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Why are we always trading the wrong side?


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Why are we always trading the wrong side?

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  #11 (permalink)
 shokunin 
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arnie View Post
Entering the wrong side would be buy at 50, immediately prices drop 4 ticks to 49, you get a reaction with prices retest that 50 area and start pressing down again to 49, 48.50, 48, might go back up, testing 49.50, and again drop back down to 48s again. We have bought precisely at the price where it seems is now an area where prices are having some sort of resistance moving above, hence the wrong side. We got in at a price that seems to be used to "limit" direction.

So on the example above, where we bought 50s, yes, I guess we could say we got in at the right place, but at the wrong side, instead of selling, we bought, because that was the reading we were having. Maybe a support area we were looking at, where prices did react higher from there and we were looking for another reaction.

Yes, this is what I see. I build strategies around this and write algos to trade this behaviour. This is what is happening:

I enter a position on what I believe is the perfect turning point, aiming for 0 ticks against me. If that doesn't happen and price moves 1 or two ticks past my threshold, I will immediately place a limit order to scratch the trade at breakeven. It is the scratching the trade that keeps the price on the 'wrong' side of your line and prevents it from going in the predicted direction.

I can't speak for other traders, but I guess if I'm doing this (and I know other traders that are doing this), odds are a lot of traders are doing this.

If the price move is so strong I don't manage to get out at breakeven, I'm pretty certain there are other traders also underwater, and if price keeps moving away they are going to have to start chasing price to exit at a loss. So if I think this is going to happen, it is worth a cut and reverse. Any loss can usually be made up in the other direction using the liquidity of traders that haven't exited yet.

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  #12 (permalink)
lightsun47
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^So from that example, you will break-even your trade if the trade goes against you only 1-2 ticks, if I read that right?

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  #13 (permalink)
 shokunin 
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lightsun47 View Post
^So from that example, you will break-even your trade if the trade goes against you only 1-2 ticks, if I read that right?

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It all depends on context and what the order flow is doing. It could be that the order book suddenly changes, or there is large volume traded at the bid/offer in the opposite direction that I need.

For example, if price moved 2 ticks against me straight into an iceberg, and then algos aggressively hit the bid/offer to prevent price moving any further, I'd probably double up rather than scratch.

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  #14 (permalink)
 bobwest 
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arnie View Post
Not sure if anyone has discussed this here (did not find any similar topic), but why most of us seems to be trading, the majority of the time, the wrong side of the market?

I think this does happen. That is, I want to buy at the top. I want to sell at the bottom. Or I wait "to be sure," and then buy at the top, sell at the bottom.

I think that many, sometimes most, traders act the same way at the same time. So I am not alone in buying too high. A lot of others did too. Then all of us buyers are in, and who buys next to push it up? Not us. But we can all sell, and so can traders who weren't buyers along with us, and so it can't go up much but it can go down, and it does. We bought at the top.

So I would put it as crowd or group psychology, our individual decisions being pretty much in step with a large enough group of traders that we together affect the market -- against ourselves. In other words, the usual culprits of fear and greed or emotional trading or whatever we see in ourselves are being acted on by others who are in the same boat, at pretty much the same time.

It would make sense that this is seen without regard to trading methods or systems, to the extent that traders use discretion in ways that are not in accordance with their systems. That is, being caught up in the group psychology, it just seems right to buy or sell now, no matter what the supposed underlying reason is.

So traders that don't use any discretion because it's all algorithmic may not be subject to this (unless their algorithm doesn't actually have an edge), and traders who hold themselves apart from the emotional or psychological pressures of the moment and just trade their edge don't either -- at least, when they manage to stay detached from the shared emotional responses of the moment and trade by an actual edge, not an emotional reaction.

I don't think discretionary traders (and I am one) will always manage this (and I don't always, either .) But sometimes you can.

Bob.

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  #15 (permalink)
 Sandpaddict 
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bobwest View Post
I think this does happen. That is, I want to buy at the top. I want to sell at the bottom. Or I wait "to be sure," and then buy at the top, sell at the bottom.

I think that many, sometimes most, traders act the same way at the same time. So I am not alone in buying too high. A lot of others did too. Then all of us buyers are in, and who buys next to push it up? Not us. But we can all sell, and so can traders who weren't buyers along with us, and so it can't go up much but it can go down, and it does. We bought at the top.

So I would put it as crowd or group psychology, our individual decisions being pretty much in step with a large enough group of traders that we together affect the market -- against ourselves. In other words, the usual culprits of fear and greed or emotional trading or whatever we see in ourselves are being acted on by others who are in the same boat, at pretty much the same time.

It would make sense that this is seen without regard to trading methods or systems, to the extent that traders use discretion in ways that are not in accordance with their systems. That is, being caught up in the group psychology, it just seems right to buy or sell now, no matter what the supposed underlying reason is.

So traders that don't use any discretion because it's all algorithmic may not be subject to this (unless their algorithm doesn't actually have an edge), and traders who hold themselves apart from the emotional or psychological pressures of the moment and just trade their edge don't either -- at least, when they manage to stay detached from the shared emotional responses of the moment and trade by an actual edge, not an emotional reaction.

I don't think discretionary traders (and I am one) will always manage this (and I don't always, either .) But sometimes you can.

Bob.

I'm only chiming in cause I think it's relevant.

I think bobwest has a point about crowd psychology but I'd like to add that it's each of us individually doing this that creates let say a capitulation spike for an extreme example.

