Home > Technical Topics > Strategy Development > Trading WITH versus WITHOUT a system

Trading WITH versus WITHOUT a system

  1. Hello all,

    I am new to trading, and am trying to learn as much as I can. I've been reading a few books (like Day Trading for Dummies), but I still can't get one thing straight.

    So let's say, I'm going to start trading. Never done it before, so I'm going to be on a demo account.

    Do I start by creating a system?

    Doesn't a system require the formulation of a hypothesis, i.e. "Every time there is an MACD cross, and the Stochastic is over 80, and there is a hammer, there most likely will be an uptrend, and every time I see this combination I will place a trade, unless there is a news report"?

    How does a trader begin coming up with such a hypothesis? Gazing at historical charts, throwing all various technical indicators on it and noticing patterns?

    I hear a lot about systems, discretionary versus automated (you decide versus it decides for you). Does ever trader have a strict "system" which they have rigorously backtested? Or is this simply one way of trading?

    Thank you for any and all advice!
  2. Okay...

    So there's one group of traders who has a defined system, we'll call them Group A.

    The A types say "MACD crosses, hammer, stochastics are upwards of 80%, no news, let's take it, there's a 65% chance this will work".

    Then there is a group B who doesn't have a system per sey. They just know what security they're trading.

    The B type says "Hmmm, what do we have here? Hammer. Okay, what is the stochastic saying? 80%. Okay, that is a promising sign. What about the MACD? Not crossing. Hmm. What about the bolinger bands? Crossed the top of the band, so looks like there's something to think about here. Any news releases? None. Okay, no unexpected moves. Should I take it? Where are we in the 45 minute chart? Okay, looks like it's heading towards the top of a range, might be a bit risky for a buy...."

    Is this accurate?

    Thank you for all advice, as always...
  3. If you want to become professional trader then I'd strongly suggest you study Van Tharp's materials, perhaps start with his Peak Performance Course http://www.iitm.com/products/course/peak_performance_crse.htm it will totally change your perspective on trading.

    You can read some articles for free here http://www.iitm.com/Van-Tharp-Article-Directory.htm

    To find out answers about discretionary versus system trading etc, just do some research, it would be beyond the scope of a short reply on a forum.

    For a technical analysis you can try John Murphy's "Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications"
  4. Thank you for all the links.

    I just want to get the semantics correct here...

    A system trader formulates a hypothesis on what is likely to be a trend in a given market. S/he looks for certain indicators that when put together, will usually predict/confirm that a trend is taking place.

    The system trader will look for these indicators, and when s/he sees them, they jump in and take the trade knowing that statistically they are likely to win more than 50% of the time (and they manage their money so that they can't get killed because of a losing streak). They have extensively backtested the system and have demo traded it, so they can fall back on a statistical success average.

    They always follow their entry and exit rules, because if they don't, they get creamed.

    Some system traders operate like a robot, always entering a trade, others might weigh a few fundamental factors before deciding to pull the trigger.

    The discretionary trader, by contrast, doesn't follow a concrete system. They check a variety of indicators, and based on what those indicators are telling them, they make a decision whether to pull the trigger or not. They don't always look at the same indicators. They are more of a "wing it" type of trader, they don't have concrete rules and they go by a combination of indicators and gut.

    Is this accurate?

    Thanks again...
  5. This is spot on, can't be said any better.
  6. Trading without a system is random gambling.

    "Discretionary" traders are using a subconscious system that they cannot quantify. Their brain is performing hundreds or thousands of calculations by looking at price and arriving at a decision of "based on what is happening, should I buy or sell?" It's exactly the same as a mechanical system, they just can't quantify it. But inside their heads it all boils down to a red light/green light system.

    System traders have been able to quantify what they want to do.

    But yeah, all the "MACD/stoch/whatever" indicator systems will end up losing you money in the long run.
  7. Okay, so it seems that the discretionary traders don't adhere to a solid rule book, they simply use various indicators and then make a call based on what they think those indicators are telling them.

    I haven't placed any trades yet, I haven't even started a demo account. I like the idea of the discretionary trader, I have a creative personality so I'm inclined to believe that might be the better method for me.

    I gather system traders start by observing charts, coming up with a hypothesis, and then testing that hypothesis until they feel it proves them correct.

    How would a discretionary trader proceed with coming up with a plan, by contrast?

    Any insight is appreciated!
  8. You are asking good questions, but getting mostly bad answers. Unfortunately ET is mostly the blind leading the blind. The path you are headed down right now has ruined many new traders. Usually I don't respond to these posts but I'm bored so here goes.

    -Indicators are to be used as a guide, not a strategy. They are also much more effective on indexes than individual stocks. They are only useful due to crowd psychology, so you need a big crowd. Many new guys fall into the trap of indicator based strategies and don't survive the learning curve (because they don't learn anything about actual trading).

    -You cannot hypothesize a strategy without understanding how stocks move, how to execute properly, and where the profits can be found consistently. The ONLY way to learn these is practice. Ideally if you have the bankroll, practice with small size in a real account. No backtesting, No paper trading. You don't learn to trade with those.

