Education
Now Reading
Flawed Technical Analysis And Other Fallacies
116

Flawed Technical Analysis And Other Fallacies

by The MoleNovember 1, 2015

Over the past few days I have seen very productive discourse covering a wide range of trading related topics. As humble host of this digital sanctuary one in particular has become a recurring theme for me personally as not a day goes by when I don’t encounter some hare brained train-wreck of a chart posing as ‘technical analysis’. As this is a veritable Pandora’s box of filled with confusion, assumptions, misinformation and deeply ingrained superstitions I will merely attempt to establish a number of basic tenets which should be appreciated as indisputable truths and serve as a quick acid test when evaluating any technical tools into your trading activities:

  • Candlestick Charts are at best a rough representation of time series propagation. As such they are deceptive and can lead to misinterpretations of what happened in the past. One needs to be conscious of the fact that volatility as well as participation within one candle can vary widely. This spells true in particular for interval based candles which assign a series of price changes into time slots. Whereas an intra-day hourly candle may comprise over 10,000 ticks one recorded during off hours may sometimes only comprise 1000 ticks or less. This seriously calls into question the validity of interval based charts as market participation does not abide by the rhythm of a metronome.
  • Indicators or oscillators which are a product of any time series by definition always have been and always will be lagging. Placing entries purely based on a time series based indicator or oscillator is tantamount to driving on the freeway whilst looking in the rear mirror. Oscillators may only represent a state within a range but rarely account for the explosive trending behavior propelling price outside of normal standard deviation thus producing ’embedded signals’.
  • Mean Reversion is an illusion. Price is not naturally attracted to some artificial range or moving average. The one reason why price reverses after trending behavior is due to profit taking. During stop runs profit taking can occur without price reversion. The phenomenon we call ‘mean reversion’ is only observed when selling or buying is met by insufficient opposing demand, therefore driving price back in the opposite direction. As such concentrations of participation at various price ranges can have a large impact on price behavior. To expect price to always revert to a certain point due to ‘mean reversion’ is naive at best.
  • Support and Resistance Lines are expected to represent inflection points observed by a critical number of market participants. There more touches the higher its visibility and thus the odds that a price range near a line is expected to accumulate buyers or sellers. However price is not intrinsically affected by lines on a chart but rather by the beliefs and actions of a large number of participants in a market. By drawing a line on a chart you are implicitly expecting other participants to anticipate and then observe the very same formation. Thus you are making a bet on consensus as well as the ability of others to perceive the same patterns and to observe similar price intervals on their charts (e.g. 5-minute, 60-minute, daily, weekly, monthly, etc.).
  • Price Channels – see support and resistance lines.
  • Retracement Levels such as fibonacci fans or pivot points are based on underlying formulas extracting support/resistance ranges based on prior price movement. Once again you are driving forward whilst looking in the back mirror plus the data analyzed is based on a particular time period, e.g. one day, one week, month, etc.. This should not be confused with statistical trading which is an advanced research topic among large financial institutions.
  • Moving Averages only matter if they are being observed. It doesn’t matter if you follow a 20-day or a 100-day SMA. Similarly you could be following a 21-day or 101-day SMA – or a 25-day and 120-day SMA. At which point does your moving average lose its credibility/value? IF a particular moving average coincides with a number of turning/touch points in a particular time series then it is either due to consensus among market participants or pure chance. So instead of looking for a particular moving average to predict price movements instead seek one that best represents existing market behavior. The more touches the better – with recent touches most likely representing equilibrium separating buying/selling ranges.
  • Chance and Random Events affect price movement. Sometimes an accumulation of random price movements over time produces context which is hence interpreted as a support or resistance zone and thus becomes one. Human beings constantly seek out patterns and will invent some if presented by purely random data. Appreciate the fact that random events may play a large part in how price movements are being interpreted by market participants.
  • Buying/Selling ranges are separated by equilibrium zones which I often refer to as Inflection Points. All trading ranges are inherently a product of volatility (i.e. speed/velocity ratio) and participation (i.e. volume/pressure). Within inflection points entries are favorable as price tends to moves slowly until price follows the easiest direction in response to shifting market behavior. As such they could also be referred to as transition zones. Be aware that the odds of resolution shift constantly as time and price propagates. An support zone which is only tepidly being observed can quickly make way to a selling frenzy. In other words – a support zone only should only be considered as one as long as it offers support, the same applies to resistance zones. Some of the best long trades happen near resistance zones and some of the most lucrative short trades occur near support ranges.
  • Volatility is comprised by price propagating at a particular speed and velocity. In a sideways market price moves at low velocity in comparison with the ongoing speed as represented by interval based candle ranges. In a trending market price moves at a higher velocity/speed ratio – meaning that we have high speed and a directional vector. Be aware that volatility differs significantly between period and tick charts. If price moves 3 handles within a one hour candle but most of those 3 handles happened in 500 ticks (within only a minute) then should the entire hour be labeled as volatile? The answer to that should be reflected in your trading system.
  • Continuous Futures Contracts do not exist. They are helpful in establishing a larger picture but do not represent reality as you are looking at several futures contracts which have been merged to accommodate a larger time period. This complicates technical analysis in the futures markets for obvious reasons.
  • There is no such thing as a Forex Market. Rather there exists a number of Forex islands which are all loosely connected. Prices as well as spreads can vary extensively as all forex traders are inherently prisoners of their particular forex island.
  • Stocks And Its Underlying Companies are only loosely correlated. When you are buying a stock you are holding a derivative financial product which represents the collective opinion of the observants of the underlying company. Although senior management is always incentivized to increase the company’s stock prices it is important to realize that the two are in fact separate entities. There are great companies with undervalued stock prices and crappy companies with high flying stock prices.

