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Underexposed view on use of Indicators and Overlays
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Underexposed view on use of Indicators and Overlays

  #11 (permalink)
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Big Mike View Post
I am sure @Underexposed's blood is boiling at this point, so I will bow out of this chain of replies.

But let me say, I am not judging you as a person as that would be completely unfair. I am judging the content of your posts, however, and to me it indicates you are a complete rookie. Only a rookie would get excited about a 90% win rate without knowing the statistic by itself is meaningless.

Let me leave you with this: How can you expect to outperform me as a trader with your current mindset? Everyone has to start somewhere, but right now you have not yet realized just how lost you truly are. Just don't make the mistake that most do - and never break that cycle. You can read in depth about it in this thread:

https://futures.io/elite-circle/11125-ask-any-trading-question.html

You need to out trade me, as well as countless others that are much better than me. If you can't, then I will out trade you - and I will take all your money in the process.

Enjoy your weekend, and be sure you fully understand the business you are engaging in.

Mike

Thanks Mike. I appreciate your feedback.

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  #12 (permalink)
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Big Mike View Post
I am sure @Underexposed's blood is boiling at this point, so I will bow out of this chain of replies.

My blood is not at the boiling point....however this is not the kind of conversation I want to see in this thread.

This is an education thread and I have a long and drawn out way of educating my audience. I have been a teacher in a high school, teaching English as a second language and as a salesman/sales manager over my 30+ years of working life.

I take my time in revealing my thoughts and my explanations are detailed as you would know if anyone has read my other 2 journals.

I love discussions on what I have presented in previous posts in any thread.... I dislike off topic discussions that interrupted my classrooms in my past history and as well as here.


Last edited by Underexposed; March 21st, 2015 at 11:09 PM.
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  #13 (permalink)
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Gambler View Post
Mike, I appreciate your answer but I want to learn them. It's part of my study of mob psychology.
My winning rate is 90% out of 100%. It's impressive for me. All it's based on big picture, analyzing of market condition, analyzing daily volatility based on current condition and current info and so on. I did not use indicators so far. They haven't convinced me yet. Also as a novice trader I do not go in a trade if I do not understand that. That helps me keep my winning rate high. So still want to learn indicators.

I am glad you are interested in the topic but off-topic discussions like this will get you put on my ignore list... YOU are warned.


Quoting 
Is it possible to give some examples on that with charts?
I look at indicators as at the past. History repeats itself they say. I agree with that on a big picture but details. They always screw big picture. I'm kind of person that only trust what you have current. Still try to understand how the past can help predict future when we are talking about indicators.

I gave those four points as a table of contents as to what I have to say about Bollinger Bands as they are used by themselves... don't worry about chart examples... my style of presentation is loaded with chart examples you only have to view my other threads on Canadian and American stocks to understand that.

I will not be pressured into jumping ahead in my agenda.... there is a method to my discussion... I realize it takes time for me to progress from one point to the next. In my life as a teacher, I never went to the next topic until my audience was clear on what I had just discussed... I learned that early in my life as a teacher... to not do so left some in my audience lost forever.

So questions on content are welcome... your own personal history in trading is not relevant here.

At times I might request a chart from my audience... especially a tick chart and the equivalent 5 min time chart. I have no facility for generating a tick chart but I do have comments on indicators/tick charts and would like to see if my thoughts are true or not on Tick charts.... but I will ask for them when I need them... not before.

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  #14 (permalink)
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Underexposed View Post
I am glad you are interested in the topic but off-topic discussions like this will get you put on my ignore list... YOU are warned.

It's kind of unfair. You can put me on your ignore list I do not mind.

Thanks,

Gambler

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  #15 (permalink)
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Bollinger Bands - Construction and Price Volatility

ok... back on topic

Construction of Bollinger Bands

Bollinger Bands (Bollies) were created as I have pointed out earlier by John Bollinger in the 1980's as a way to measure volatility in a stocks price.

The calculation is very simple and is based on statistics (mean and standard deviation). It is criticized of being a pseudo statistical approach as the results assume a normal distribution deviations of share price from a simple moving average calculated from that set of values.

However, the numbers can be anything but a normal distribution, especially in a breakout (up or down). Such situations make the resulting distributions very skewed one way or another.

But those criticisms aside, this is one of the most useful overlays and still stands the test of time... about 35 years now.

The basic Bollinger band uses Simple Moving Averages for the calculations. I have seen discussions saying that Exponential Moving Averages are better and I laugh to myself... the overlay is controversial enough using real numbers... using a artificial average is supposed to improve things??? I have not seen such and it makes no sense to me.

here is what a normal distribution looks like

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this is your bell curve or normal distribution. The "X" on the axis represents the average value and the "1s", "2s" and "3s" represents the first, second and third standard deviation values from that mean. The area under that curve represents the values that fall within each +/- standard deviation.

For example: the +/- 2 Standard deviations from the mean encompass 95% of all the numbers that are used in the creation of that normal distribution.

NOW...here is a critical point that will be emphasized later... the remaining 5% of the values lie further than +/- 2 standard deviations from the mean!!!

