This is really everything you need in a nutshell! Once you develop a statistical edge involving a decent risk:reward ratio and you back test it enough to realize it works through all market conditions, and THEN (the hardest part) trust it and follow it in the face of that hard right edge, you will be net profitable. As I just posted elsewhere, I took 5 trades today and was wrong 4 out of 5 times. The average loss on my 4 "wrong" trades was approximately 1/10th the amount of my single winner and the end result was a net profitable day that pays the bills.
I am still the student and not the professor, but I'll share a few of my own conclusions about markets. Market understanding will not make you a trader, but market misunderstanding will hinder you. 1) I think one of the most difficult things for some to accept is that markets are not governed by mathematical or physical laws, therefore there does not exist some sort of mechanical holy grail if only you study hard enough. Some folks have tried to apply thermodynamics and information theory for instance, or fibonacci, or anything else that pretends to have a mathematical fundamental understanding of a price chart. I know this point is very contentious but look at it this way- you can't have macro laws with micro lawlessness. Chaos theory is of no use for a precise trading system because the buying and selling decisions of the fundamental unit, the trader, do not obey natural laws. 2) Price charts are derivative products from human psychology, which is itself can be arbitrary and irrational and at other times 'rational' (which is itself not well defined outside of random walk theory). Overall then markets are not rational and efficient, but about half of the time they bear a resemblance. 3) Markets change their character over time. 4) Markets have some memory, but it decays fairly quickly over time. 5) Price movements will change their scale and local correlations without warning and very rapidly, sometimes without a news event.
Albert Einstein said something like, "make things as simple as possible but not simpler" and that's a great trading concept which Jack Hershey fails at spectacularly. He couldn't even apply it to a grade school geometry problem that has a simple and obvious solution http://www.elitetrader.com/vb/showthread.php?s=&postid=2911211#post2911211
And maybe your comment shows you have your head way up your asshole. check out my comments on x1y1, x2y2 and x3y3. Do you think any of that thinking could ever enter your mind. Take your head out of your ass to give my comments a chance to penetrate before to talk to the shit surrounding your mouth. x1y1 is the locator for the left and horizontal axes of the nonstationary window. x2y2 is the price data flowing into the model based on preiodicity of EMH models. x3y3 is a line path for optimum crossover trading models based on multiple instrument periodicities. Thanks for stepping in for Einstein. Everyone else have a laugh. Lets see if Blowinski "lifts" this one and posts in in Fidelity.
You have excellent risk management skill as you showed it here again, but 4 wrong out 5 trades is quite unusual for you though. Was it your strategy gave wrong signals or you over-analyzed the situation and that caused the those untimely entries? Just curious.
Combination of things: trader bias, picking/choosing trades instead of taking all valid price action signals, and some solid signals that simply didn't work out. Trade 1: Pre-market shorted extreme weakness, held through the breakout and covered on the first pivot for a decent gain. Got another short signal and before I could get an order in edgewise, price dropped nearly 30 ticks (my full profit target, basically) so I didn't chase. Avoided trading around the Chi PMI and Mich sentiment news, which spurred a reversal in the previous downtrend, but by the time the news was all done, the new trend appeared tired. Trade 2: Shorted first lower high, when the new uptrend appeared tired and price action confirmed it. Price came within 1 tick of target and stopped me out b/e. Trade 3: Shorted the low of a signal bar where an upside b/o failed. Tightened the stop quickly when the bar break follow-through failed to materialize, limiting my loss nicely. Trade 4: Took a setup nearly identical to trade #3 and was stopped out b/e, again when follow-through failed to materialize. Didn't take the next short signal, the next long signal and the short signal after that, all three of which would've lifted my target orders, and so I missed out on excellent profits off those three trades. These setups occurred during what is normally the "midday mush" and I rarely trade then, but they were decent setups and so that's the cost of picking and choosing trades. Trade #5: Shorted one of my strongest setups and contemplated moving the stop to b/e when the follow through failed to materialize but the setup was so strong that I was blinded to the price action this time and took the stop loss in the end. There was a breakout setup about 20 mins before NYMEX close that I would've taken in a heartbeat, but was frustrated by all the stop outs and was taking a lunch break. That trade would've provided a bigger profit than my opening trade. So there you have it. No bad entries, no chasing, no revenge trading, no "hold my beer and watch this" counter-trend trades. I traded actual decent setups and took only confirmed entries. But by picking and choosing, I ended up picking the weaker trades that either just missed my target or just plain didn't work, and leaving behind four other trades that would've worked perfectly.
For every woman with a curve, there are several men with angles. Any woman who uses the word "hard" twice in the same sentence, causes a man to instantly forget that "Mother's Day comes nine months after Father's day"
Thanks for the explanation. Here I can see again why you are so successful and your DD is minimal. You have a very solid and detailed analysis and differentiated account of what went right or wrong, in doing so you would avoid or reduce the chance of repeating wrong trade and re-enforce the right trade setup. That ensures you more consistent success in the future. Trading with the trend is working when one can identify those trends that offer strong strength and longer duration, whereas shallow trend or quick reversal are often the pitfalls for trend following. An edge to differentiate (JH's favored term recently) the quality and strength of the incoming trend by either price action or indicators combination before the price moving into a trend would be advantageous in helping entering or avoiding the trade, or at least keeping the target at the more reasonable range.