    -"OK I will practice with small size but what do I trade?" I'm a big believer in trading volatility. This means using scanners to find what's moving today. Without volume and volatility you will have a tough time, so find it and trade it. You will learn from every losing trade. There are only so many mistakes you can make in trading, and once you learn not to make them you will turn profitable.

    It took me 1.5 years of full time trading to turn profitable. If I had the above advice it would have shortened that significantly.
  9. You need to spend like 2+ years watching the market for 6.5 hours a day, open to close, and another 5-6 hours a day after that (plus maybe 10+ hours on weekends) reading books, reading ET (seriously there is some good stuff here), running up and down rabbit holes, doing replays, and all that good stuff.

    Far as I know, unless you have a mentor, the only way to become profitable is to test out ideas, almost at random, until you find something that works. If you had a mentor, you could probably become profitable in a matter of months.

    The Anek's Holy Grail thread is a good place to start...
  10. Brother,

    with that type of impression you're dead in the water. BEFORE you start.

    MACD, Stochastics? Please.

    Three successful traders once gave me priceless advice & it changed my life.

    Buy at support. Sell at resistance.

    If you lose your money looking at moving averages, MACD, stochastics, fibo, elliot or Jim Cramer I won't feel sorry for you one bit.

    Good luck. Play hard & SMART. :)
  11. Hi Dustin, thanks for the good tips...

    Here is my problem. I just learned the basics of technical analysis (i.e. what this indicator does, what that one does, a few candlestick patterns, etc). Now what would be the next logical move, if I wanted to focus on an intraday strategy?

    Do I sign up a demo and just start looking at the live charts, having the indicators on and begin observing the behavior of the price?

    The problem is the books give you all the technical background, the psychological principles, and some even outline a few strategies, but they never actually go through the process of how you go from book wisdom to your first paper trade. I could start paper trading right now of course, but it'd be not much different from someone throwing darts blindfolded.

    I would go take a class, but they are expensive and I am wary of people who make a living teaching other traders - it often seems that is their way of making money when they lose their winning streak and need supplemental income.

    Thanks again for any and all advice.
  12. A discretionary trader, hopefully not a discretionary gambler, will have a system that they operate. However, for them it will usually be a framework of operation rather than a rigid mechanical system.
  13. This is good advice. Reread it. I think the volatility paragraph is something I wish I took under consideration at day one, as per it would have saved me a year of groping in the dark...................
  15. The next step is to take what you've learned and try to apply it to the charts of the stocks that are the most volatile each day. You can get the top gainers/losers free from many sites like Y! Finance. After each day take a look over those stocks and see if you can find tradeable patterns. Ten good traders will find ten different ways to trade them, you just have to find what you are comfortable with. For example you could trade them as continuations in the morning, then range trade them midday, then reversions late day...or any mixture you like. There are many good strategies out there, just a lot a of bad traders trading them.

    Don't pay for any classes.
  16. godamit, this statement is just about spot on !
    I would add, you'll never get 'em all right - ie trades - but the better the system, the higher the probability and that's what you trade, probabilities.
    Never fall in love with a position, believe nothing you hear from the [slanted] media.
  17. further, discretionary trading will overload your sensory perceptions.

    If / when you build a mechanical trading system, the concepts should be quite simple and the range of choices should be limited to avoid information overload.

    Information overload will seize the trader up.
    The brain can't cope with too much changing new information repeatedly imo.
  18. Generally that’s the concept.
    Theoretical yes, but in reality there comes a time when you get a string of losing trades resulting in a larger drawdown. Then the question is whether you blindly decide to continue trading the tested system on the assumption that in the past it was giving you a statistical edge, or do you stop using the system because the market conditions have changed and the system is no longer appropriate for different market conditions? There are many nuances like this that need to be emphasized, because generally systems are overrated, there are many hidden traps in system trading and consequently the most money made by systems are by those who sell them to new traders who believe they can buy success. Obviously there are exceptions, but most of the so called profitable systems don’t work in the real world of trading, and when they do, they are definitely no match for discretionary trading, because discretionary trading is superior in more than one aspect.
    Defining a process of trading style is one aspect, but I believe you should also look at what are the actual outcomes of each style, it’s strengths and weaknesses, such as smoothness of equity curve, expectancy, returns not only on money but also return on time for spending time in front of the monitor, etc.

    The problem with system traders is that they are removed from the actual market by number of abstract levels, and so in a sense they’re like robots. Another problem with system trading is when developing the system, you need some knowledge of how the market works, how the elements of the system should be adjusted, because if you don’t you’ll just be purely relying on some nice optimized statistics that the computer spits out and the system will lack trading logic behind those numbers and it will be a disaster waiting to happen.
    Discretionary traders have rules, they know exactly what they’re looking for, and they can even write it down in pseudo code, but unfortunately in most cases those rules are not possible to program and therefore human decisions must be made in rder to apply the method to the market. Discretionary traders do have trading plans. Don’t confuse them with gamblers who ‘create’ trades out of thin air without having any statistical edges. Discretionary trading will not overload your perceptions, because as discretionary trader you will have to adjust your thinking in a way that will filter out most information that has no value to you, and you’ll let your mind focus on only those things that are relevant to your trading methodology.