General Misconceptions

  • Assumed Risk has many faces and dimensions. For example futures and forex markets are commonly considered to be risky due to their inherent leverage. However I do not recall ever having witnessed a futures contract or even a currency dropping to zero (the latter usually go the other way when failing – thus admittedly affecting a cross). On the other hand the annals of the financial markets are littered with stocks that have done just that. Thus assumed risk should be clearly defined based on market, personal requirements/limitations, time frame, etc. Highlight various aspects of a market or instrument that may harm you and then prepare accordingly.
  • What Everyone Knows Is Not Worth Knowing. It is rather surprising that such a thing as the financial media exist as any information available has exactly zero impact on your trading performance.
  • Chaos And Uncertainty are the norm in all financial markets which stands in stark contrast with the expectation of most market participants who instinctively seek out order and predictability. Be cognizant of the fact that all financial markets operate on the notion of harming the largest number of participants.
  • Zero Sum Game – In order for minority to produce significant gains a majority has to be on the losing side. Ponder on this irrefutable fact every single day.
  • Hard Work is no guarantor of success. To quote Einstein: The definition of insanity is to keep doing the same thing over and over again expecting different results. Just because you read dozens of trading books and attended expensive seminars doesn’t mean you are a successful trader. In fact you are a only a successful consumer of trading literature and services.
  • Successful Trading is an acquired skill as opposed to an inherent ability. Learning how to trade and manage one’s capital is more akin to learning how to play the piano as opposed to memorizing a book or a poem. The more you practice the better you get at it.
  • A trader’s daily activities should be comprised of 40% risk control and 60% self control. In turn the risk control portion is only half money management and one half market analysis. Yet most traders emphasize market analysis while avoiding self control and de-emphasizing risk control. To become successful traders need to invert their priorities. — Van Tharp

I think I’ll leave it at this for today. Plenty of material for Halloween haters – enjoy!

 


About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at various social media waterholes below.
  • http://greenlander1.blogspot.com/ Greenlander

    I agree but I have found in sideways conditions, the combo of stochs/ CCI/ Bollingers/MACD divergences if aligned over multiple time frames extremely useful. When volatility ramps up a lot and things get wacky like back at end of Aug, I typically put this reversion system on ice.

  • mugabe

    Good post.

    Mean reversion, as in prices snapping back after a v big move in either direction (not sure if this is what you’re describing as mean reversion), has proved to be the basis of profitable trading systems.

