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We perceive time by dividing it into three factors, the past, the present and the future. We're told that we're living in the now, that the future is not possible to predict, and the things that have taken place are impossible to change. Is that really how we live our lives?
I believe that we live in the future, based on our past!
We're constantly projecting our past into the future, letting our future actions be colored by our past errors and mistakes.
It's been said that living in the now is a "gift". Imagine being able to get rid of one's past, and allow the future to be what it really is, an infinite amount of possibilities. Nice one right?
Unfortunately it's hard, and that's because of all the layers of information we're carrying with us from our past.
When we approach the markets, we're doing it on the same time premises that we use in our daily lives. We're looking for patterns in the past, in order to project them into the future, and make a lot of cash.
In order to facilitate that, we use indicators! What's wrong with that, or what's the advantage with that?
Well, the advantage is that we create some sort of assistant that's helping us to monitor the markets easier, and to take the proper decision. If we think about it from this perspective, I believe that indicators are a great tool that's facilitating our decision making point.
Now, how about the disadvantages, are there any, could there be any?
If we're projecting the past into the future, as we do in our daily lives, how come we don't get killed in real life every day, the same way we get killed in the markets?
How come life works well on those premises, and we still manage to get by?
I invite you to take a look at your own life and to ask yourself how well that equation works! Have a look at your future through your past and tell yourself how it looks like. And when you've done that, I invite you narrow everything and step on the gas pedal and get yourself on the fast lane. Increase the speed and see how well it works!
What most of us are going to find is that (and please forgive me for generalizing) the tolerance in the fast lane is going to disappear. Most of us are probably too afraid to get on the fast lane, so they solve it by projecting the past into future, and by not taking any actions.
What I want to say is that we love patterns because they give us security. And that the social construction, is telling us that we've become mature (mature is positive, when we look at it from the past towards the future)! Remember college? Remember, we thought we were invincible? Now we're mature right?!
Now, let's skip the past, and let's skip the projection into the future! Let's just stay in the now! Could we then assume that, the future is an infinite amount of possibilities that lies ahead of us? Could we have a look at the present action and be able to perceive it for what it is, instead of having an expectation based on previous patterns from the past?
I think you all agree that the answer to that is yes!
How well does indicators again fit into this equation? Well, probably not that good! But why?
Simply, because they represent only one possible outcome in case the past is repeated. If the past is not repeated then they fail to meet our expectations.
Successful trading is all about avoiding losses! Can that be achieved by following a system, (read indicator)? YES, if you have such a huge account that could tolerate all the black holes you can be dragged into, when your indicators past outcome is not meeting the right future.
So back to the initial question! To have them or not to have them? I believe that they’re good tools if they’re used together with a high level of one’s present being involved. Using them that way, means that they ought to be used together with one’s intuition, which is very much more present in the present.
Unfortunately or better said thankfully we’re back on square one! Trading it’s a mind game, and in order to master the game, one has to master one’s own mind!
"Did any of your indicators tell you to exit? If so, are these the right indicators to be using? Should you even use indicators at all?
If not (indicators did not say exit), did you exit in accordance with your trading plan and your money management plan, or did you exit by the seat of your pants based on your gut feeling/emotion?
I think the answers to almost everything can be covered by answering those questions and learning from it.
For example, exiting based on gut/emotion is a no no. Don't do it. If you do it, you are stupid. Find a way to not do it, or stop trading now and give me all your money.
Exiting based on money management and trading plan, regardless of any indicators, is acceptable. The rule would be to follow your plan. Measure yourself on how well you followed the plan, not by on the net profit of your trades. After some time, you'll be able to prove/disprove your plan as a good one or bad one based on actual profitability of it.