    You always politely ask, and politely thank to others, if you want I can help you to get started to put together some basic framework to get you started in the right direction. I won’t be back to trading till about September so meantime I have some spare time. But you’d have to keep a blog so that you start developing some kind of a structure based on trading logic which you could later on utilize as a framework for any kind of trading based on your personal beliefs and preferences.
  19. ALL of the previous posters and anyone else reading this will agree that preservation of capital is the single most important part of any winning system

    suggested hints:

    1. be on the right side of the trade
    2. use a sell stop
    3. dump losing positions before they hit the sell stop and hopefully before any money is lost.

    I might suggest a system with charts that has the following and nothing else: price, volume, hand drawn trend lines and channels and your ability to recognize chart patterns. look at charts in many time frames intraday, days, months, years. a one day chart is useless without a bigger picture.

    use a virtual account or paper trade for a year before spending any real money.

    if you had a system you would understand, the market goes up you make money the market goes down you make money there is always another opportunity.

    if you trade now without a system you would have more enjoyment if you lit your hundred dollar bills on fire and watched them go up in smoke

    keep your money in a nice safe bank account.
  20. Only achievable using tea leaves or a Ouija board...

    Sort of like saying, in order to win at sports, you must outscore your opponent...
  21. I use a Ouija board.

    obviously, if the original poster had a system he would know if he was on the right side of the trade or not.

    knowing what will happen next really helps, come up with a system where what happens next is not a surprise.

    trend lines, volume, and chart patterns are useful for this.
  22. Op,you have just been handed one of the very few diamonds in the dust here. Just add money management,patience and discipline-try to lose as less money as possible while you learn those 3 things.And finally,make sure your strategy can be summarised in 2 or 3 sentences.At this moment in time you are on target to waste the next 2 or 3 years proving that 99% of the stuff out there is 100% useless.
  23. This is exactly one of the reasons why so many spend huge amounts of time learning about trading.

    Let's say you have a few brains and say you won't start trading till you have a well tested method of at least 3000 sample size and then forward test it for min of six weeks, providing of course in your backtest of min of 3000 sample size it agrees with your personality. Not the best method is the best for you. You might find that drawdowns are too huge for your account size, maybe your risk is too huge. There are a number of reasons of why a profitable method may not agree with WHO you are as a person.

    I have tried all the indicators, some better than others. To me one indicator is enough and to watch it and learn all you can about what that indicator does in regards to price. It is just easy for me to see it and know what that market is doing as I day trade several futures during the day. But I use it WITH Price Action.

    When I build a new system, it is easier to program using 1-2 indicators, the difference between me and a new trader is I use that indicator differently that it was intended. I don't just entry on the cross of anything. But I can use it as confirming of price action trend. It is said to have higher highs/higher lows for trend up, an indicator may show that it's trend may still have it in a down trend, so this might be a possible trade to not take. But that is only found through extensive backtesting.

    I only have a couple patterns for entry, but I have 37 money management rules. It is the getting out that shows the profits, the breakeven trades and the losses.

    I set up like a diary for each trade, on winning trades I want to know how far price went against (this will help me figure out protective stops). How many bars or time did the trade just sit there (time stop rules might be used). How far did price go after target was made (figure out targets this way).

    I learn very little from losing trades, I learn much from winning trades.

  24. If you want to see the entire evolution of a beginner turned professional, I suggest reading nexial_1002002's comments by searching the forums at wl4.wealth-lab.com.

    I strongly suggest Fidelity as your broker of choice. WL is the single greatest backtesting platform known to man. TS is only useful for intraday trading, and has no portfolio level backtesting.

    That said, couple that with courses on finance and economics, and I think you'll be all set. It's not that simply backtesting gives you a strategy, more than it is about that it teaches you how to manage money from a mechanical perspective. The truth is, every professional when he allocates a client is required to have a reasonable and adequate basis. An analysis, if you will, is a pre-condition for taking investment action. The path to learn "how to analyze" is the secret of backtesting, and is essentially required study if you plan to make it as a trader.

    I have no interest in recommending Fidelity, other than that they have been a consistent, objective broker during the seven years I have used them, for both WL and fundamental research and data. I strongly recommend them. If anything, for the first three months to be "testing" strategies like MACD crossover with StochD>80 type bullshit. What you'll find is that while they might be profitable, they aren't necessarily something you could stomach actually trading.

    It's all about risk and reward, and it is only through backtesting that you'll understand risk and reward in terms of how you rate as a trader. Giving yourself the benefit of hindsight is one of the easiest things to do, but only if you understand its limitations.

    This bullshit about "be on the right side of the trade" is what they call the holy grail. However, you'll find that even the holiest of holy grails loses from time to time.