  • http://evilspeculator.com molecool

    Ask yourself WHY those indicators work well in sideways conditions. Sideways conditions are times when we deal with high speed and low velocity – a.k.a. range bound markets. Those times are perfect for oscillators or indicators which rely on an upper and lower range.

  • http://evilspeculator.com molecool

    My point is this. When an indicator or a mix of them performs well in a particular period then we should reflect on the underlying reason for this. There are reasons why momentum indicators become overwhelmed (e.g. embedded) in trending markets.

  • http://evilspeculator.com molecool

    My point was that mean reversion is an illusion, mugabe. It’s used to explain buying/selling surges which often occur at various staggered price regions. However each region may exhibit a participation profile which does not necessitate ‘mean reversion’. If we have been pushing up strongly due to some market event (i.e. emotional spike) and it pushes price into a region where buying interest has accumulated then mean reversion is likely not to occur. Hence a short squeeze ensues and sellers which again feeds into further regions above. Does that make sense to you?

  • mugabe

    yes, it does. but that just shows that mean reversion doesn’t work all the time :)

  • http://evilspeculator.com molecool
  • http://greenlander1.blogspot.com/ Greenlander

    I agree I am just saying that they are not mean reversion indicators are not totally useless when you have a well-defined range to work with.

  • http://greenlander1.blogspot.com/ Greenlander

    Meant to say ‘the indicator not totally useless…’

  • http://evilspeculator.com molecool

    LOL – see what you just did? I NEVER EVER said indicators are useless – I said they are lagging by nature. I simply explained the reasons why they may fail.

    That is the problem with many traders – they jump to conclusions very quickly or disregard views which run opposite to close held beliefs.

  • http://greenlander1.blogspot.com/ Greenlander

    Dude we are talking about the same thing. Then why did you say mean reversion is an illusion?

  • mugabe

    the fact that it doesn’t work all the time puts it in common with all other trading strategies, the issue is whether it can be net profitable 😉
    btw, I’m talking about a mechanical system here, a la Scalpius. Not a discretionary tape reading strategy.

  • http://evilspeculator.com molecool

    I misread – I thought you talked about indicators in general. Regarding mean reversion: It’s an illusion caused by market behavior that is intermittently triggered. What I am saying is that it cannot be relied upon and will fail you at critical times. Some fledgling traders expect MR when their campaigns are running against them. Then watch while the tape keeps running higher turning small losses into significant ones. Especially after large moves mean reversion often fails to materialize for that very reason.

  • SirDagonet

    “Placing entries purely based on a time series based indicator or oscillator is tantamount to driving on the freeway whilst looking in the rear mirror.”

    At one time, I gave some thought to attending a Ken Long seminar… for the
    time being, I’ve dismissed the thought… but one of the reasons I considered it was @Scott’s high praise of his trading systems, which appear to be primarily indicator based.

  • SirDagonet

    And maybe that it could be useful when placed in proper context?

  • http://evilspeculator.com molecool

    Perhaps. Maybe. In case… etc. That’s nothing to go by. What is the ‘proper context’ exactly? At minimum you need to be aware of participation levels across various price ranges. Who does that type of research ahead of relying on MR? Exactly – practically nobody. Nevertheless it’s commonly used as the sole excuse for placing contrarian trades. Stepping in front of a bus or trying to catch a falling sword come to mind.

    How often have you heard: Well, it’s come a long way – very doubtful it could drop much further from here…

  • SirDagonet

    “Nevertheless it’s commonly used as the *sole* excuse for placing contrarian trades.” (emphasis added)

    I think that was my point about context.

    But perhaps I suffer from lack of experience, or perspective, or both. Even so, I can intuitively agree with you, Scott, & others that say EW, Fibs, Lunar trading, etc. should be dismissed because they seem to have no basis in reality. Regarding mean reversion, indicators, bollinger bands, etc, it seems they can be integrated into a workable system, albeit with – what – maybe a 50% success ratio? If so, wouldn’t that be about as reliable as most trading system success rates (just in terms of winning trades, notwithstanding risk management)?