What does that mean in a practical sense?... it means that share price values, that are above the Upper Bollie or below the Lower Bollie, are a rarity... they don't belong there for long and in my experience within a few days will pull back into the Upper/lower BB envelope in a predictable time... Don't ask for examples at this time this observation will be discussed in detail in several future discussions with plenty of examples...patience please

Bollinger Bands - Price Volatility

So Bollinger Bands are a measure of price volatilty...there are no references to volume of transactions... as long as there is a closing price for each time interval the Bollies will be updated with each new interval whether there is one share sold or one million shares sold... the bollies will have the same number. If there are no transaction during the period... no problem we just use the previous close in the calculation of the mean and +/- 2 standard deviation values.

This has been another criticism of Bollies... they don't take into account volume or "action" in its calculation. BUT it was never intended to be used that way.

That is like taking a Volkswagen beetle as transportation and then criticizing it because it only holds 4 people comfortably. If you can use a VW beetle well who cares??? If you want to transport more people build a bigger car!!

Bollies measure price volatility... period... it does it well.... using this tool gives you a lot of useful information... want to include volume into the mix... select another indicator....

The accepted simple moving average is 20 time intervals... that can be 20 days, 20 hours, 20-5min intervals

Here is my first chart showing Bollies with Candlestick pricing. I will show it based on a 20day SMA and 10daySMA.


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Well my first comment on this comparison chart is that I don't really miss any nuances choosing a 20daySMA over a 10daySMA.... yes the bollies react a little quicker in the 10 daySMA but think on this.... if the data is irratic...do you want fewer numbers in the calculation or more to smooth things out??? I choose more...but it is my choice. I see nothing wrong with the tried and true default of 20interval SMA.

Now look at the price movement... when are major reversals happening??? after a period of time where the share price settles down....

You can see this in the purple boxes in both charts... the share prices get more and more stable... the bollies get tighter and tighter...until they reach a so-called "Bollie Squeeze" then there is a major break-out one way or another. The bollies suddenly diverge as the breakout occurs and the race is one to a new level.

Is this chart as it stands and interpretation very useful as it stands?....Hockey Pucks NO!!

But I will lay you ten to one odds this is all that 95% of users of this overlay know.

Is this overlay reliable when only used this way??? ... No it isn't?

Most can recognize the squeeze but they have no tools to evaluate the potential direction of the breakout.

Can the interpretation of Bollie Squeeze breakouts be improved ... Hell yeah!!!

In many ways..and they serve to either confirm or cancel each other... but it is far better than blind guessing... You make an "educated" guess.

This is enough to digest for now........... the next post will expand the Price Volatility aspect of Bollies and take it to the next level... though in truth this next post is ONLY the beginning of making evaluation of the BB Squeeze more reliable... as we go along ... especially when we add indicators into the evaluation you will realize the full potential of Bollies.

These following discussion are some that you will NOT find in any book.... they are a result of my own research on the subject... it is IMHO worth waiting for.

Good trading.

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Gambler View Post
It's kind of unfair. You can put me on your ignore list I do not mind.

Thanks,

Gambler

your wish is my command.... good bye

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Underexposed View Post
your wish is my command.... good bye

Same to you.

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Auf wiedersehen.

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Big Mike View Post
Expectancy is what matters.

Mike

Another concept I found useful (from one of the Van Tharp books, I think) is "expecta-tunity". A combination of expectancy (your "edge") and opportunity (the frequency with which you are able to exercise that edge).

It's a good way of explaining how a scalper whose expectancy is a single tick (after costs) can make an income because they are able to exercise their edge with potentially hundreds of trades per day, while a swing trader who trades only once per week will need an average trade expectancy more like the one in your image. For day-traders overcoming costs is always the biggest challenge, even with a consistent strategy, and I think a swing term style of trading is generally the best route to go down in retail.

While I agree with the 'random line fallacy' where chart patterns are concerned, we should be careful not to throw the baby out with the bathwater; some indicators such as averages and oscillators can be helpful if correctly used.

Finally, the idea of learning chart patterns to understand "crowd psychology" mentioned above probably isn't going to be profitable - fading these things is like trading with them - your results will be random over time. Although these things might be widely followed by retail, that's too small a class of market participant to matter.

Nick

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  #20 (permalink)
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Big Mike View Post
Win rate is virtually useless and only something rookies focus so much energy on. Expectancy is what matters. For scalpers, it is important to also factor commissions as some poor souls pay 50% of their day to their broker (mine is more like 1-2%).

Well, I wouldn't say it's useless. After all, win rate, or probability of wins and losses, are half of the calculation for expectancy from what I remember:

Expectancy = (Probability of Win * Average Win) – (Probability of Loss * Average Loss)

That being said, I absolutely agree with you that you shouldn't fetishize win rate, as it's only one piece of trading performance, and leads to poor risk management and negative expectancy. Also, as you said, costs play a huge role that new traders don't take into consideration as they trade on sim at first (well, if they're smart). And there are other factors as well, most obviously the trader's skill level.

That being said, learning to pay attention to various performance metrics was what turned me profitable. It just has to be done the right way.

Oh, and claims of a 90% win rate over time makes me quite skeptical, to say the least. Yesterday, I absolutely killed it and my win rate was like 85%, but that's not typical; as I said, my performance was off the chain.

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