    I hope this helps you see the gargantuan task in front of you. Here's a tip: lie about how often you trade for the first three months at fidelity. This should get you enough time to experiment to the point that you have something you "might" be willing to risk hard earned money at, but, obviously, this requires at least $25k. And this is a very decent amount to begin trading with. Enough to make it worth your time while you learn, and, the real bread and butter amount that gets you passed the day traders rule on the NYSE and NASDAQ.

    The benefit I want you to get from reading my early comments is to understand that knowing that you don't know will take you to the next level. It may not be profitable yet, but it will help you understand what you don't know. Then, when you learn what you do know, you can have confidence enough to bet your future and your family's future on your day to day trades. This is a stage that only a handful of traders get to, and, really, there's very few on here that have. A lot of them can say they have, but not many have verifiable proof.

    I'm pretty sure you've caught that I'm someone that knows what he's talking about without being questioned about my background or credentials. At this point, only the most uninformed or simply arrogant traders would question my comments on this subject. You'll find that the single greatest breakthrough in modern finance and in my own personal trading endeavors was learning about how to exploit volatility. Adding standard deviations to indicators and formulating a theory on how to use them was one of the keys to my success. CAPM, APT, these are all variations on volatility and how to use them. Just look at how SuperBands with Linear Regression Analysis turned out more than 3 years after releasing it at http://wl4.wealth-lab.com/cgi-bin/WealthLab.DLL/getpage?page=Top25APR.htm \. I did a whole lecture to the Kentucky Math Association on this strategy, and while it wasn't anyones bag but my own, it was instrumental I think in taking me forward in my development.

    At more advanced levels you'll begin to notice mean reversion is the only absolute in modern finance and any price chart. This may be beyond your understanding of trading now, but once you "get it", coming up with profitable strategies will be your true passion. It has become mine after years of development, some heartache, and extra money for the future.
  25. Was this the system you used to generate those -30% returns last year or this the new and improved version??
  26. You need to understand a couple things, because you are way off base on your assumptions.

    First, discretionary trading is something that you may elect to do ONLY after years in the saddle. You can't beat the market unless you know it better than your competition. Five years from now you can - possibly - think about trading with some personal discretion. Even then I would advise against it unless you are very, very good.

    Second, successful system trading is about statistical probabilities. It has nothing to do with a single trade, or a single day. It has everything to do with many trades, over many days, weeks and months. That's the value of backtesting. You need to put the statistical odds in your favor in order to beat the house. Otherwise you simply won't do it over time.

    Third, you are making a very typical newbie mistake of focusing on technical indicators. There are NO secrets there. An indicator is nothing more than a measure of past price and/or volume. You first need to spend many, many hours sitting in front of realtime or playback charts, trying to understand what's happening and why. Then you can engage in trying to backtest your observations. After quite a few years at this, my very best systems use no technical indicators at all. They only measure price in relation to past price. That's it. Nothing more.

    Finally, your 'creativity' will come in systems development, not in trading. Creativity during the trading day will be your ruin, because it will engage your emotions, which you need to keep under wraps. If you feel like you need a creative outlet, then pick another profession or take up a hobby.

    Good luck.
  27. Get a job at a successful trading firm.

    1. Everything you think and people tell you are pretty much BS until you see it happening or confirmed via money.

    2. General idea of trading within a retail environment is only the tip of the iceberg, compared to how the institutions make money. There's a lot more happening behind what Bloomberg reports and what you read in books.

    3. Keep yourself up-to-date. Market Wizard, Van Tharp's book, etc. etc. are all out-dated. I wouldn't bother reading things that's been written 5 years and older. It's only interesting to read for nostalgic purposes, and the industry is different from what's been written. Industry and environment changes as much as the market does.

    There is no such thing as being timeless. Being in time is more important. Sorta' like trading a losing model that's tested profitably with 30 year data and trading a winning model that's been tested with 5 days of data.

    4. Get connected. Meet people rather than reading about things.
  28. It is fascinating how much of your opinion is ill-informed and based on untested assumptions. :D LOL
  29. I had a look at the breakthrough system of yours, the "SuperBands with linear regresion analysis" and it has shocking -49.38% maximum drawdown !!!!!!!!!!!!!! :eek:

    I wouldn't trade such system even with "your money". Oh my God, your system will take your equity down to a half, and you're claiming to be someone that knows what he's talking about. I guess if I'd question your comments then it would make me "the most uninformed or simply arrogant trader" as you have pointed out, so I'll rather keep my comments to myself. :)
  30. Hello to all, and thank you very much for all your advice!

    Mr. Consistent suggested that I start a blog where I can start talking about my newbie process. I've already written two articles describing how I got started here:


    I am inviting all experienced, profitable traders to jump in and offer your advice, as you have time, and all beginners like myself to read and ask questions.