Exiting based on indicators might possibly make sense, but is an extremely dangerous game. Indicators are the devil to most inexperienced traders. They are trickery and illusion. You would do well not to use them at all until you are a profitable trader, then you can start adding them to further refine profits. Now if you are more disciplined than 95% of your peers, you can establish clear guidelines in your trading plan that are not necessarily about money management but instead about indicator values (rising, falling, over 80, below 20, that stuff). Then follow them. But for most people this won't work because they can't do it or they've chosen the wrong type of indicators. But mainly because they can't do it. "
+++++++++++++++++++++
I copied the following into my trading file a long time ago and don't have the link but it is relevant -
"One must first accept the continuous nature of the market, the continuity of price, of transactions, of the trading activity that results in those transactions. The market exists independently of you and of whatever you're using to impose a conceptual structure. It exists independently of your charts and your indicators and your bars. It couldn't care less if you use candles or bars or plot this or that line or select a 5m bar interval or 8 or 23 or weekly or monthly or even use charts at all. And while you may attach great importance to where and how a particular bar -- or candle -- closes, there is in fact no "close" during the market day, not until everybody turns out the lights and goes home.
Therefore, trading by price and volume, or at least doing it well, requires getting past all that and perceiving price movement and the balance between buying pressure and selling pressure independently of the medium used to manifest or illlustrate or reveal the activity.
For example, the volume bar is a record of transactions, nothing more. The volume bar does not "mean" anything. It does not predict. It is not an indicator. Arriving at this particular destination seems to require travelling a tortuous route since so few are able to do it. But it's a large part of the perceptual and conceptual readjustment that I referred to earlier, i.e., one must see differently and one must create a different sense of what he sees, he must perceive differently and create a different structure based on those perceptions. As long as one believes, for example, that "big" volume must or at least should accompany "breakouts" and clings to this belief as ardently as he clings to his rosary beads or rabbit's foot or whatever, he will be unable to make this perceptual and conceptual shift.
If you can work your imagination and use it to travel in time, you will have a far easier time of this than most. Imagine, for example, a brokerage office at the turn of the 20th century. All you have to go by is transaction results -- prices paid -- on a tape. No charts. No price bars. No volume bars. You are then in a position wherein you must decide whether to buy or sell based on price action and your judgment of whether buying or selling pressures are dominant. You have to judge this balance by what's happening with price, e.g., how long it stays at a particular level, how often price pokes higher, how long it stays there, the frequency of these pokes, their pace, at what point they take hold and signal a climb, the extent of the pokes, whether or not they fail and when and where, etc., all of which is the result of the balance between buying and selling pressures and the continuous changes in dominance and degree of dominance.
One way of doing this using modern toys and tricks is to watch a Time and Sales window and nothing else after having turned off the bid and ask and volume. But this wouldn't do you any good unless you spent several hours at it and no one is going to do that. Another would be to plot a single bar for the day and watch it go up and down, but nobody's going to do that, either. Perhaps the least onerous exercise would be to follow a tick chart, set at one tick. Then follow it in real time. Watch how price rises and falls due to imbalances between buying pressure and selling pressure. Watch how and where these waves of buying pressure and selling pressure find support and resistance to their movements. And when I say "watch", I mean just that. Don't worry about what you're going to do about whatever it is you're looking at. Don't worry about where you'd enter or where you'd exit or how much money you'd make or whether you'd have been right or wrong to do whatever. Just watch. Like fish in an aquarium. If that seems only slightly less exciting than watching concrete harden, or it's just not possible for you to watch this movement in real time, then collect the data and replay it later at five or ten times normal speed. You can do an entire day in little more than half an hour (though you won't get any sense of real-time pace). Granted this means a lot of screen time, even in replay, and only a handful of people are going to do it. But those few people are going to part that veil and understand the machinery at a very different level than most traders.
Once the continuous nature of these movements is understood, the idea of wondering -- much less worrying -- about what a particular volume bar "means" is clearly ludicrous, as is the "meaning" of a particular price bar or "candle" (including where it "opens" and "closes" and what it's high is and so forth). If this is not understood, then the trader spends and wastes a great deal of time over "okay so this volume bar is higher than that volume bar but lower than this other volume bar, and price is going up (or down or nowhere), so...".
You are correct, exits are more important than entries. Afterall, only the exit will control the outcome of the entire trade, yet no one discusses them just like no one discusses money management. I believe the reasons for this are self-evident: people …
BigMike wrote -
You are correct, exits are more important than entries. Afterall, only the exit will control the outcome of the entire trade, yet no one discusses them just like no one discusses money management. I believe the reasons for this are self-evident: people consumed by indicators are also consumed by entries (earlier, faster, quicker) and these same people make up the majority.
