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Concerning risk per trade sizing
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Concerning risk per trade sizing

  #121 (permalink)
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Big Mike View Post
Bob drives to work every day for the last 10 years using the exact same route from his home to his work place. He also drives home every day the exact same route from his work place to his house.

He drives himself. He does not have a robot driving for him and he is not using cruise control, GPS, or some other mechanical system. He is a discretionary driver. If he wants to change lanes, he does so, he does not need to wait for his rule book to say it is ok to change lanes.

Over the last 10 years, Bob has found it takes him between 30 and 40 minutes to get to work.

How long do you think it will take Bob to get to work for the next few months, on average?
A) 30-40 minutes
B) 5 minutes
C) 2 hours

Mike

If I put 3 apples in a jar today, and tomorrow I remove 1, how many oranges do I have left in the jar? Analogies only ridicule complex topics. You want to illustrate, use actual trading examples.

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  #122 (permalink)
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Hang on, he is right about that. A lot of times I will close my trade before it reaches target and before it stops me out, often I scratch a trade, based on new unfolding information (I expect deviations on a trade ALL the time......Sometimes I will add to a trade when I did not expect to, or like today on CL expand on final target. I do not expect deviations in driving that often), upcoming news, change of pace, size and depth of corrective wave and/or something else. i have not yet come up with a way to quantify all those factors. So how can i determine probability.

Driving a car on the same road.....has a very set defined rules and reactions to deviations. There are no fat tail events.....the road won't open up and swallow Bob..LOL

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There can only be a small rudimentary set of deviations...accidents, delays, reroutes...all easily identified. Perhaps the same can be done with price action and what factors affect a trade...but it wouldn't be as clear cut and simple....

I can replay a market but I can't backtest or forward test them, I am in that apples to oranges camp. Not saying it can't be done, just that....I can't even begin to quantify them...I mean..for one thing...even a basic thing as a pattern recognition....I can't quantify that...And if the the same pattern were to re-appear at an odd time of day, or under some other factor I could either take it or ignore it.


Last edited by Deucalion; March 8th, 2012 at 01:41 AM. Reason: added content
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  #123 (permalink)
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Regardless of whether it's discretionary or automated, every trader has stats that give insight into what might happen on the next set of trades. I have an expectancy, e-ratio, r:r, winning percentage, etc. Just because I pick and choose the trades, doesn't mean I'm throwing darts at a wall.

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  #124 (permalink)
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Big Mike View Post
Strongly disagree.

Mechanical traders and automated traders base their probabilities on prior backtests or prior forward tests. Either way, it is on a set of sample trade data.

Discretionary traders do the same thing. As I explained before when you brought this up, if you take the prior 1,000 discretionary cash trades and analyze them, you can define threshold parameters for what the next few hundred trades may look like --- just like you would with a mechanical or automated system.

It is all apples. Not apples and oranges. Apples for my last 1,000 trades, and apples for my next 1,000. All apples and all consistent with the same approach.

Mike

...

monpere View Post
...the only way you can legitimately rely on probability is if you record and analyze a large sample of your actual trades, and calculate the data based on the sample of actual trades. Even then, you will not be measuring the technical probability of a certain type of trade, you will be measuring how effectively you manage those trades when you took them overall. The next time you take one of these trades, the outcome will be less affected by the winning probability of that type of trade, but more by which discretionary variable(s) you introduce in the execution and management of that singular trade, and the same holds true for each trade you take after that.


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  #125 (permalink)
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Markets have a way of thwarting expectations. It is important to remember that no one, whether the mechanical trader or the discretionary trader, can know that there is an 80% chance (or whatever percentage) that the next trade will be a winner. Market conditions change and evolve. Our probability analysis is based on prior trades/market conditions, not future or even present conditions.

Changing conditions are difficult to measure in real time Gbut it's critical to recognize that the ground can shift. Imagine if the laws of physics were subject to change without warning, and what impact that would have on probability analysis of an outcome in the physical world. That is the world that traders work in.

-----------------------------------------------------

"If you must forecast, forecast often."

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  #126 (permalink)
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Let's say I enter a trade here. My stop is 50 ticks away, and my first target is also 50 ticks away. I enter here because it is moving higher, and just bounced off a support level.

Maybe after I enter, price moves down some but not all the way down to my 50 tick stop, which was placed there because that is beyond the next support shelf level, and I concede that if price moves to this area, I was wrong about this trade. So it has moved down some -- lets say 20 ticks -- but then it stops and starts moving higher again.

This happens often, as it breaks through just enough of the prior support level to trap some shorts or to take out prior longs.

In this case, my trade is still valid because I had planned for this as a possible event. It is not enough to simply say this happens all the time, so wait for price to move down 20 ticks before entering in the first place. Sometimes that works, sometimes it does not. I prefer to take my position when I see my setup, and add to my position when I feel that the above scenario has happened, or the other scenario is when price makes a HH+HL combo in this case.

As for RTH session times, I am not following how that has any bearing. Sometimes I do hold trades overnight, but not most of the time.

Mike

Doesn't this illustrate the apples vs. oranges argument in a way? You entered the trade with a fixed target and stop and an expected success rate based on prior experience. Then based on how the trade progressed you added a contract. This could also be considered to be a separate, independent trade. In any case, the expected sucess rate going in has changed, no?

The point is that each discretionary decision changes the end results. Hopefully for the better or otherwise you would not be a discretionary trader.

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  #127 (permalink)
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subjectivity along with common sense are superior

There are many departments where subjectivity along with common sense prove to be superior to mechanical processes.

For example, when does a change of trend occur?

No matter how complex your rules might be to define when a change of trend has occured, you will always have cases that does not fit your set of rules. Common sense along with subjectivity is more apt to deal with unexpected exceptions when they occur.