    Hopefully this blog will help the newbies of trading go from booksmart to demosmart!
  31. I've sent you a PM, we first need to discuss some parameters, because I decided to stay away from a situation where everyone will jump in and ask questions. I'm not at the spiritual level of people like Mother Teresa who would help every Dick, Tom and Harry. :)

    I came to the conclusion that private blog should be the way to go, let's leave others here on Elite trader forum, here they can amuse themselves, no need to invite anyone :)
  32. Yeah, they did beat the S&P by several hundred thousand basis points now. None of them may be the holy grail, but they are as close to it as you can get without making your own system. I haven't seen you on there in awhile. I guess you moved on.
  33. No answer is required for your stupidity. They're two different systems dumbass.
  34. A good post. Very to the point.
  35. It's funny that you think I endorse it. Why else is it freely available then? It's a timeless experiment, but one that has managed to beat all of the ten thousand plus systems ever to be published on WL. If you ever get a chance, it looks pretty good on the NAZ100 with 1% of sizing. The drawdown is from 10% per trade up to 100% position sizing, which, obviously is something I don't recommend. That is to say, 100% in a single stock is not recommended, but it can be done with ETF's as you essentially hold 100 securities or more at once.

    Since you probably aren't well versed in understanding these statistics on WL, I'll save you the trouble.

    SuperBands, with Linear Regression Analysis since 1/1/1996 on the NAZ100
    Long + Short
    Starting Capital $100,000.00
    Ending Capital $1,102,590.63
    Net Profit $1,002,590.63
    Net Profit % 1002.59% Compared to the S&P's profits of 37%, this is oustanding, and would beat BRKA over that time period as well.
    Annualized Gain % 19.81% Say whatever you want. Good luck finding a system with this long of a backtest and that high of an APR
    Exposure 8.89%

    Cash Interest $127,905.48
    Margin Loan Interest ($5,561.16)
    Total Commission ($231,451.11) 0.01 per share

    Number of Trades 29,285 high statistical significance
    Avg Profit/Loss $34.24
    Avg Profit/Loss % 0.75%
    Avg Bars Held 1

    Winning Trades 16,396
    Winning % 55.99%
    Gross Profit $2,503,521.50
    Avg Profit $152.69
    Avg Profit % 4.42%
    Avg Bars Held 1
    Max Consecutive 169

    Losing Trades 12,889
    Losing % 44.01%
    Gross Loss ($1,623,275.20)
    Avg Loss ($125.94)
    Avg Loss % -3.91%
    Avg Bars Held 1
    Max Consecutive 225

    Max Drawdown ($153,103.25)
    Max Drawdown Date 11/20/2008
    Max Drawdown % -23.87%
    Max Drawdown % Date 8/31/1998

    Wealth-Lab Score 169.5453
    RAR 222.7115
    Profit Factor 1.5423
    Recovery Factor 6.5485
    Payoff Ratio 1.1307
    Sharpe Ratio 1.2275 This is probably where experience tells you something. Put about this way. If this is the most profitable system ever to be published, then it is the benchmark against which you should compare yourself. This tells me a long term sharpe above 1 is very good for systems.
    Dghost Annual Volatility % 15.8595
    Excess Return 19.4676
    Ulcer Index 5.5967
    WL Error Term 13.491
    WL Reward Ratio 1.4683
    Luck Coefficient 7.5119 This is low for a system so old.
    Pessimistic Rate of Return 1.4147
    Equity Drop Ratio 0.2617

    A very simple system. Buy in 0.25% increment starting at 5.5% below the 10,1.5 bollingerband if the linear predicted value is greater than the band. Sell on the open the next day. Maybe it's not so simple, but it's done perfectly well for 12 years, compared to the S&P's NP of 37% in that time.

    I feel like my other systems are better on a risk adjusted basis. Anyway, if you can get a system that looks this good "and can actually be traded" you'll be rich. That's the only goal really, is to be rich. This one has so many technical challenges that it's just plain easier to time the market than sitting at a computer all day.

    Swing trading daily systems have made me more money in two years than in three years of my start percentage wise.

    So definitely need to have a system. You just won't know your risk at all without one.

    Again, that's the best backtest people can produce in WL and still be verifiable. I'm sure there's others reading this that can throw out their systems measures, but we won't actually know if they aren't just saying if priceclose(bar+1)>priceopen(Bar+1) then buyatmarket(bar+1,'');
  36. So, dipshit, then why did you answer??

    And congrats, you've created 2 money losing systems. Brilliant!

    Don't quit your day job kid.
  37. Watch the market a lot (and all inputs into the market), then notice patterns linking the inputs to future price behaviour. Form a hypothesis using observation and pattern-recognition ability/creativity, then test it. If it seems to work, try it with real money, using adequate and robust risk control. Rinse and repeat.
  38. Okay, what exactly are "inputs", news? Or are you talking about tech indicators here?

  39. You talk out of your ass way too much. I don't even know why I bother with someone so new to trading like you. Typical wannabe intimidated by a succesful financial professional.
  40. Georgii

    Nice Blog, very good idea. I will learn with you.

    Don't know which broker to use yet.

    Any ideas for a broker - anybody.

