Ok... enough... I knew I was possibly opening a can of worms with Jack, but I want to do this right. Jack: respectfully, give me a week or so to look over your stuff and really think about it. Might be more like two weeks, but I'll get to it and we'll come back to it. I don't want to dismiss your ideas out of hand and want to dig into them a little deeper. I may have the occasional question along the way, but for the most part I think there is enough information between your posts today and that other thread. Thank you. Everyone else: I asked several of you to table the conversations we were heading into on volatility and volatility measures. Let's go back to that for now. Some good work has been done here and some good questions raised. Last post for me for this year. Happy New Year everyone! Party safely.
Jack, if you had really been reading out of interest, you'd know that the methods Talon has presented don't require predicting market direction. The topic of the thread is "How to research and verify trading ideas," not predicting market direction. Unless and until you are able to contribute to this thread with comments that are on topic, and more importantly coherent, please only post on your own threads. Talon, search on Jack's previous posts. If you give him the time of day your thread is all but done. Between he and his few followers, your posts will be lost. Jack, I think your primary motive is to stimulate controversey. Whenever asked to demonstrate that your methods (supposedly refined over many decades) are profitable, you withdraw. Earn our respect by posting on topic, providing a P&L or real-time calls (referencing your other threads), and most importantly, ensuring that your posts are clear and understandable. You already know that most can't understand what you say, but I think you enjoy that. I don't think you want do do any of the above, as it seems that it is your desire to create an ongong mistique that benefits nobody but yourself. Please, just leave this thread alone. It is one of the best threads I've seen on ET. Chris
Jack thinks stochastics is a leading indicator of price http://www.elitetrader.com/vb/showthread.php?s=&postid=1302778&#post1302778 http://www.elitetrader.com/vb/showthread.php?s=&postid=2437787#post2437787
We've all seen how good Jack is at predicting... like his September 1st prediction "As a trader for 53 years, this turning point tomorrow is the most significant I have seen in my life." http://www.elitetrader.com/vb/showthread.php?s=&postid=2560747#post2560747
This thread is toast. Once Jack enters a thread, it is all over. It wiil degenerate into page after page of incomprehensible jargon. Worse, it will attract Jack's bashers, who are legion.
There's only a handful of people here actually contributing value. If you feel the need to post personal/emotional/useless crap, go elsewhere. What happened to staying on topic? So far the topics are: 1. Volatility filters. 2. Position sizing aka risk management. 3. Interelationship of 1&2. 4. Curve fitting, i.e. ATR ratio lags as a hard case study. 5. Best practicies for portfolio testing and system construction. I'm sure there are more but how about we stick to these 5? The more posts about non-related crap just annoys the hell out of me. At risk of sounding like some pre-madonna teenager, I'm about to walk out on this thread. I'm sure it will go on just fine without me, but I only have so much patience with for unintellectual spew. Mike
Ok EVERYONE please listen. You too Jack: Stop. Everyone has a point here... Jack has his viewpoint to defend and I do see what has happened to other threads when Jack comes in. If we're going to do this, let's do it right. Let's resume the conversation on volatility and testing ideas. A good point of departure would be looking at some of the tests people have posted in this thread. I'll also reply tonight to some of the questions re prediction etc. i know mike has some background stuff planned on volatility testing and i'll put some background stuff in too. I'll give Jack's stuff a decent shot but as I said it will take time. Jack - of course you're welcome to post here but please keep your posts short and excruciatingly on topic. Avoid responding to personal issues. Everyone else, please avoid provoking Jack. (This of the sign in the zoo: Don't feed the monkeys.) This thread survived the BoWo attack so just keep it on topic.