Another example, you believe that S/R are emotional meeting points where traders like to make business and take important financial decisions. No matter the reasons why you like S/R. You use them to define the overall structure within which price moves.

But this poses an interesting problem, how do you define these key levels? swing lows and highs ? but what about these times when price behaves a bit erratically and produces many swing highs/lows making your structure looks like a pick-up sticks game .

Don't you think, common sense and subjectivity would be better to identify the important swing highs/lows by loosening the rules just enough to find the most likely tradable structure? I tried your indicator in the download section that identifies levels of S/R and to be honest it is not up to snuff when it comes time to identify a workable market structure.

Another area where discretion is even more necessary and superior is when you see patterns on the chart which create an obvious expectation within the retail traders. When future price movement fails to meet expectations and you see traders becoming trapped in the wrong direction. These situations offer a high probability setup to the astute trader but in my mind these scenarios can only be dealt effectively with discretion and your common sense. Trying to profit from these losing traders would be a Herculean task (titanesque task) with rigid rules.

Hope it provided a few ideas to your illustration need


monpere View Post
If I put 3 apples in a jar today, and tomorrow I remove 1, how many oranges do I have left in the jar? Analogies only ridicule complex topics. You want to illustrate, use actual trading examples.


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  #128 (permalink)
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There are so many counteracting forces in the market I have never considered I was competing with anyone. So many people in market large and small doing different things at different points in time for different reasons it is hard for me to see anyone large or small as my competition. However, within that chaos trends can be identified which is why we can measure probabilities and make money.

Someone may be going short the moment I enter a long trade but we both could profit depending on our stops, targets time frames etc.. I don't consider whoever was on the opposite side of my trade as competition. We may both come out on top.

I think if I am competing against anyone it is against myself. To beat the market is to be able to consistently identify the direction of the river and win the battle against my own bad tendencies.

"The day I became a winning trader was the day it became boring. Daily losses no longer bother me and daily wins no longer excited me. Took years of pain and busting a few accounts before finally got my mind right. I survived the darkness within and now just chillax and let my black box do the work."
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  #129 (permalink)
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trendisyourfriend View Post
There are many departments where subjectivity along with common sense prove to be superior to mechanical processes.

For example, when does a change of trend occur?

No matter how complex your rules might be to define when a change of trend has occured, you will always have cases that does not fit your set of rules. Common sense along with subjectivity is more apt to deal with unexpected exceptions when they occur.

Another example, you believe that S/R are emotional meeting points where traders like to make business and take important financial decisions. No matter the reasons why you like S/R. You use them to define the overall structure within which price moves.

But this poses an interesting problem, how do you define these key levels? swing lows and highs ? but what about these times when price behaves a bit erratically and produces many swing highs/lows making your structure looks like a pick-up sticks game .

Don't you think, common sense and subjectivity would be better to identify the important swing highs/lows by loosening the rules just enough to find the most likely tradable structure? I tried your indicator in the download section that identifies levels of S/R and to be honest it is not up to snuff when it comes time to identify a workable market structure.

Another area where discretion is even more necessary and superior is when you see patterns on the chart which create an obvious expectation within the retail traders. When future price movement fails to meet expectations and you see traders becoming trapped in the wrong direction. These situations offer a high probability setup to the astute trader but in my mind these scenarios can only be dealt effectively with discretion and your common sense. Trying to profit from these losing traders would be a Herculean task (titanesque task) with rigid rules.

Hope it provided a few ideas to your illustration need

1. No one is debating the superiority of any methodology. I never said one methodology is superior to another. I believe anyone can make money using any methodology, as long as they understand it and apply it well.

2. I accept your criticism of my S/R indicator. Like with any indicator, some have found it helpful, some not . Although I am not sure how that is relevant to this conversation. So no further comment there.

3. I don't know how one 'sees' trapped traders, I'm not part of the borg collective, so I don't know who is trapped and who is not. Since you mention it, I guess you have a window onto every trader's entries, stops and exits which determines their level of entrapment.

4. If this is the first time the market produces the pattern of pick-up sticks, then yes, it may well be that my entries will get trounced, maybe, maybe not, that depends on my exact methodology, so no conclusion can be made in that regard.

5. If the market regularly produces pick up sticks patterns, then it will be reflected in my backtesting data, therefore will be reflected in my probability data. Furthermore, if my method was not designed for pickup sticks market environments, then I will not be trading that market action. If my method cannot tell the difference, then I have crap method, and no amount of probability calculation will help me.

The question here is when one says this is a high probability trade, what does that mean? Is it something you can base your trading methodology on, or is it something that makes you feel better about taking the next trade? You say a 'Trapped traders' setup is High probability, How high is high? I can say my 'CL 4Range Double Divergence' setup is 80% win probability, because I trade it the exact same way that it was defined in the 1000 occurrences of it in my backtest. So 80% is a defined and reasonable expectation. How do you define 'High' in that trapped traders setup? 80%, 65%, 110%, or is 'High' determined by how you enter, manage, and exit, this particular single occurrence based on discretion, and your physical and mental state at that time? In which case 'High' this time around, means a different thing then 'High' the next time around.

PS: Please don't answer with analogies of baseball players, pintos and 18 wheelers.


Last edited by monpere; March 8th, 2012 at 12:43 PM.
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  #130 (permalink)
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In regard to market being random. I think at any given moment their can be randomness about it. But overall it is not random. At one time I was convinced it was random until I started really using probabilities in my trading. My probabilities clearly say it is not random.

"The day I became a winning trader was the day it became boring. Daily losses no longer bother me and daily wins no longer excited me. Took years of pain and busting a few accounts before finally got my mind right. I survived the darkness within and now just chillax and let my black box do the work."
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