  • Scott Phillips

    I think the data has established that mean reversion exists as a concept

  • Scott Phillips

    Indicators that are derivatives of price are very useful shorthand for objective system building.

    They have literally no meaning in and of themselves, since they are all derivatives of price.

    So for example Ken defines trending behaviour as when price is more than 1 SD (100 period) above the 200 SMA. This is not correct, but a useful objective definition.

  • Scott Phillips

    Indicators bollingers etc are very useful for system building.

    Mole is correct in that their PREDICTIVE POWER is an illusion

  • Scott Phillips

    I suspect that we are all talking about the same thing here :-) Everyone should be well aware of the inherent artificiality of indicators and also their usefullness.

  • SirDagonet

    Serious question: isn’t every setup, regardless of its component parts, and notwithstanding that you’d be willing to abandon it if proven wrong (as in, your stop was hit or your entry was not hit because price action moved in the opposite direction) a prediction?

  • TheRooster

    Many will be a long to answer this one with differing views I am sure.

    In my opinion one of the most dangerous fallacies that losing traders believe is that you need some special insight into what the market will do next to make money.

    Whenever I put a trade on I don’t know what the market will do next. I don’t see my trades as any sort of prediction of market action and with a 42% win rate nor should I.

    My trades are part of a bigger game to (hopefully) exploit a statistical edge I have found – on an individual trade level it has little meaning and no predictive power.

  • Scott Phillips

    You win the internet

  • mugabe

    I don’t think any one trade with a system is a prediction. The assumption (or, if you like, the prediction) is that the system will be profitable, not any individual trade. An individual trade would only be a prediction if you thought your system had 100% accuracy.

  • hellbent

    Excellent post. Hungover thoughts on mean reversion (yahoo, we won the rugby!)… catching gaps and spikes retracing within 1-2 sessions has been some of my best trading over a long period. Chasing bigger reversals on daily charts has not worked. I think MR is a poor term used broadly and incorrectly to describe other phenomena that we commonly fail to understand. Break it down. Ouch.

  • mugabe

    congratulations!

  • hellbent

    Thanks :-))

  • Billabong

    The post almost wants me to commit trader suicide… Bottom line is ride your winners, keep the process simple, cut your losses, manage risk, use stops, be disciplined, and file the news in the circular file draw (who said all of this?). Buy with some common sense and keep the losses small…

  • BobbyLow

    “isn’t every setup, regardless of its component parts . . . a prediction?”

    In a very simple answer – yes. Or put a different way – a scientific guess based on a higher probability of success than failure.

  • http://evilspeculator.com molecool

    And even Ken is effectively looking at the past – just because you were in a high volatile period based on a 100 or 200 period doesn’t mean that it will remain so in the coming weeks – similarly it doesn’t mean it’s about to change. All these tools are great after the fact for analysis but have zero predictive value. You and I have spent quite a bit of time attempting to use his indicators (e.g. SlopeStat, VolStat, StretchStat) and they proved to be completely useless.

  • mugabe

    ‘And even Ken is effectively looking at the past ‘

    By definition, all analysis looks at the past
    (- order flow is probably the closest to the present)

  • saltwaterdog

    Mole are the Thor results up to date? Last entry was mid Oct

  • http://evilspeculator.com molecool

    Strange – let me look into this later today.

  • Scott Phillips

    Not a prediction, more a sensible rational bet.

    For example trend following systems have consistent win rates around 39%

    But the outlier wins make it a rational long run bet

  • Scott Phillips

    Yeah I couldn’t make his market classifications work

  • http://evilspeculator.com molecool

    I just saw wheat close out and log to its spreadsheet while I was looking into it. We just haven’t had much activity as of late. The public sheet hasn’t updated yet but should do so shortly – if not I’ll dig deeper later tonight.

  • saltwaterdog

    Cool no worries, just curious.

  • CandleStickEmUpper

    Great post. Thanks.

  • JRob

    all of this is great..but not worth the electrons used, if you are not gonna point us in the RIGHT direction with ACTIONABLE plans to join the minority..

  • BobbyLow

    If you are looking for a Guru, you are in the wrong place. I also suggest that you drop the attitude if you plan on participating here.

