Of the traders that I know - they all rely on 'pattern recognition' to some extent but it is more related to behaviour than to a series of bars creating a pattern.
Trader 1 - Trades 40 or so stocks and has been doing so for more than a decade. He'll run 1 to 3 positions at any one time. He has developed a good 'feel' for when a stock is bottoming out/topping. Obviously some of this is to do with seeing a move slow down (which can be done with candles) and some is to do with how far each instrument typically sells off/rallies before reversing. This does mean a stock can sell off hard in the morning until the Trader figures it's done and he'll get in just based on that experience with very little confirmation off the chart.
Trader 2 - Trades any earnings/news stock he believes will put in a sustained move. He has also been doing this for more than a decade. He has a good idea which news will create moves by now and he also has an idea of the type of pattern he'd like to see. Again, the hard sell off and reversal is a play but he also plays continuation moves. For this trader, all trades are confirmed with L2/Time & Sales on entry. In a sense - it's a scalpers entry at a point in time where a long term move might develop. As silly as it sounds, on some setups his stop will be 1 cent.
Trader 3 - Trades futures. Mostly this guy trades reversals. He'll trade index futures, grains,oil as well as the Eurex - DAX, Bund futures. He looks for moves of yesterdays price levels and todays price levels. He'll trade measured moves, channels and pullbacks but is mostly interested in large intra-day reversals. All entries are confirmed by DOM/Time & Sales. I have watched this trader at work many times and his ability to pinpoint reversals is uncanny. Again, he's been at this for more than a decade and knows the instruments he trades intimately.
These 3 are retail traders. The next is a pro.
Trader 4 - Actually this is 4 people, not on. This team is headed by a guy who came through the institutions and who made his personal fortune trading. The money they trade belongs to a hedge fund. Apparently there's some deal where small teams like this can get money from funds to trade as long as they are bringing in the returns. The team work outside of market hours to identify opportunities and they also work intra-day to identify them too. The guy trading does not use charts but does use L2 at times. The rest of the team use charts as they don't have the head for numbers the trader has. They can have 30 positions on at a time which is necessary as the amount of money they are using is in excess of US $20M. Again, one of the moves they love is a sell off which finds buyers.
Meeting these people was an eye opener to me. I keep in touch with them all. Traders 1, 2 and 3 have all given me some insight into their methods but trader 3 is the one that took me under his wings.
Some of the things I find of interest:
- None of them are afraid of trading a reversal in the right circumstances. The right circumstances might be that LVS generally sells off 50c before making a move up (just an example). So - despite what we hear about reversals being for amateurs, it seems there are people that have cracked this nut.
- None of them use any indicators or candlestick patterns. In fact, the analysis employed seems to be more about how particular instruments or particular events play out.
- There is no particular personality type. One of the above is most certainly NOT a zen-like trading master in control of his emotions. In fact, he flips out when he misses a trade and gets pissed off about it. Another gets pissed when he leaves money on the table. Still - both of these have personally made millions from trading.
This is what leads me to the conclusion it is skill and experience that counts.
The type of analysis I was doing before I started to meet real traders was the typical TA/Indicator stuff. I took a leap of faith with it but looking back there is no reason I should have done that, I had zero evidence that anyone was making money that way - other than books and the internet. When I met real traders, they didn't use these methods BUT they did use common methods that AREN'T in the trading books.
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When someone tells me they do it for the love of something. (Not saying you are)
Then, I always ask them, ok, now remove the compensation from what it is you are doing and tell me how long it would be that you would stick with this. In Real Estate development, sometimes the payday is 3-5 years with just putting money out in the interim. And, then sometimes you don't even get paid back!
My point is that if TRADING didn't offer compensation, then I know of nobody that would be doing it. However, I love to ski, I love to help people and all the other tangible and intangible possibilities that a occupation gives you.
I couldn't agree with you more. I have seen some people make millions being a complete emotional 'jerk' while others are zen-like masters sucking money out of the sky. Of course, we all want to be the Zen person.
I do believe that calm emotions are needed for some people to evoke the right wisdom groomed from the skill. However, some people are most capable when they are frazzled. Different strokes for different jokes.
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First off, I was surprised to find relatively little on this site in terms of topics about trading skills (11 results with 'skill' keyword, 3 to 4 relevant ones). The reason I say this is, I would have thought that there would be more traction amongst the participants in at least debating whether trading is a skill or a 'problem with a solution' as Peter puts it.
