Thoughts on Day/Swing Trading

[AW10]

hi ST

I have a small doubt here.. frm whatever I gathered frm ur posts, u trade with the flow and do not close ur trades till the time the market comes back and takes ur Sl...
what I imply here is that , as per my understanding, u do not trade with a decided % stop and a decided % profit or a fixed profit & loss...
In such a case scenario, to calculate the trade expentancy, u will have to rely on the past data of profits and losses...
what I believe is that past data of a small time period may not give the true representation of the robustness of the system, as the markets are dynamic and may change....
for instance if I take the the past trade data of profits & losses for x period and find that my system gives a positive expentancy.. the very nature of the mkt may change fr the next x period. ie. the mkt may go frm a 'trending phase' into a consolidation phase..
hence I believe, if one is trading a system where the profits are not predecided, to calculate whether the system has a positive or negative expentncy, trades done in all kind of mkt scenarios would have to be taken into account...

regards

Anurag, You have raised valid point. To address this issue, Van Tharp proposes to use the concept of R-Multiple and measure everything in terms of R, not in terms of $. R is risk per trade. To know the expectancy, we need to understand our R distribution well. If sample size is 200 trades, then avrg win/ avrg loss, win/loss % are lot more reliable then sample size of just 15/20 trades. Moreover, by finding out the standard deviation of R-distribution, avrg win/loss, win/loss %, one can always find a range for each of the 4 component (average, 1 standard dev, 2 standard dev, 3 standard dev). and find the very differnet insight into system expectancy. This will give fair idea about what return could be for 70% of the time, 94% of the time and 99% of the time.

If we look at the parameter of consecutive looser/winner etc than we also good confidence in the systems performance.
These topics are addressed more in system development part of trading.

ST, has already mentioned about small sample size, and he has already used profit factor as replacement of R.

With this understanding, we can find out expanctancy for purely discretionary trading system too. Assuming human response pattern remains fairely constant, our R distribution will also reflect it over statistically significant sample size.

hope this helps.

happy trading.

 

[Smart_trade]

Excellent...AW10....

ST

Note : We have calculated returns on R multiples concept....not indicated as I thought it is less relevant in this calculation of method's expectation.....

Following para from your post is wonderful :

"With this understanding, we can find out expanctancy for purely discretionary trading system too. Assuming human response pattern remains fairely constant, our R distribution will also reflect it over statistically significant sample size."


Smart_trade

 

[jagankris]

Dear AW10,ST,

Just my opinion.Every body who takes a trade with a guess falls under the category of discretionary traders.Just few gifted experienced traders
who are discretionary traders but still highly successful may be less than 1% of the crowd and rest of the successful traders comes under the systematic rule based mechanical trading.

And successful discretionary traders response may not be consistent like normal crowd's response and they should have very excellent skills of tuning themselves to the markets movements and that's why other people who speculates or guess loose money.

My point is successful discretionary traders response wil not be consitent like other's behaviour.

Please correct me if it is otherwise.

AW10,

Please give us an example of pure discretionary system.

TIA.

 

[Smart_trade]

Dear AW10,ST,

Just my opinion.Every body who takes a trade with a guess falls under the category of discretionary traders.Just few gifted experienced traders
who are discretionary traders but still highly successful may be less than 1% of the crowd and rest of the successful traders comes under the systematic rule based mechanical trading.

And successful discretionary traders response may not be consistent like normal crowd's response and they should have very excellent skills of tuning themselves to the markets movements and that's why other people who speculates or guess loose money.

My point is successful discretionary traders response wil not be consitent like other's behaviour.

Please correct me if it is otherwise.

AW10,

Please give us an example of pure discretionary system.

TIA.

Dear Jagankris....

Successful discretionary traders will generally behave in a predictable manner in any given situation because though they say they are discretionary traders they have some trading methodology in their minds....no successful trader trades without reason....their mind is tuned to taking particular course of of action in a particular situation based on their beliefs and experiences......sucessful discretionary traders never trade on guesswork....

