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Simple Directional Trading profitable?
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Simple Directional Trading profitable?

  #1 (permalink)
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Simple Directional Trading profitable?

Here is the topic:

Is it possible to be long-term profitable by trading only simple directional trades? For example, trading 'long ES' or 'short oil' etc. Just a simple directional trade, which either you or your trading strategy trigger. But this trade is entered by itself, meaning you don't require any other trade in any other position to go a certain way in order for this trade by itself to be profitable (and then repeat that as a long-term strategy).

Or, does long-term profitability require more complex trading? For instance, maybe:

- Spreads
- Options
- Hedges
- Portfolio trading

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  #3 (permalink)
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And here is a follow-up "extra credit" question:

What level of complexity is required in order to be a long-term profitable trader?

Mike

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Combined answer. I believe the straight directional approach is the only way to go. Focus on a specialty instead of taking the shotgun approach and devote your attention to understanding your niche. I don't believe it can be as easy as "this crosses that", but I believe it should be very simple.

The complexity of trading is not in the charts, it is in the mind. Trading itself is not overly complicated. An example of the simplicity;

1) Markets only go up or down (they can consolidate, but they leave that state in a direction). There are only two directions. Deciding how far, how much room to allow it to breath can get complex, but it still comes down to one of two choices.

2) Markets will only move in one direction for so long before they change direction. Traders study, and for the most part agree, where the change of direction should most likely occur. That should limit your choices for where to watch.

3) Volume moves the market and volume changes the direction. Limit your entry and exit selections to areas where volume provides confirmation. Don't try to be the first to make a move. Volume will show itself.

4) Allowing winners to be larger than losers beats a lot of things that could go wrong.

It may require a lot of study and practice and learning and patience, but not anything that seems "complex". Maybe chart analysis, but even that can be simplified to far less than quantum physics.

Maybe a silly analogy, but as humans, our ability to balance on two legs is complex (try programming a robot to do it as well as a human). We had to practice that skill as babies until it became second nature. But today, while there may be a lot of complexity occuring in the background for our bodies to maintain balance (and we could probably map all of that with tons of analysis and indicators and charts), if you stand up right now, does any of that really matter? The complexity of balance is just going on silently in the background.

The study of anything can be complex, but is complexity a required point of focus? I'd rather go skiing. Balance is mandatory for that, but never enters my mind. Gravity is also mandatory, and complex, but still not on my checklist. Skiing does not require me to be aware of the complexity. What does matter, in my mind; have I practiced enough to have the ability to ski this run safely? If not, the prudent thing would be to get back to the practice area.


Last edited by GaryD; December 10th, 2011 at 05:14 PM. Reason: typos, expanded thoughts
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GaryD View Post
... I believe the straight directional approach is the only way to go...

Can you define what is a "straight directional approach"?

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trendisyourfriend View Post
Can you define what is a "straight directional approach"?


Loosely quoting Big Mike; the trade is entered by itself, meaning you don't require any other trade in any other position to go a certain way in order for this trade by itself to be profitable. More complex trading would be, Spreads, Options, Hedges, Portfolio trading.

Expanding on that; Entering and/or exitting a trade in a single and immediate vehicle based on nothing other than what that particular instrument is doing. No correlations, no offsetting long/short strategies, no basket trades, etc. One on one.

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Is it possible to be long-term profitable with simple system.
I believe GaryD gave a perfect well reasoned answer to this.

=============

define long term. goal to trade forever or make enough to walk away in x years?

Now here's a side thought -
600 fund managers flip a coin. Heads they make profit for the year. Tails they lose it all and fold up shop. Let's not over analyze this and assume even distribution.
2nd year - 300 left
3rd year - 150 left
4th year - 75 left
5th year - 37 left
6th year - 18 left
7th year - 9 left
8th year - 4 left

Now the 4 money mangers left strut out and say "look I have made money 8 years in a row while others have failed. I know the markets - I am a market guru." Millions then flows into their funds. (from all the people who had money in the funds that blew up previously, right? They want to be with a winner)

9th year - 2 funds blow up
10th year - 1 blows up
11th year - last one blows up
repeat.

all on a coin flip. no skill. So luck vs skill I dunno

“Be who you are and say what you feel because those who mind don't matter and those who matter don't mind.” - Dr. Seuss

Last edited by websouth; December 10th, 2011 at 08:07 PM.
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websouth View Post

600 fund managers flip a coin. Heads they make profit for the year. Tails they lose it all and fold up shop. Let's not over analyze this and assume even distribution.

11th year - last one blows up
repeat.

all on a coin flip. no skill. So luck vs skill I dunno


Fund managers typically diversify, aka complexity. lol

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right GaryD... the complexity just obscures the coin toss.
tough question Mike.

Someone else posted this link on the forum but I'm going thru it now. Free class on game theory
Game Theory — Open Yale Courses

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websouth View Post
right GaryD... the complexity just obscures the coin toss.
tough question Mike.

Someone else posted this link on the forum but I'm going thru it now. Free class on game theory
Game Theory — Open Yale Courses


On the topic of simplicity, maybe think of it as the difference between a coin toss and a lottery ticket. One of those I can determine the odds of without a calculator. The lottery ticket, that is nothing but luck. Sure for $1 you might win $1M, but the odds reset every single time.

Now, in trading, no one says I have to flip a two-sided coin. It could be a 6-sided cube with 4 heads and 2 tails, or any other number of sides of any geometric shape. As long as heads outnumber tails ( aka the trade has a definable edge), tails may still come up x times in a row, but there is a positive expectancy to the bet.

Also, in trading, nothing says if I bet $1 and lose, that I can't make $3, $5, $10 on that same $1 bet when I win. I could have an expectation of profit on that same cube by betting on tails at $5 to $1.

Also in the pursuit of simplicity, by focusing on one or two markets, over time, has the potential to allow the trader to somewhat "understand" what the market is saying at a particular moment. That can give an additional edge, although very tough if not impossible to prove mathematically through standard backtesting. And certain markets are easier to read than others depending a lot on their volume and volatilty, so developing a feel may be easier in some instruments than others. I can't do it, but some traders will swear by reading order flow, as one easy example.

However, adding the component of discretion ("do I take the $3 showing or let it ride for $5", for example), increases complexity. As a strictly discretionary trader, my complexity in trading, is me. So I prefer to keep my math simple. I have a lot more to be concerned about.

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