++++++++++++
In Dr. Van K. Tharp's book, Trade Your Way to Financial Freedom, he refers to a study he conducted to demonstrate that an effective exit strategy could produce profits even with random entries. The exit methodology he used to produce the profitable test results across a diversified portfolio of futures markets was the Chandelier Exit. (Tharp used three ATRs trailing from the highest or lowest close and used a ten-day exponential moving average to calculate the ATR.)
"Unless you experience the unpleasant symptoms of being wrong, your brain will never revise its models. Before your neurons can succeed, they must repeatedly fail. There are no shortcuts for this painstaking process."
Pg 54 - HOW WE DECIDE
"Look, for example, at this elegant little experiment. A rat was put in a T-shaped maze with a few morsels of food placed on either the far right or left side of the enclosure. The placement of the food is randomly determined, but the dice is rigged: over the long run, the food was placed on the left side sixty per cent of the time. How did the rat respond? It quickly realized that the left side was more rewarding. As a result, it always went to the left, which resulted in a sixty percent success rate. The rat didn't strive for perfection. It didn't search for a Unified Theory of the T-shaped maze, or try to decipher the disorder. Instead, it accepted the inherent uncertainty of the reward and learned to settle for the best possible alternative.
The experiment was then repeated with Yale undergraduates. Unlike the rat, their swollen brains stubbornly searched for the elusive pattern that determined the placement of the reward. They made predictions and then tried to learn from their prediction errors. The problem was that there was nothing to predict: the randomness was real. Because the students refused to settle for a 60 percent success rate, they ended up with a 52 percent success rate. Although most of the students were convinced they were making progress towards identifying the underlying algorithm, they were actually being outsmarted by a rat."
Pg 64 - HOW WE DECIDE
"Think about the stock market, which is a classic example of a "random walk," since the past movement of any particular stock cannot be used to predict its future movement. The inherent randomness of the market was first proposed by the economist Eugene Fama, in the early 1960's. Fama looked at decades of stock market data in order to prove that no amount of knowledge or rational analysis could help you figure out what would happen next. All of the esoteric tools used by investors to make sense of the market were pure nonsense. Wall Street was like a slot machine."
Pg 67 - HOW WE DECIDE
TRADING IS SIMPLE:
Price either goes up or down.
No one knows what will happen next.
Keep losses small and let winners run.
POSITION SIZE = RISK / STOP LOSS
The reason you entered has no bearing on the outcome of your trade.
You can control the size of your loss (skill) but you can't control the size of your win (luck).
You need to know when to pick up your chips and cash them in.
The biggest problem we're facing with stops is how reliable is the past projected upon the future, hence this rational numbers game that money management is all about.
If we are to go deeper on this subject and zoom into what the market executions consists of, we find the least possible common denominator which is a person making a transaction. There's this story about this brilliant analyst getting a job at this old (as old as the street) guy that's been through it all. One day he rushes into his office shouting out loud, that they really should go short on coffee beans.
The old guy's asking him calmly why. The guy says because that's what the analysis is saying. It has broken the mother of all supports and it's going to dive very soon.
Oh yeah?; he replied, picking up his phone telling the broker to buy 10 000 contracts. Now watch, he told the guy!
The content here is that, it only takes one actor to go against the past in order to mess up your stats, analysis, and money management plans etc...
Hold on, the confusion is getting even bigger!
BUT, big but here, there are times when all your plans gets you exactly where you expected.
Your only problem is that you don't know which one of them (moments) are the right ones.
So you get back to your plan, system and your indicators. You do the mathematics and get great numbers. And you tell yourself, if only I manage to follow my plan I'll get the numbers right.
What you're missing out is the lag. The action takes place now, and you see it first when it has already taken place. That makes you act or react postum, late.
Now is when you start beating yourself up. You've made the mathematics, done your homework, back tested and it all looked great.
But, you're still not getting the numbers right when you're trading live. You ask yourself what's wrong, and you go on beating yourself up.
And instead of doing the right stuff you go on thinking, I have to stick to the plan. The problem is me! I'm the one not following my own plan. And you keep on beating yourself up. By now you're that messed, that your perception has all its focus on two things:
1: How messed up and bad you are, (remember the self talk)
2: Making your money back!
