.

Tech, we don't know he doesn't have positive expectancy. Actually, I re-read that last quote of yours. Sounds like he's expecting R:R alone to be enough.

 

[tech/a]

You didn't specifically mention the entry though, which in my opinion is the most important part of a trade.

Most do.
I dont.

we don't know he doesn't have positive expectancy

I suspect he doesnt either.

 

[Mr J]

Most do.

And still most of them don't make good entries, at least by my definition. As for qualifying the importance of entry, it's easier to profit from a good entry and poor exit, than a poor entry and good exit. The entry sets the stage for the rest of the trade. I think a good first decision makes subsequent decisions better and easier. Obviously you feel differently, but I make good entries and it makes my trading better, so it's what is most important to me.

 

[Trembling Hand]

The entry sets the stage for the rest of the trade. I think a good first decision makes subsequent decisions better and easier. Obviously you feel differently, but I make good entries and it makes my trading better, so it's what is most important to me.

Clearly a good entry will effect your R:R. So I would agree.

 

[tech/a]

Intrigued as to how you determine a good entry until after the fact.
Same with an exit.

You can set a buy up to give excellent R:R but you wont know how excellent that turns out to be until after it turns out!

I think EVERY entry I make is The Ducks guts (As I would I'm a Duck) but inexplicably not all are!

 

[Mr J]

I think EVERY entry I make is The Ducks guts (As I would I'm a Duck) but inexplicably not all are!

I'm not suggesting any differently, I'm just saying the entry is the most important part of a trade for me, because the perfect entry maximises potential profit and minimises risk. Until the trade is well underway, the entry is only a predicted good entry.

 

[tech/a]

I'm not suggesting any differently, I'm just saying the entry is the most important part of a trade for me, because the perfect entry maximises potential profit and minimises risk. Until the trade is well underway, the entry is only a predicted good entry.

The entry may well be the most important to you in your mind.
Every single trader aims for the perfect entry and the perfect exit.
Yes and we all know what it means to the bottom line--- but unless you can couple it with the perfect exit your RR for that trade may well be less than optimum.

So on the point of entry what is in your mind a perfect entry---the thing you aim for---other than the trade to be executed and the trade played out to the exit or trailing stop.

Isn't that (the trade to be executed and the trade played out to the exit or trailing stop.) the only definition of a perfect entry?

 

[Trembling Hand]

Intrigued as to how you determine a good entry until after the fact.
Same with an exit.

You can set a buy up to give excellent R:R but you wont know how excellent that turns out to be until after it turns out!

I think EVERY entry I make is The Ducks guts (As I would I'm a Duck) but inexplicably not all are!

There is idea generation, like buy the breakout, then there is idea execution,

Miles about. This is where the practicalities of trading smokes the theories. If you're happy punting with 2 ATR stops, like the other 90% of punters, I'm happy for you.

 

[tech/a]

There is idea generation, like buy the breakout, then there is idea execution,

Miles about. This is where the practicalities of trading smokes the theories. If you're happy punting with 2 ATR stops, like the other 90% of punters, I'm happy for you.

Where do you get the idea that I trade only breakouts (Yeh I trade breakouts but differenly to what you percieve in many cases) and use a 2 ATR stop mechanism?

My bottomline and aim is to increase my real (as in closed trades) RR and in turn expectancy--the real one. ---From this you may be able to decipher then what I consider the most important aspect of Trading/Business or Property.

 

[Trembling Hand]

I didn't say you trade anyway. I was just giving an example, a breakout trade is an idea, within that idea you must execute it. Most just hit a magic buy button. I 100% believe that is poor trading. A fortune is to be milked from the next step, execution of the idea.

Just like in business. Plenty of good ideas go broke or could of been helped with some finesses on the execution.

 

[James58209]

Hi Tech/a

Explain for me how you make a profit or a loss for that matter (Other than arb and some options spread) without a trend?

I think most of the profits I have made have been by riding trends, (and by listening to/reading thoughts of more experienced traders than myself about whether they are bullish or bearish on the general direction of the overall market). But because I am not a system trader, (more discretionary), there are always factors other than trend influencing my decision, so I certainly don't have enough data to prove that pure trend following is consistently profitable for me. In some cases I have profited without following a trend, e.g. when a company director leaves a company and liquidates their holdings, and the share price appears severely oversold as a result, I might take a punt and buy in, hoping for a bounce back in the short term, which is not exactly following a trend.

This statement really interests me,I'm absolutely riveted to hear how your Trade management helps your positive expectancy (Indeed Profit) after you take a trade without a positive EXPECTATION.

Not saying you cant do it but cant understand why you'd take a trade that hasn't a positive expectation and then try to manage it into one??

I suppose I'm splitting hairs here about the definition of EXPECTATION. Of course I "expect" to make a profit when I put money on a trade, otherwise why would I put money on it? But sometimes I find it difficult to accept that it can be proven by backtesting that the trade will have a positive expectation (mathematically speaking), because I would need a lot of data based on the same or very similar market conditions and similar reasons for entry (which are partly discretionary) to be convinced that the effectiveness of this particular entry can be predicted in advance.

Clearly you like most "beginners" don't understand positive expectancy how to calculate it and how you come about knowing you have it
But I could be wrong---the above statement certainly doesn't give me confidence!!.

Expectancy = (Probability of Win * Average Win) - (Probability of Loss * Average Loss)

What I am questioning is how accurately you can estimate the Probability of Win vs Loss. Obviously it is easier if you are system trader (rather than discretionary) and if you believe that the market conditions have not changed significantly since you gathered enough backtesting data to assess its statistical distribution accurately.

Question
Framing your Risk/Reward based on a trend what is it that you are trying to achieve?

No, that's not what I am personally trying to achieve. I mentioned the framing risk/reward stuff after reading point 3 of Trembling Hand's Post #2 in the "Technical Analysis: Useless" thread, which makes sense to me after the trade has begun. If I make an entry because I think a stock is on an uptrend, then it reverses immediately, I am happy for my stop-loss to be hit which suggests that I may have been wrong about the stock being on a continuing up-trend. But if this happens 3 times in a row, how do I know whether my entry method is flawed or whether I was just unlucky?

I think the only way I can be 100% confident in my entry method is if I become a system trader (which I don't particularly want to do), and if I believe that the market conditions have remained the same (or close enough) for long enough to accumulate enough backtesting data to form a statistical distribution from which meaningful hypotheses can be made.

Cheers,
James

 

[tech/a]

I didn't say you trade anyway. I was just giving an example, a breakout trade is an idea, within that idea you must execute it. Most just hit a magic buy button. I 100% believe that is poor trading. A fortune is to be milked from the next step, execution of the idea.

Just like in business. Plenty of good ideas go broke or could of been helped with some finesses on the execution.

Ill argue that thats more MM than entry.
Then I'll argue that Trade and better still Portfolio Management will have a greater effect on Business (trading is a business) profit than simply entry/execution.

Sure finess should be a primary aim and if you dont get it right 1st ---4th time just keep at it.
But this is a far cry from "J"s entry being the most important.