Let's take a step back and look at the 30,000 foot overview for this thread, just be sure we're all on the same page. In addition, I'll also talk a bit about how I view the market. Expect nothing specific here, but just background. First of all, the kinds of trading ideas I want to look at in this thread are ideas with positive expectancy. This will be extremely elementary review for some of you, but it may offer some slightly new perspective for some readers of this thread. (I would caution you that if what I'm about to say next is new to you, you really should expand your math background before you spend money trading.) In trading and gambling (which, be clear, are very closely related) we think a lot about expectancy. Expectancy is defined as the payoff of an outcome * the probability of that outcome. If you have multiple possibilities, it works like this: (payoff of outcome1 * prob of outcome 1) + (payoff of outcome2 * prob of outcome2) + ... etc It is worth your time to spend a lot of time thinking about this very simple formula. It is important to not just understand this, but to build intuition. For instance, I would argue that in many cases a stop (intraday) .75 away (assume say a $40 stock) actually carries less risk than a stop .05 away from your entry. The reason is that the close stop has a much higher probability of being hit. Like I said, this is elementary, but this intuition is maybe one of the most important "mental tricks" for a trader. You simple HAVE to be able to think like this. More elementary work here, but it is important to establish this. You also have to consider trading costs. At a minimum, assume trading costs are 2 times the spread of the instrument you're trading + commissions + all associated fees, taxes, etc. You can make arguments that other things should be included and perhaps it's possible you will enter one side on a limit and not pay the spread twice, but this is a good starting point. For instance, if you find a great statistical tendency to make 3 ticks in the ES, that's only borderline tradable. Our testing software includes several assumptions for trading costs... think of this is a hurdle rate that must be overcome. There are many many statistic tendencies in markets that do not exceed trading costs and so are not significant. So, be clear that all we're looking for here are market tendencies that have a positive expectancy. All of our work, thinking, research, system development... it all revolves around this idea. That's all for now... maybe more later tonight. The post I quoted is exactly the kind of post to avoid here imo. I know a lot of people have a lot of strong feelings about Jack. Repress them.
one more thought on big picture before we jump into the volatility stuff in more depth. i made the claim that the market was mostly random in response to jack's claim that the market was orderly and predictable. someone responded that they disagreed with my word 'random' but he thought the market was unpredictable. fine, we're both saying the same thing there. i think if i elaborate on this statement a little further it will help the newer guys (and ladies... unless i've gotten some pm's from dudes with interesting handles lol) orient themselves. as i said before, i think the basic mental trick of all trading is just thinking in probabilities. any one trade is more or less a coin flip... may work out or may not. this, incidentally, is why it's important to be consistent in your execution and how much risk you assume on each trade. you don't know which trades are going to be the good ones so you have to treat them all the same. what is your responsibility as the trader? to put the trade on and manage it correctly. you have no responsibility for the ultimate outcome of the trade... if it doesn't work out you just move on to the next trade. it's that simple. but it's only that simple IF you have an edge. this can come from a high probability setup (which, btw, usually means 60%... so it ain't actually all that high) or from a setup that has a low probability of winning but wins much larger than losers. (here right away you see why people who focus only on win ratio are simple wrong.) if you know you have that edge, then you just work within the calculus of the probabilities and put the trades on... at the end of the day, week, month the cards will almost always fall in your favor. i don't mean to trivialize this process because finding these edges and monitoring their performance (sometimes things do stop working or sometimes things only work well in certain environments) is a lot of work. in addition, monitoring your emotions and performance as a trader is key. it doesn't feel good to be wrong 80% of the time on a particular setup, but if your wins are 10 times your losers you have to keep sitting at the table and paying the ante. as for the question about calling the market in advance, in my experience and in my framework that's ludicrous. 85% of the time if you ask me about any market my answer is "i have no clue." in those times, i have no edge and no reason for being involved. all i am doing if i take a position in those times is guessing... because i have trading skills i probably won't lose money (but other people without these skills will) but i am assuming unneeded risk. for instance, what if i'm screwing around shorting some POS biotech in the middle of the day then they halt the stock to announce they found the cure for cancer? Sh*t happens all the time but if it happens to me when i'm in a position i have no business being in, well that's a major mistake. However... 15% of the time I think I have a clue. Now, I'll be wrong a lot of the time anyway, but here's the point of this post: The key is identifying what I think the most likely outcome is (based on my intuition or a specific trading edge I have identified) and... here's the key... knowing where I'm wrong. It can be as simple as saying "this 30.15 level should hold, if I see 30.14 I'm out" or it can be much more complex... but whatever... that's the key and that's how I teach the people I have worked with to think. It's not about some complicated magic formula and it's certainly not about knowing the future. It's about knowing where the probabilities lie and knowing what "should" happen and knowing what would have to happen to make me wrong. This relates primarily to discretionary trading, but I think it's a framework that underlies all my thinking... so I thought it was important to get it out. Ok... let's dig into volatility next.