TNTNEO: Ddo you look at all 4 time frame simultaneously or do you "step down " the time frame size as you get ready to buy/ sell ???
to Mr ROBOTO: two questions (1) when you refer to a strict methodology are you implying that you view the same setup each trading day and patiently wait for a specific signal to generate before taking action, or are you referring to taking many setups even using discretion based on experience but employing strict stop loss and pre determined sell points. imo both can be strict methods but emphasize different aspect of the trading equation. (2) re the coin toss analogy; does this mean you specialize, i.e trade one vehicle over and over each day or do you rely on stops to attain your 2/1 or whatever risk/reward? But in general I agree with ignoring the mkt and concentrating on the vehicle being traded and letting its volatility generate your signals without wondering the whys and wherefors of the action; more or less trusting the system not the outside influences. And as with all good methodology, it sometimes gets out of synch in that returns are not upto previous standards, do you then tweak your methodology or ride it out? These are really some of the issues I deal with each day and would like other input. Thanks in advance.
mr roboto, I'm afraid coin-tossing example isn't good, trading is not that simple. Its possible to calculate probabilities in coin-tossing, while in trading it's impossible. System's "edge"... you can only talk about an edge in the past, edge in the future is uncertain. For example, are you sure, that some system will be profitable in the next 6 months?
I miscommunicated there. I/we trade 4 time frames at the same time. And with different methods and markets. This, in an effort to smooth the equity curve for our associates. That's why you would read me talk about different markets or trading style depending on the post. Including discretion and systematic. on a side note, it's true that at times the market as a whole gives an edge to shorter or long time frames. I may decide to lighten one side or the other. Many trading methods ignore the market. I think it's good. However, imho you should always know what the sector is doing. The smart money trades by sector, you should be aware of what is happening. As a minimum it has an impact on your risk parameter. Index don't care and that's why I prefer to trade them (it's easier to analyse and make systematic too). regarding methods not within their parameters. I guess there are many ways to deal with that. The way I like is simple : reduce size. if the system continues to fail (even with discretion by the way) reduction continues until eventually it is totally stopped. Even when stopped, simulations continues to monitor the method. The mistake with any trading is to insist when it does not work anymore. The paradox is, an even bigger mistake is to constantly stop and try something else. This is why we chose this protocol : reduce size and stop if need be. be ready to restart any time. Don't change systems or methods all the time. Tweaking is fine. it is very important to be flexible. the market is constantly changing. If you don't change too, you are doomed. However, there are basic principles which never change. They should be the basis, then you build on that, then eventually you tweak. imho tweaking must be based on experience gathered with live trading. as I wrote yesterday, your edge is hidden in your past mistakes or bad trades. Each bad trade should be analyzed, if a pattern is found, that's a possible tweak right there. Any change is carefully considered though. because each change request intensive back and forward testing for validation. that costs money. For discretionnary trading, it's easier to accept tweaking, not that it's a good idea. but it comes with the territory. trading is personal though. maybe what I say and we do, does not apply to others. Anyway, since you ask, I reply. tntneo
To answer your first question, I guess I would say "either". When I refer to a strict methodology, I mean a method where you have specific, definable, rules that identify a setup, get you in the market, and then get you out with a pre-determined loss, or a profit, or after some logical time period. Personally, (and I am about to describe what works for ME, not what I think everyone should do) I swing trade equities looking for a few specific set-ups. At first, I was looking for a few discretionary chart patterns using TC2000 to screen, and then entering trades with pre-determined profit and loss targets. With experience, and a fair amount of backtesting, I narrowed my definition of a setup to the point that if I would apply my P&L targets to ALL of the handful of candidates my daily scans produced, I would make more money than if I went thru and handpicked the charts myself. In other words, once I found a good edge, I just wanted as many "at bats" as possible. When I tried to interject my market view on my trades, I made less money. As for taking discretionary trades, based on experience, I have no problem with the concept, and many people make more money than me in doing so, I'm sure. But FOR ME, I found that the less discretion I had in a trade choice, the less I would 2nd guess myself after I was in the trade. And more discretion makes backtesting more difficult. My method has been rigorously backtested with about 5 yrs of data, which as we know has encompassed both a record setting bull market, and a vicious bear market, along with a lot of time being rangebound. It has made good money with a low drawdown consistently during this period. This is what I meant when I said that I don't worry about what the market will do today or tomorrow. I don't have to. I am confident that if I take every trade my method produces, I will do just fine. Maybe not today, or tomorrow or even this week, but will be nicely "in the green" if I stay the course. I worry about breaking my own rules, because that is what will cost me the most money over time. To answer your last question re: "tweaking", my definition of a setup has remained essentially unchanged for several years. If I hit a "cold streak" I review my money management parameters keeping in mind the market's recent behavior, and occasionally "tweak" my algorithm's for P&L targets or trade sizing, but the changes are fairly minor and rare (maybe twice/year).
I sorry, I have to respectfully disagree. First of all, EVERYTHING in the future is uncertain. Since it's "baseball day" lets use it for an analogy. If the Yankees are 25 games above .500 at the All-Star break, are you more comfortable betting on them to win the World Series, or the Cubs? Nothing is certain, but if I have to bet, I know where my money is going. There are countless situations in sports,trading, and in life where you base a decision on what has worked in the past. Yes, it may not work this time, but trying what has worked well in the past is almost always better than a random, seat of the pants decision. If you truly believe the future is totally random, then it would be illogical and irrational to even attempt to make money trading. Yes, edges can be fleeting, and things can change. Maybe people will figure out how to beat Clemens & Wells, and the Red Sox take the AL East. And yes, the probability of a fair coin toss can be calculated, while the probability of an individual trade's success cannot be predicted in advance. But I truly believe (and can prove it with my backtest results as well as my bank account) that given a set of rules for entering and exiting a trade, the outcome of a decent sample size of trades resulting from those rules can be predicted within a certain margin of error. The point of my original post was only to point out this: If you have a definable, systematic method that has consistently made money in up and down markets, I am willing to bet that if you record every trade that method would make over a decent time period and at the same time record your results when you override the same method with your current market views, the "untampered" results will beat your "tampered/enhanced" results.
thanks tntneo for your reply, and insight on your various posts here on ET; I always enjoy reading and thinking about your comments. And Mr ROBOTO thank you also for replying so succinctly; it's always nice to read someone who has developed a system and is constructively confident in it's use without gloating. As mentioned here many times, a trading approach must fit a trader's personality; for me it's specialization. I've traded all my life and have concentrated on one vehicle at a time for extended periods. My tweaking usually involves changing vehicles(1-3 times a year). Yet you might think an etf might suit me better but i've found over time that i do much better with indiv stocks. Can't explain it especially with all the interest in the QQQ & SPY and the intricate systems developed forthem.
Markets are predictable. Chaos theory can predict more than just short term moves. The holy grail does exist in the form of a mathematical equation/system. Fibonacci is valid. Gann was on the right track. Money management is necessary, especially before you find the grail, it plays a much smaller role after finding the grail because all your trades are winners. Stock charts are ugly and index charts are beautiful. Tick charts are bogus. Arbitrage is relative. Riddles are supreme.