I have seen some very successful discretionary traders as well as some very successful systems traders.....so I really cannot say which one is more successful.....what suits us is best for us .....

I do see a point in your views and I respect them.....for me a combination of good understanding of the market action ( discretionary) and a good method ( mechanical methods ) along with discipline and good money management works the best... but very tough to mesh both the methodologies togather.

I will go a step further to say that pure mechanical systems will always have average results but the combination wil have superlative results.....this is my experience...many may not agree and may very strongly contradict this statement.....anything which gives us an edge in the market and suits our psychological setup is best for us....we have no quarrel with any methodology......

Smart_trade

 

[Smart_trade]

GAME OF WINNING AND LOOSING

Everyone comes to the market for winning......but most end up loosing...why does this happen ? To answer this question we need to peep into earlier part of our trading career.

We start trading most predictably on some tips given by some friends....we make some money and then some more and we get convinced that we are into world's best business.....no efforts, no work....only make money....this illusion soon vanishes as the reality dawns....

In initial period we have no method....later we latch on to some method....it may be moving averages, camerilla pivot points, indicators, swings....etc and we get into a stage when we make money on 50-55 % trades but small money as we are too scared to let the small profits turn into losses so we grab it.....our losses are also small most of the time because market gives us a chance to get out of loosing trades with scratch trade/ small loss. But very few trades the market does not favour us and kepps going against us inflicting a cripling loss on us which cripples our trading account and our confidence. This has happened to all of us.....

Just think about an imaginary opponent who is taking the other side of all our trades....this guy has made all the money we lost and he is happily smiling. Why ? because he has never lost big ( ie we never waited for our profits to grow big ) ...he has his share of small losses and small profits and few bumper profits trades ( which are crippling loss trades for us ) .So if you reverse the role and take small profits/small losses....few largish profits by allowing profits to run anf few very big profit trades then you will do much better than this imaginary opponent in his earlier role.....It is the large loss you have to eliminate and get some large profits trades in your bag and you make it.....

You need to have a competent method which need not be complicated.....it is a myth that good methods are complicated .Your method should stack the odds in your favour.It could be a simple method that you take all trades in the direction of larger timeframe moving average.....put your stoploss points, add points, profit taking points and backtest that method....if you like that method chances are that method goes well with your psychological setup and belief systems. Then you have your holy grail up and running for you.....

Smart_trade

 

[Raju]

Hi Smart_trade ,

Whatever U write , I feel I am exactly going through same phase, Big Losses taken , Grabing small Profit in order to avoid profit turning into loss.

Salute to you ..your level of understanding/explaining to the point is very good

Thanks for guiding me..

Cheers !!!

Regards,
Raju

 

[Smart_trade]

[/URL][/IMG]

Posting a chart which works on a simple method which trades in the direction of a moving average slope and colour.....all trades taken have valid reasons ....so are profits taken at various points......every trade is not a big winner but the last trade is a big winner....

Posting this just to illustrate that simple method with proper position sizing, adds, profit taking.....stops ...can make money in daytrading....you cannot eliminate loosing trades....loosing trades are unavoidable evils and you have to accept them as a part of your job.....but let the winning trades be your friends and let them overpower the loosing trades....

Smart_trade

 

[preethi21]

Uploaded with ImageShack.us

 

[S-1585]

GAME OF WINNING AND LOOSING

Everyone comes to the market for winning......but most end up loosing...why does this happen ? To answer this question we need to peep into earlier part of our trading career.

We start trading most predictably on some tips given by some friends....we make some money and then some more and we get convinced that we are into world's best business.....no efforts, no work....only make money....this illusion soon vanishes as the reality dawns....

In initial period we have no method....later we latch on to some method....it may be moving averages, camerilla pivot points, indicators, swings....etc and we get into a stage when we make money on 50-55 % trades but small money as we are too scared to let the small profits turn into losses so we grab it.....our losses are also small most of the time because market gives us a chance to get out of loosing trades with scratch trade/ small loss. But very few trades the market does not favour us and kepps going against us inflicting a cripling loss on us which cripples our trading account and our confidence. This has happened to all of us.....