  • newbfxtrader

    Only if you know the secret handshake…

  • tradingmom

    Do you read Mole’s daily posts? He offers ideas with entry points almost every day.

  • BobbyLow

    JRob we might live in a free country but this is a private blog and snarky remarks are not tolerated. If you keep this up you will be banned.

  • mugabe
  • JRob

    yes i do since late 2011 but, i have always maintained some want to FISH and not be FED FISH..that is where this blog lacks..but, so do all the others so its nothing out of the ordinary..

  • mugabe

    shhhhhhhh!

  • saltwaterdog

    If you’re really been reading for 4yrs your comment is stunningly off base

  • JRob

    thank you!!

  • randomuser6789

    If I were a moderator, I would have already banned this guy.
    With that cocky attitude, he will blow up soon anyway.

  • ridingwaves

    Most fishermen/women that don’t eat and enjoy fish are not so lucky while fishing…and do little catching

    if fishing was easy, it would be called catching

  • mugabe

    i’ll have to mullet over

  • BobbyLow

    All things in its time. :)

    I wanted to give fair warning first. We’ll see what happens from here.

  • hellbent

    don’t do it Mr Bong

  • http://evilspeculator.com molecool

    3600 posts in the past seven years – not my fault you didn’t read them.

  • BKXtoZERO

    ouch……….

  • http://evilspeculator.com molecool

    Agreed – I have little patience for personal attacks these days. Here I spent four hours of my Halloween Sunday putting this together. What’s my thanks? Personal attack reeking of self entitlement. Not my fault he’s not able to realize the value of my work. NEXT.

  • http://evilspeculator.com molecool

    What gets me the most is the insulting/aggressive tone and the sense of entitlement that’s rampant these days. What ever happened to ‘thanks for the free information, good sir’?

  • http://evilspeculator.com molecool

    So you’ve been leeching since 2011 and none of the stuff posted here in the past four years FOR FREE has been of value to you?

    What do you rats say? Ban for life?

  • http://evilspeculator.com molecool

    That’s what I love about trading. Someone may call you names and criticize you for no reason. Sweet justice is soon imparted when he finds himself on the other side of my trades 😉

  • hellbent

    Somehow I kind of understand the sentiment but, you’re wrong. It is worth the electron used. Why? because most of the ‘secrets’ are hiding in plain view and it really is a matter of just taking a closer look. Mole is bloody good at articulating that process. One of the most important things to understand is that title of this post draws attention to a massive hurdle stopping the majority of traders becoming successful. They are believing in bullshit and not seeing things for what they are. If you, or any of us, seriously studied the fairly brief rundown above, think right through it, and refine your own deep understanding of these points they, we, would be making a great step forward.

  • http://evilspeculator.com molecool

    I just checked it and the wheat campaign is on the spreadsheet. I think Google is just limping behind with updating dynamic spreadsheets.

  • http://evilspeculator.com molecool

    Exactly – you get it.

  • http://evilspeculator.com molecool

    What he doesn’t get is the value presented by dismantling/abandoning this laundry list of misconceptions. If you have two neurons to rub together then what has been presented should have triggered a veritable cacophony of epiphanies. Besides all that has been said above has been covered here in the past in much detail by either me or Scott.

    So what the…

  • hellbent

    Feed him to Scott :o)

  • BobbyLow

    This person sounds like an angry ball buster. I thought he or she might take a hint. This doesn’t appear to be the case. I don’t think we need this kind of Yahoo shit here. Don’t let the door hit him in the ass on the way out.

  • wandering196

    I think he lost self control. “A trader’s daily activities should be comprised of 40% risk control and 60% self control.”
    Great post by the way.

  • kudra

    Thank you!

  • http://evilspeculator.com molecool

    hehe…

  • http://evilspeculator.com molecool

    Is he gone? That occasion calls for…

    https://www.youtube.com/watch?v=JfUM5xHUY4M

  • BobbyLow

    Good point. He’s probably angry after a losing streak and blaming everyone in sight because he hasn’t been able to find the well lit road to riches that doesn’t exist.