  41. I think you missed the part that tech indicators don't work. Try looking up some books on investment theory and corporate finance. Learning how to calculate what things are actually worth is a good step before worrying about "predicting" future values. Knowing what things are worth now is a good starting point to predicting what things will be worth in the future. That's one of the best places to start, too, and is also where all models should start as well. The old adage in the CFA curriculum is that if your current valuation isn't what the market has, your model is off and needs recalibration. If you think about it from that perspective, you'll start to understand how the market works. In the end your valuation can be in a range of possible values, and it is only the "changes" in the market's expectations that will affect your trades. Market timing, at least the way I trade, is based on the assumption that the market can "change it's mind on a dime" and frequently does. That is also mean reversion.

    Going back to your question, learn how to "develop" a system. When your succesful at that, I think you'll be ready. Have you taken a look at Fidelity's Wealth Lab Pro?
  42. Fidelity.
  43. I actually understand the irony of the post.

    But I think you would agree that you wouldn't take things mentioned in these post or books and trade them as they are written. I'm sure everyone has their own set of criteria for considering and accepting what other people mention.
  44. I say before trying to learn how to trade learn who is in the game first. Technical traders, quants, value investors, arbitrageurs, news traders, market makers, block traders, hedgers, manipulators, brokers...etc. What are you going to do to take money out of their pockets? What are you going to do to be better informed then anyone else?

    A trade is what makes a market, it reveals the price at that point in time. When price moves away with the passage of time one's position will have lost value and the other gained whether it be the buyer or seller. Hence this is a zero sum game. If you want to, for example, buy at support, try and imagine why anyone in their right mind would be selling to you at support. What information do you have that the seller may not be aware of besides the fact that price is located at what you deem "support"?

    Some critical thinking will lead you to a better learning process and away from thinking that there might be easy money out there.
  45. I disagree. Livermore, Wyckoff et al. discovered the principles of successful speculation going on a hundred years ago.

    ...though this is for the type of trading where you sit and watch the squiggly lines. I don't know anything about market microstructure, mathematical models, gimmicky arbitrage, genuine scalping or any of that.
  46. Finally a quality post with wisdom based on observation. The dynamics of markets change, but the crowd psychology doesn't. :)
  47. to the OP:

    i hope this advice will ring true to you at some point during the years you will spend beating your fists against your head:

    the market is not yours to predict, but yours to follow.

  48. It's fine that you disagree and very understandable. I don't mean to be sarcastic too, FYI. One way to look at it is, all that matters is that you are making money trading.

    Though... I'm not a big fan of using Psychology, Market Psychology, Philosophy or all the subjective stuff as the answer of any trading discussion. It ends up with a self-fulfilling prophecy and it's not a transferable advice to a newbie asking for an advice. Don't get me wrong. I don't deny those subjectiveness of trading, but before any newb. goes into those things, there are prerequisite knowledge to be gained about the market to make money.

    Principles... you're using tough words. For example... they've both mentioned about the importance of Money Management. I agree. Though, would I use a 10% risk per trade like Livermore? No I won't, hope you don't too. Would I trade as Wycoff? Nope, his trading techniques are out-of-date.

    During the past 100 years, Math and Market Infrastructure has changed so much. I find it very hard to find any book off the shelf which doesn't mention about the "Principles". There's no doubt that I respect them as pioneers of trading but the information is out-of-date. Timeliness as a piece of mind is still living.

    My question is... there's so much to learn about the market. Why limit what you can learn about it, just because you know the Principle? Is knowing the "Principle" all that is required?
  49. Quality post meaning something you agree to? Then explain to me.

    What is crowd psychology? How would you use that knowledge as a part of your trading process?

    And... I think everyone doesn't want to hear the obvious like:

    - The price goes up, and the crowd is bullish.

    - The price rebounded on a previous resistance price consolidating around the price range.... and the crowd is waiting to see what happens.

    Seemingly, those things are just a post-analysis of what has happened. There are direction, there are strengths of a direction. There are bunch of other stuff... that needs to be determined....

    I am not posting to be conclusive, but it seems like people who mention crowd psychology are using it as a self-fulfilling reasoning towards what the market has done, without any rational reasoning behind it.

    Also, considering you mention market dynamics... isn't crowd psychology the basis of the market dynamics? If not, what else determines the market dynamics? Is crowd psychology just a noise of the other elements of the dynamics? If crowd psychology is a noise, then why not just trade the elements determining the market?
  50. The psychology of the crowd is reflected in the behavior of the crowd, it behaves like a herd of animals. Here is an intro for you http://en.wikipedia.org/wiki/Herd_behavior

    Such behaviors create inefficient markets, you can read some intro here http://en.wikipedia.org/wiki/Behavioral_economics

    Part of my trading process is to capitalize on these inefficiencies through self-awareness so that I don't become part of the crowd, this gives me additional edge.