Now, if we were to be observing someone behaving this way, do you guys think that we'd be recommending them to be trading?
So you manage to end the day, and distance yourself from the markets for a couple of hours. Do you think that by now you're starting to be nice to yourself? No!
You go on and start scanning your errors. The system is good, the numbers are right. If you're lucky enough you get to the point where you understand that there's a big difference between the past which has already taken place and the context of where you’re taking action. You understand that the difference lies in the fact that you’re observing the past mechanically without taking action while it's being produced.
So you start thinking, IT MUST BE THE INDICATORS! If only I get one that's not lagging. That will give me the right edge. And you go on again, with all the above, but with a great hope of finding the Holy Grail outside of yourself.
Trading is one of best journeys one can take in a lifetime. That is because it beats you and it throws you against the wall, and it swallows you, and it chews you and it spits you out again.
If you by now are still interested in making it all the way. And if you have the courage to face the truth about yourself, you'll start to understand that:
1:Beating the market with your rational mind, is possible, BUT in order to be able to do that you need a huge account. And let's face it, by now that potential is minimal, and you simply can't afford it! and
2:There has to be something outside the rational mind that could help you to beat the market. And that’s your own Holy Grail.
But In order to find it, you have to peel off all the old junk you've managed to get yourself throughout your entire life.
Remember trading is not about doing your best in order to find the winners. It all about successfully avoiding the bad trading/trades. And that's the last thing your indicators can do for you.
You simply have to make it discretionary, let your indicators be nothing else then tools and put all your trust in your own internal ........call it whatever you wish. It is there, and it has always been there. It needs though to be allowed to come up to the surface.
Websouth,
If you are to be getting out using your rational mind, get out as soon as there's no momentum. That's where the money is (in the momentum)! If you’ve missed out, be happy you're safe, and learn that there's always, always, always another momentum coming up.
And sorry Mike, my opinion is that the gut is always right. The problem is telling it apart from the mind. When one has learned to disconnect the mind from the gut, that’s when you get it 100% right.
Trade Well!
/George
PS: Websouth, I'm not referring to you personally, I'm addressing myself to traders in general.
George
Thanks for the post. Your timing is excellent for me. What a long, strange trip it's been. I have traded successfully without indicators for several years by breaking all the "traditional" rules... of money management, using no hard stops or targets, no indicators just basic OHLC charts, trading odd hours or infrequently. More looking for the black swan event. For example in March of 2008 I made 60x my money on the EUR/USD and really didn't need to trade anymore for the year. I realize now that part of why this method worked for me was that it just fit my personality. My trade method is not something I can explain to others or write out because all the events in my life up to now make me what I am. You don't have my experiences then you won't react the same way I do in the same situation. Possibly the inner holy grail you spoke of. I had it... and then screwed it up. Things were going just fine until I attempted to make more of a regimen of it. Part of this was altruistic. I have friends who have never traded and I couldn't explain how I traded to them so they could do it so I went looking for a red/sell - green/buy sort of a system to share with them. I figured if I could only make a few pips a day I would have a stable excellent living. Then I reasoned I could only do this using indicators to "refine" my entries and exits. Then I went to smaller time frames. Staring at tick charts waiting for 5 different indicators to all say the same thing. For the last 8 months or so I got lost in indicator hell. I tried them all - free ones and paid. Even taught myself how to program (barely - more of a hack). I had fun and learned some and of course spent more money than I'll admit to. I basically have gone though the whole process of chasing indicators around as you and others have detailed and now have come full circle back to where I was. I don't need them to trade. Never did. Hopefully I won't have to unlearn too many bad habits.... this post seals that chapter. I guess it was a journey that had to be taken.
“Since your mind is your most valuable asset and your most valuable lever, you need to be careful what you put in it. Sometimes it is even more difficult to get rid of thoughts and ideas that are already in your mind than it is to learn something new” - Pg 119 WHY WE WANT YOU TO BE RICH
F - Follow
O - One
C - Course
U - Until
S - Successful
- Pg 110 WHY WE WANT YOU TO BE RICH
If the rat is beating you, you are the reason why.