    Speaking of which I’ve already been hit with one Forex Loss today and have another one on life support. I’m still long Crude and that thing has been floundering all over the place.

    And to top everything off, it’s raining outside. :)

  • http://evilspeculator.com molecool

    He officially won the golden turd award for this month for turning gold into complete shyte for himself:

    http://www.rollonfriday.com/Portals/0/Images/golden_turd_2015.jpg

  • http://evilspeculator.com molecool

    he eats one of those for breakfast

  • ridingwaves

    yes, thanks Mole!

    Kudra, you might get a move north in GENE soon…60 min chart is starting to look better…not a big move but up to the 2.15-2.20 area or overshoot

  • http://evilspeculator.com molecool

    Most classy response of the day – thank you good sir.

  • http://evilspeculator.com molecool

    A prediction no – it’s an action based on statistical evidence in what is perceived to be a recurring situation/moment yielding an edge over time.

  • wandering196

    I haven’t been trading much at all, took two of Mole’s forex setups last week, but I have been working on my behind the scenes trading and making progress.
    Speaking of weather, we are just for snow this month but we have had great weather for my neck of the woods.

  • kudra

    Thanks for looking out, riding.

  • Bill

    Thank you.

  • hellbent

    Nice. I like happy endings.

  • BKXtoZERO

    I have fallen behind on even my reading the last week or so but Thank you. I have way too much going on elsewhere at the moment. I knew it would be a busy winter for me and that I wouldn’t be trading but now reading and even Thank You notes are behind.

  • captainboom

    Especially after a massage :o)

  • hellbent

    always a great relief :o)

  • ridingwaves

    start looking into ACRX especially on pull backs to 4-4.10 if they come…it could break out to 5 and never go back to 4..look at the daily chart and tell me what you see
    put a stop at 3.93..

  • randomuser6789

    He’s ticked that you didn’t build his self esteem!

  • Billabong

    A lot of action since I left …. one member guillotined and markets continuing to roar ahead on ever worsening data (discounting something). ES just one day shy of new all time high…

  • BobbyLow

    Hey Billabong – just want to tell you that I shitcanned my hedging plays on Crude. Fortunately, it didn’t cost me much except for time.

    One change that I have made is quickening up my time frame because price has been range bound from hell so I’m taking profits sooner instead of watching them go up into money heaven. :)

  • mugabe

    who smoked him- Mole or Bobby?

  • hellbent

    MR cut and dried… It’s a pretty simple (and true) concept but can certainly fuel misconceptions.

    http://mathworld.wolfram.com/ReversiontotheMean.html

    As this definition explains, the law of discreet variables is not violated, it’s just that the odds of more extreme occurrences get diminished the further you get from the mean.

    The oscillations and snap backs we see on the tape are mostly market psychology and SFA to do with probabilities. Or that’s my take on it anyway.

  • BobbyLow

    I warned him and Mole “disappeared” him.

    He now “swims with the fishes” with Luca Brasi.

  • http://evilspeculator.com molecool

    Zero session today – very clean and solid up signal. I take it you Zero subs didn’t do anything stupid 😉

  • http://evilspeculator.com molecool

    Chart…

  • http://evilspeculator.com molecool

    I may add – pretty limited participation (small signal range).

  • mugabe

    well, he wanted to fish :)

    No horse’s head on the pillow, I hope :)

  • mugabe

    Really good post (snippets below):

    I’ve witnessed many seasoned investors over the years who have developed a well-thoughtout system or process decide to change it on the fly once they see something in real-time that didn’t occur during the historical sample set. “I won’t be surprised by that one next time,” they say. But there are always surprises, so form-fitting your strategy to every single type of environment or scenario is impossible.

    Every investor will have to deal with the following internal struggle many times throughout their investing lifetime: Is this an inevitably period of poor performance that comes along once every cycle or has the competitive advantage of my strategy been completely eroded?

    http://awealthofcommonsense.com/the-biggest-difference-between-the-reald-world-academia/

  • Billabong

    CL is definitely in a volatile channel … I’ve stayed away since my last long attempt.

