@tigertrader.......I understand exactly what u are saying.......Am focusing on a few "tools" and using these in ym vs. oil right now. Bankroll definitely influences the strategy u must employ. Beginning to recognize certain signals which I never would have even thought of before. Appreciate the "plain truth" advice
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Platform: Ninja Trader, Nexgen T-3 Fibs Pro Trader (Love Them!)
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I'd like to add some humor to the discussion. I also like metaphors and I just came up with one.
The Old Farmer: The old farmer goes outside and looks around to gauge the weather. He looks as far as his eyes can see. He checks for clouds and the wind in the trees. Maybe he consults the Farmer's Almanac or holds a wet finger in the air. But that is all he knows; he has no other tools.
Then he decides whether it is time to get the hay in the barn.
The Weatherman: The weatherman has Indicators. He looks at the Baraometer, Temperature, Humidity, and Doppler Radar etc. to decide on the weather.
Now who do you suppose gets it right most often? Who would you consult if you were pouring concrete? -Quack-
To me, the Macd bbs is like Doppler Radar to the weatherman. It is absolutely NOT a lagging indicator. If you know how to read the subtle signals, you can predicat price movement as accuratley as a weatherman can predict the weather. The weatherman is not always right, but when he says 100% chance of rain, we usually get wet. A good farmer can do surprisingly well. If he sees the leaves fluttering from dark to light, and dark again, he knows he'd better get the hay in the barn soon. The leaves flutter and change color because the wind is swirling in two directions; it is the boarder between a high and low pressure area. A low pressure area is moving in and it's going to rain. Pretty crafty farmer. But I prefer to have doppler radar on the screen so I can see where the low pressure area came from, how big it is, and and what path it is taking. I'd also check to see if the humidity is getting high. My wet finger isn't that accurate. But that's just me and I could be all quacked up.
Last edited by Trader Duck; November 4th, 2011 at 05:44 PM.
Oh, I'm sorry. I meant to include a chart. The Macd bb lines indicator is a Macd with dots on close (the bbs). The 9 EMA signal line and Histogram are taken out, and Bollinger Bands added. It is free on this site. Fat Tails did a wonderful job on one. He calls it MACD BB Lines V3 . I think I saw a version 4 also. As far as I know the combination of Macd and Bollinger Bands was 1st put together by Nexgen in about 1998. It is part of thier software package, which I have. The Nexgen site has manuals and videos for free that explain some of the signals. The best signals, though, are the ones taught by New Futures Trading, but that site is shut down right now. Here is a charts showing differnt codes written and how they look. Some are here on the forum.
I like your analogy, but I'd rather use other "indicators" than a squiqqly line.
Weather forecasting involves mathematical models that looks at various atmospheric factors, that is quite different from what a MACD does.
A MACD is just another way of filtering the same time series one views as a chart. I would argue that some people intuitively model the series equally accurate, possibly even better, than a simple indicator. If one decides to do some quantitative analysis, a rigorous statistical framework is much better!
That being said, if it works for you -- then that's great.
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I agree with you - there is a huge difference between investing and gambling. Still - I'm a day trader. There is a huge difference between investing and day trading. Day trading is much closer to gambling that it is to investing.
The problem with R:R & a win percentage, it presumes totally passive trade management. I don't know a single profitable trader that is passive in their trade management. It also doesn't consider trade frequency, slippage and commissions.
Theoretically, a 1 unit stop and an 2 unit target requires a 33% win rate to break even.
- If you have any slippage the win rate must be raised
- If you ever cut a trade before the target, the win rate must be raised
- If the 2 units was an ES tick, your commissions would be 16% of your profit on a winner, the win rate must be raised
- If the 2 units was an ES point, your commissions would be 4% of your profit on a winner, the win rate must be raised
In face, the one thing you can guarantee is that if you have a 1:2 R:R, a 33% win rate will definitely cause you to lose money. So - the theory that 1:2 needs a 33% win rate is somewhat trampled upon by the fact that a 1:2 R:R and a 33% win rate will be guaranteed to see your account bleeding dollaroonies.
I do agree that it's nice to consider where the market may go before you enter a trade but the "R:R" metric is abused heavily on trading forums.
One thing that I found very useful was to set up a random entry system and play with the R:R. In all cases the system broke even (without slippage, commissions of course), regardless of what happened to the %winners which was adjusted automatically by the R:R adjustment. The R:R adjustment does the same thing to non-random entry systems too.
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the challenge will be how you feel and how you make decisions while the money is actually draining from the account. I recommend you do it, go live. Stop simming, but, at all costs, pay attention to how you feel. That is the key to winning. You have to pay attention to how you feel before, during and after a trade. Simming won't give you that feedback. Winning real money and more importantly, losing real hard cash, that is where it's at. After all I have spent and done over the years, the most important thing I bought is training on how to read emotion while trading. It is all about emotion and the accurate interpretion of emotion. All the other stuff is not very useful. The key is in how you feel and how you make decisions in emotion.
Hmm, the premise that you used for the RR system failing is only valid if the R:R of trades remain constant throughout the system.
There are still times where a trader can adjust his R:R to higher levels like 1:9 if he sees that the trade will go for the long run therefore, the 33% rule does not apply anymore as it is only subtle if your R:R is constant at 1:2
The trader could have also chosen to ignore trades which only accomplishes 1:2 or 1:1 RR.
Like you, I'm also a day trader but unlike you, I don't pay for comissions or have any slippages as I'm into Forex.