Just think about an imaginary opponent who is taking the other side of all our trades....this guy has made all the money we lost and he is happily smiling. Why ? because he has never lost big ( ie we never waited for our profits to grow big ) ...he has his share of small losses and small profits and few bumper profits trades ( which are crippling loss trades for us ) .So if you reverse the role and take small profits/small losses....few largish profits by allowing profits to run anf few very big profit trades then you will do much better than this imaginary opponent in his earlier role.....It is the large loss you have to eliminate and get some large profits trades in your bag and you make it.....

You need to have a competent method which need not be complicated.....it is a myth that good methods are complicated .Your method should stack the odds in your favour.It could be a simple method that you take all trades in the direction of larger timeframe moving average.....put your stoploss points, add points, profit taking points and backtest that method....if you like that method chances are that method goes well with your psychological setup and belief systems. Then you have your holy grail up and running for you.....

Smart_trade

:clapping:
Great write up and very true. Thanks.

 

[anuragmunjal]

Dear AW10,ST,

Just my opinion.Every body who takes a trade with a guess falls under the category of discretionary traders.Just few gifted experienced traders
who are discretionary traders but still highly successful may be less than 1% of the crowd and rest of the successful traders comes under the systematic rule based mechanical trading.

And successful discretionary traders response may not be consistent like normal crowd's response and they should have very excellent skills of tuning themselves to the markets movements and that's why other people who speculates or guess loose money.

My point is successful discretionary traders response wil not be consitent like other's behaviour.

Please correct me if it is otherwise.

AW10,

Please give us an example of pure discretionary system.

TIA.

Dear Jagan

All the discretionary traders also trade with a method.. it is just that 'the method' is imbibed in their subconscious mind.. by 'method', I mean that their reaction to different market conditions would always be the same..
I will give u an example of a discretionary system.. this system was devised by a friend of mine in the 'tech boom' of late 90's and early 2000's. It does not work today...so pls don't try it... the purpose of this post is to demonstrate that often very simple things work in the mkt..
this was a time when tech stocks were roaring.. and the stocks had a tendency of moving in pairs.. infosys-digital- wipro, software solutions-niit, himachal-global, silverline-rolta..even hpcl-bpcl.
keep in mind that there was no f&o, only cash (and u had to trade a minimum lot in cash), the only way to trade was thru vsat as there was no internet or lease line..the stcoks used to freeze (upward or downwards) @ 8% and there were many stocks freezing upwards or downwards or maybe both sides every day..
observation: as I said earlier most of these stocks moved in tandem, in groups..
infrence: It was highly unlikely that silverline was up by let's say up by6% and rolta would be down.. even rolta would be up, if not by 6%, then maybe 3-4% or vice versa.
method: on a vsat there is a time lag of a split second or two when the stock freezes actually and when it shows on the screen.. taking advantage of this fact, this friend of mine would put a buy stoploss or sell sl of one lot just a few ticks below or above the actual freeze price of all the stocks which were up or down by around 5%..
taking a hypothetical example if himachal was up by 5%, he would put a buy sl a few ticks below the freeze point of himachal..when himachal would come close to the freeze, he would type in a big quantity to buy global and wait., just as his sl triggered, the confirmation of the sl 'triggering' would come in a split second or two before the actual freeze showed on the screen.. he would use this time to buy global..just as the freeze showed on the screen, the whole of India would rush into buy global... and he would be sell his global at least 10-20 rs above his purchase price in just a few seconds.. on atleast 8 out of ten occasions.. on those two occasions when himachal just touched the freeze point and came down, he would just sell his global 4-5 rs. below his puchase price..
see the risk to reward & imagine the results when huge quantities were involved..and on an average there were atleast 3-4 oppertunities everyday. again no TA-FA involved.. just a small edge which is the knowledge of crowd behaviour and finding means to get the information that the crowd will get a split second or two earlier..

regards