  • hellbent

    “and in wear and tear on your internal organs” – I wonder if the condition of our organs is mean reverting if we ever get over that drawdown…. Probably not huh.

  • Billabong

    Markets have morphed into something that eventually grinds to a halt … It’s sort of like the old US Air Force joke about Lockheed / Boeing; they build cutting edge fighter aircraft that’s getting more and more expensive. Eventually, the USG is only be able to afford one fighter.

  • mugabe

    that’s beyond my pay grade. is there a doctor in the house?

  • http://evilspeculator.com molecool

    Definitely issues I have been dealing with in the past few weeks. If you think trading your own money is stressful then I can assure you that it pales with trading client’s assets.

  • hellbent

    I get very bearish when I think about the systems we have built in general, so I try not to go there. Certainly there is much more going on than I will ever understand but my feeling is that you are dead right. Last night I recounted a Seminar I seen once titled “Can technology save the world?” It was presented at the UN I gather and concluded that we are basically screwed (quite soon). I actually beg to differ on that point. Our current systems though are toast for sure. I’ve been trading only 5 years and quite intermittently and been caught out an alarming number of times in quite extreme market movements. We know there is going to be more. No TA can really help us there. It’s one reason why I’ve struck with more discretionary than systematic trading. I fear that there is much more risk that we factor in and only quick reactions will save our arse when the shit hits the fan.

  • hellbent

    poor bastards are always the first ones to go broke :o)

  • TheRooster

    this is comforting to hear – i was on a tear in September but October wasn’t a good month for my rule set – its amazing how quickly doubts can creep back in

  • Scott Phillips
  • mugabe

    always good to see this again. what struck me this time is the juxtaposition of sticking to the system through thick and thin and, at the same time, managing risk

  • Scott Phillips

    Happens to us all, and I am not immune to the temptation to tinker with things in a drawdown :-(

  • Scott Phillips

    My father is a surgeon, and a terrible trader. Reads zerohedge, won’t take a loss…. all the worst habits

  • Scott Phillips

    I have an order to get long (again) on break of the daily high

  • Scott Phillips

    I’ve been doing a deep investigation of his sort of systems, and the secret sauce isn’t in the entry technique or stop technique or the actual parameters, it is in the risk management and correlation management.

    Bottom line, almost all of the 300 billion CTA trend following industry uses the same turd rolled in a different colored glitter.

  • mugabe

    Personally, I think you need to have a mathematically-based plan in place when drawdowns happen that don’t involve tinkering with the sytem (the slippery slope) but do involve a pre-set decision on position size. This might not be optimal in terms of performance (almost impossible to know ‘in the moment’) but is optimal in terms of psychology: following a plan, feeling in control of what you’re doing, trading at your sleeping point.

  • mugabe

    So it’s in the overall portfolio management? This is something, I think, that we don’t talk a lot about here.

  • mugabe

    lol

  • http://evilspeculator.com molecool

    I can only imagine Christmas dinner conversations at the Phillips house :-)

  • mugabe

    bet he’s good at slicing up the turkey

  • mugabe

    This got me to thinking about trading and surgery:

    http://careers.bmj.com/careers/advice/view-article.html?id=2285

    From a technical point of view, a good trainee surgeon must strive for skilled performance; this is accomplished by devoting attention to practised skills in order to concentrate on achieving the desired result.
    Junior surgeons tend to be easily distracted by complex operations using complex equipment. It is more important to learn the general basics
    Surgeons must be technically able; make sensible, logical decisions; communicate well; and know when (and when not) to operate

  • http://evilspeculator.com molecool

    )
    ( /( ( (
    )()) ( )))( ‘
    ((_) ) ((_)() )
    _((_)((_) _(())_)()
    | | || __| ((_)/ /
    | .` || _| // /
    ( |_|_||)__|( _/_/
    ) ) ( /( ) ) * )
    (()/( )()) (()/(` ) /(
    /(_))((_) /(_))( )(_))
    (_)) ((_) (_)) (_(_())
    | _ / _ / __||_ _|
    | _/ | (_) |__ | |
    |_| ___/ |___/ |_|