I too have come to the belief that trading is a skill.
I was initially seduced by the possibility of trading being a mechanical endeavour: if I trade a system long enough, I will acquire fundamental beliefs at a functional level that trading is a probability game and that, in turn will lead to increased chances of success, or so I thought. 'Trading in the Zone' played clearly a part in the above initial belief, and for many many aspects I still consider this book a masterpiece.
However, after having religiously implemented the 'mechanical trading' stage described in the book I had to reconsider. It wasn't so much the losses (trading that system accounted for over 60% of my overall P/L losses) I had a problem with - after all the process was about installing a set of beliefs, not becoming rich overnight - but the fact I could not reconcile the theoretical results the 'system' was showing with the actual trade results.
What I think I found particularly frustrating was the gap between the P/L 'curve' the system showed - based on past performance - which was astoundingly good (12k profit in 3 months on 1 lot) and my poor results, albeit my execution was decent.
I then came to the realisation that the problem I found in these systems lies in the inability to determine an appropriate exit strategy, and that is a critical component for it.
At the same time, I have seen myself trading day in and day out and improve under many 'psychological' aspects.
I used to not being able to resist trading volatility during events such as when Draghi/Yellen hold press conferences: now I am able to restrain myself because trading those doesn't work for me
I used to tell myself "I will put my stop here" and not actually bring myself to do it, sometimes with relatively disastrous results: now I am much much better in that respect
I used to just put on a trade based on data releases, not appreciating how or when the data could actually impact (or not) the direction of the market: now I have refined my undestanding of that
The improvement examples above could not have come by if not by practice, day in, day out, which suggests that trading is a skill to be honed.
Another reason I have always been skeptical of trading systems (akin to problems with a solution) was, I kept asking myself: why would anyone who has a trading system that really works sell it?
I'm not necessarily saying that trading systems that really work do not exist. They may well do (HFT firm Virtu comes to mind). But whoever has one is already retired sipping cocktails on a beach or keeps their trading algos close to their chest.
I may sound jaded, but I don't believe there are people out there on a mission to sell me something so that they make me rich!
In other words, I have come to the belief that trading - like all the other professions in the end - is based on ability and experience, and my trading approach is better as result. Of course I did have to acquire some scars to come to my current set of beliefs but I think it was worth it. I am far from being a trading genius but I believe I have a better trading skillset today thanks to that experience and refinement, which comes only with practice.
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Obviously automated systems that work exist and are employed by HFT firms - mostly doing arbitrage of some sort (incl latency arbitrage), getting paid to give or take liquidity, or market making.
If you look at the lengths people have gone to in order to be the shortest point between 2 NASDAQ exchanges to scalp a penny price disparity, you have to wonder why they didn't just buy a retail trading platform, write a script, backtest and optimize it and sip cocktails for eternity....
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The following user says Thank You to DionysusToast for this post:
Developing a mechanical trading strategy is a skill. It can be taught and it can be learned.
The problem I see is that most retail people who develop trading strategies go about it the wrong way, and a lot of that is because the software encourages it.
For example, many people pull up a chart, apply a canned strategy to the chart, click a few times to optimize parameters, and shazam! out pops a great looking equity curve. They then trade that strategy, with those highly successful parameters - the exact setup that looked great in historical testing. And guess what? They lose money. Why? Because they have a flawed process - they haven't learned the skill of developing trading systems the right way.
Just my 2 cents.
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Interesting thread - I spent a significant amount of time developing automated strategies, but currently am a discretionary trader. Why the change? I just could not find systems that gave the type of returns I wanted with acceptable drawdowns. Does discretionary trading solve that problem? No, but at least it gives me a chance to reach my goals. That being said, I agree with @kevinkdog - most people developing mechanical strategies fail to put in the required research in order to fully develop robust systems.
Regarding the title of the post (What about luck), a lot of traders seem to think that they have a certain amount of skill and that their results reflect that skill. I was monitoring a lot of hedge funds prior to the 2008 crash and several of the long-short funds had results that looked like they were buying the dips. It was a great strategy until the crash came and several of these funds found that their minimal short positions did not cover their downside sufficiently. Thus, to what do we attribute their good returns prior to 2008? Skill, a problem that was solved or luck?
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What about if you realise that patience as a discretionary trader is one of your problem among a myriad of other problems that need to be addressed properly and in a systematic manner? Does it not look like a problem or series of problems that need to be solved?
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