    In the last paragraph you seem to lose yourself. I'm referring to crowd psychology from the perspective that the crowd lacks the awareness of their congnitive biases and is inefficient in their decision making. This was happening even hundred years ago, that's why that your belief about Market Wizards books, and other gems older more than 5 years was misleading. The crowd is inefficient when it comes to fundamental concepts of trading such as cutting loses and letting profits run, which has nothing to do with the dynamics of the given market, but rather with how people process information. Market dynamics can be viewed as a change in the ladscape, higher or lower volatility, etc. Chart is a chart, and good trader needs to learn to adapt to any market dynamics, most people are inefficient decision makers in any kind of market,and that's the why the history repeats itself, that's why old books from trading legends are still useful. :)
  51. So you consider yourself a contrarian against the crowd. Only as an example, what you do is very close to having some sentiment of what the market should be doing, and you trade against the current market price relative to the sentiment you have.


    So what prices the market? Markets are made by people placing orders and getting filled. If the crowd is inefficient in their decision making, what / who determines the correct pricing?

    In another words, what is the difference between an inefficient pricing and an efficient pricing?

    In the same market:

    - Let's say I'm a Quant., I have a pricing model telling me that the market is overbought. So I short the market.
    - Let's say I'm a Systematic trader, I see a trend happening so I go long.
    - Let's say I'm a chart reader, the market is consolidating at a very strong resistance. I go short.
    - Let's say I place an Long VWAP order through a broker, and they send split orders across the day. And the broker's algo. engine just bought a bunch.

    They are all part of the crowd. Who is right or wrong at this point?

    * Apologies, I edited the post a little.
  52. It only matters to you and what you see. It's the same point I keep trying to make with that I am fellow: It doesn't matter if I'm some virtual construct or an outcrop of my metaphysical mind, my reality is what it is to me.

    If your position is causing you pain, you are on the wrong side.
  53. Sometimes contrarian, sometimes not, it depends on the excact definition. If the market is extremely OB os OS, in other words the matket gets extremely extended,(say 3 standard deviations over a longer time period) statisticaly I know that it will revert to the mean. DOes it mean that I blindly put on a trade against the crowd? No, what I do is look for strong level of confluence of S/R and at that zone I wait if I get a reversal pattern with confirming internals. Maybe it could be classified as reversal trading, but if the reversals occurs in a deep retracement which is just a countertrend to a trend on a larger timeframe then it coud be defined as an early trend entry with tight stops at the lowest denominator levels. Sometimes I do trend against the sentiment, if I am right then my risk to reward is very good. If my trade doesn't work out then I get out with a small loss and let the market extent even further. Sometimes I'm just a Theta pig, and don't care much where the market will go.

    When it comes to efficient versus inefficient pricing, I don't put every single tick in the market into a black and white category. In the big scheme of things, it is the crowd. But on the micro level, people have certain agendas. For example during the openings, there are emotional order flows, and NYSE specialists take advantage of that. Instutuitions are very aware of their VWAP, so they need to get involved in certain situation, then they need to back off and wait for the stock rebound and then perhaps jump in again, and as a result you get those common first hour reversals in the market. Is it due to crowd psychology or due to someone's agenda? Is it due to cognitive biases or due to someones own agenda? I'll let you decide. Another example would be institutional "programs" trading, is it due to crowd psychology or due to someone's agenda? End of month, or end of quater window dressing, once again, I'll let you decide. I just don't put every wrinke in the market into a pigeonhole. :)
  54. Trading without a system/rules = gambling
  55. to the op:

    here's your last lifejacket i am throwing you after reading all the previous posts.

    do you want to be a trader or do you want to analyze crowds?

    it's important, because being a trader employs different skills which are rather different from what it takes to be an analyst.

    analysis and trading have nothing in common. ok, maybe 5% at best.
  56. Let me ask you this,isn't technical analysis a method that analyzes a quantifiable behavior patterns which are presented on your monitor by charts? If so, then what does it imply? Your answer will give you answer to your question. If you believe it is, then you're right. If you believe it isn't, you're also right, because whatever you believe will become your personal truth for "you".

    I never said that analysis and trading are the same thing, that's a whole new subject you're bringing up.:)

    Before we got side tracked ,the preceding posts were on the topic that I believe Market Wizards books are still useful even though they were writen more than five years ago because markets were inefficient back than as they're now ,and there is tremendous amount of insight in those book. If others believe otherwise that's ok with me too, I don't have a problem with that :)
  57. technical analysis as well as any type of analysis represents less than 5% of what it takes to trade.

    who understands this, good, who doesn't ... well, i hope you don't get bored spending another X amount of years figuring out the "game".

    and "we got sidetracked" from what you people already started babbling about. crowds and whatnot.

    the original poster stated that he wants to start trading and doesn't know what to do. he asked if he needs a system or what.

    i am here to tell him he does need a system, but not a system of analysis.

  58. I could see through your second last post that you were trying to set me up, hoping that you’ll get certain reaction from me to go ahead with your agenda. Confirmation of that is that in my reply I wrote ‘I never said that analysis and trading are the same thing.’ Instead you chose to ignore that and in your last post you went ahead and began to impose your agendas on me.