Not that it's predictable but if you look at a capitulation point on a chart you can see it's the collective throwing in the towel.

That's why it's moving... it's looking for buyers/sellers that aren't there and it creates a vaccum and a self reinforcing spike.

Eventually it'll catch a bid/ask.

Now that is an extreme example to make a point but new and novice traders (and long time traders too at times) think it's about prediction and timing entries.

I don't think many new traders believe or really realize that when they enter and stop out creating a loss THEY did that. NOT the market!?!!

They get in and the market will go against them %50 of the time, probably %90-%95 of the time. So roughly half the time you enter you will shortly find yourself underwater.

What a novice will typically do, and I guess this makes most of us novices is, panic out. Now I say "panic out" as a generalization as any emotional based non planned action.

Now just as around %50 of your timed entries will head underwater right away. %50 of your exits will head back in your direction. $!&!%#

Now as emotional pattern recognition organisms that are self preserving this HAS to draw our attention.

It is the reticular activating system in your brain lighting up and it is responsible for recognizing these patterns.

Then your emotional systems ignite signaling to your body something is wrong (stress) and you FEEL something is wrong.

What do humans do when something feels wrong. Do something. Anything to get out if the uncomfortable feeling.

This is a self reinforcing situation and WE do it to ourselves! You CANNOT ego your way through the market. You must adapt.

My whole point is it's NEVER the MARKET. It's always us. And I dont mean P/L I mean your control over yourself and how you REACT to the given situation.

So to answer your question it's two fold.

1) Yes we ARE on the wrong side alot.

2) Human psychology practicality guarantees we pay more attention when we are on the wrong side and remember it more. So it SEEMS we are ALWAYS on the wrong side even when data shows different.

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  #16 (permalink)
lightsun47
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^So if A LOT of people are just getting stopped out, let's see here:

Team A with x number of novice traders go long, which actually turns out to be a short. So, everyone in that group gets stopped out.

Team B, again with x number of novice traders had went short in that same trade, winning that particular setup / swing / scalp, etc.

Now, if Team A is losing 8/10 times, then it clearly means Team B is winning 8/10 times. But here's the catch - these are just teams based on a particular day / time - they don't play in same teams everyday, which means, Team A and B gets mixed up almost always because not everyone trades the same way.

The question is: Apart from the market makers / manipulators / HFTs, etc., who is actually CONSISTENTLY winning everyday from all this then?

P. S. Sorry for creating a confusing scenario, but I think this might be a relevant question here.

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  #17 (permalink)
 Sandpaddict 
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lightsun47 View Post
^So if A LOT of people are just getting stopped out, let's see here:

Team A with x number of novice traders go long, which actually turns out to be a short. So, everyone in that group gets stopped out.

Team B, again with x number of novice traders had went short in that same trade, winning that particular setup / swing / scalp, etc.

Now, if Team A is losing 8/10 times, then it clearly means Team B is winning 8/10 times. But here's the catch - these are just teams based on a particular day / time - they don't play in same teams everyday, which means, Team A and B gets mixed up almost always because not everyone trades the same way.

The question is: Apart from the market makers / manipulators / HFTs, etc., who is actually CONSISTENTLY winning everyday from all this then?

P. S. Sorry for creating a confusing scenario, but I think this might be a relevant question here.

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No confusion that's EXACTLY IT!

THAT... IS... EXACTLY... IT!!!

Although maybe some HFTs make money on most days MAYBE not ALL market makers... HFTs... ect make money everyday.

Awesome post!

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  #18 (permalink)
Cutloss
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Market makers typically do make money everyday and if not everyday then definitely for the week and the months and the years or they would not be market makers anymore!

BROKERS MAKE MONEY EVERYDAY. EXCHANGES MAKE MONEY EVERYDAY CLEARING FIRMS MAKE MONEY EVERYDAY AND TYPICALLY MARKET MAKERS MAKE MONEY EVERYDAY.

DAYVTRADERS AMD LARGE TRADERS MIGHT MAKE MONEY EVERYDAY IF NOT THEN EVERY MONTH OR QUARTER OR YEAR OR THEY WOULDNT DO IT.

LEARNING RETAIL DAYTRADERS SEEM TO BE THE MAIN ONES WHO CONSISTENTLY LOSE FOR THE WEEK AND ESPECIALLY THE MONTH AND THE YEAR.

Retail daytraders make the exact same mistakes over and over again and new ones are always entering and leaving the game!

I am retail and I make money almost everyday and absolutely almost every week but I am the exception

Read the corporate report for virtu to understand and see how mkt makers make money

Virtu averages 9 to 12 million a day in market making profits!! That is 9 to 12 million a day!!
https://ir.virtu.com/investor-relations/default.aspx

And they make about 2.5 million a day from their execution algos

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  #19 (permalink)
 GFIs1 
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Well - good question!

Psychology: >90% go with the sheep...

Watching the slip in btc$ - nearly everyone said: it came down quickly - now it's time to go long!
Just to see the money melting pot

Of course these are mostly "new" traders with no feeling nor knowledge for the markets.

Thus:
KYM - "Know your market(s)"

GFIs1

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 AllSeeker 
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"Majority" trading the wrong side is the corner stone of the how markets work. If they didn't then this trading thing would be very unprofitable to almost everyone except probably people who make it possible for you ("you" here is representative of all of us) to trade with small commission.

I think woodyfox put it in the suitable words, that's whats comforting about the markets to people who actually do manage to develope the edge.

Jusy my 2c and opinion.

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