    If you want to play these games, then I suggest go and pick on somebody else, I have better things to do than write to people who cannot read. Or should I say "choose" not to read ,or maybe enjoy twisting everything to justify their own agendas.
  59. whatever. i have no agenda. i just layed out my 2 cents.
  60. ditto, no problem :)
  61. I spent many years developing a system but after many years I realized that it takes more then a system to be successful. Im not saying you cant create one but after years of working on one I only came up with ones of varying degrees of success. What I learned is that my self I am better suited at using an amalgam of ideas.

    1.) First, viewing the market on a Macroeconomic level to determine my long term trend of the market UP or DOWN, 6 months to 2 years out
    2.) Look at the Socioeconomic view point to determine if we are in a general accumulation, distribution or trending phase (3 to 12 week phase)
    3.) Use Technicals to enter, re-enter or exit positions
    4.) Fully understanding options and how they can be used to protect and maximize profits
    5.) Though I would say that the most important part is understanding how to Lose, akin to that of a top closer in baseball. You need to be able to take a punch in the face and come right back with your stuff. Your own psychological makeup is probably more important then any system you create.

    1.) DOWN
    2.) Nearing a first leg distribution
    3.) Everyone can tell you we are overbought but still awaiting that signal that confrms down.. Though you have to have full protection in at this point.
    4.) Fully protected
    5.) I got a few body punches on this last rally over the last couple days but feel good overall

    If you find a system that works for you thats great but its not necessary if you understand how to get thru those 5 areas but ultimately you need to do what works for you.

    Best of Luck
  62. Ghostdog, nice post in my opinion.

    Point 5) is crutial, it deals with risk, and trader must understand risk, If a trader doesn't understand his own psychological makeup then that's a risk in itself, because the trader himself is the most important factor his trading. Trading system could be thought of as an extension of trader's psychological makeup, because he is the one who creates it, believes in it, and trades it.

    Other points you've brought up also are very good. :)
  63. This sounds good, and it's what many members of this forum keep on writing ("over 90% of traders are not profitable", and so on), but what should be added each time is that on this forum the percentage of profitable traders is much higher, for the simple fact that not all traders write on forums, and not all traders write on this forum.

    That percentage also changes according to which section of the ET forum you're in. I wouldn't be surprised if the "Automated Trading" section of the forum had a majority of profitable traders. Therefore Georgii should not assume that most of what is written here is nonsense (as you seem to imply), but rather the opposite.
  64. Yes, create a system. Start with a simple moving average system and see how it works.

    Test it across stocks from different sectors. A stock like US Steel trends differently than something like Disney. US Steel might work better on a trend trading system where as Disney might work better using a swing trading system.

    You'll be surprised on how accurate a simple system can be. Don't try to tweak it too much or its most likely going to fail.

    Don't bother with any of the MACD, Stochastics, etc. Thats all pretty much useless. Stuff like crossovers generally don't work too well because everyone knows it. For me, looking at price movement is the key.

    Once you get a system that is producing good results, focus on reducing your drawdown. I reduce my drawdown by having a balance of longs and shorts that are not correlated. The overall direction of the market determines the percentage of my long and short positions.

    I'm a discretionary trader but I still follow a system for entering and exiting a trade. I use one custom system for both my longs and shorts. I keep mental stops on my positions and size my positions based on price volatility. This way, no single stock can hurt you much.

    I don't get the outrageous percentages seen on Wealth Lab but at the same time, I don't lose any sleep over the markets either. As long as I'm reaching my monthly goals, I'm happy.

    Best of luck on your trading and getting out of the rat race.

    (As a side note, I don't know if you guys watched Seinfeld. There was this episode where George does everything opposite of what he would think and it got him the world. I actually tried that in trading and ran a simple system using that theory. It had a 75% accuracy of wins to losses over the short term). Called it the reverse turtle. :p
  65. "Never done it before, so I'm going to be on a demo account. "

    That's a very good first step (not granted). Stay on paper trading until you find a consistently profitable method.

    "I hear a lot about systems, discretionary versus automated (you decide versus it decides for you). Does ever trader have a strict "system" which they have rigorously backtested?"

    Many traders misuse these terms. You're right in coupling "strict system" with "rigorously backtested", as the two things are possible together, and should be done. To the contrary, you can easily see that you cannot put together "discretionary" (by your definition: "you decide" system) with "rigorously backtested", because you can't "rigorously backtest" a system where your choices are made right there and then, and clearly that is not a "strict system". This has the consequence that you could say "this automated system has been profitable in the past ten years", but you cannot say "this discretionary system has been profitable in the past 10 years". You can only say "I've been profitable in the past 10 years as a discretionary trader".

    Conclusion: automated is far superior to discretionary.
  66. It is not the system,it is the trader who trades the system.

  67. practice for 12 months+ see how you do....you wil leoither keep blowing up accounts or you will figure it out.
  68. Think logically.....try to figure out the end first then devlop a method to achive that.

    Oh and forget about get rich quick....you can get rich but it takes lots of time and money!

    good luck. Most on ET are douch bags....odd few are good. you got to figure that out as well. OR keep away.
  69. If you have access to someones trading records (no I don't work at a broker) is it possible to somehow "reverse engineer" their trading strategy?