The reason that I need rules and have them , even though I am a discretionary trader, is that I am heavily influenced by my emotions. At the heart of my trading is the wish to make money and trading is sometimes stressful and emotional. I find that when I am emotional that I behave more like a bad trader than like a good one. The rules help keep me on track.
You have rules for position size and stops. Me too.
But I also have rules regarding what is likely to happen with the price action based on what the indicators tell me. These things help me filter out bad trades (of which I have a lot) and help me to take profits at realistic levels.
The reason that I have them as rules and have "coded" them is so that in the heat of battle that I am reminded of them. I'm not talking about any kind of black box.
Lets take for example the VWAP and what I have observed to be true and useful to keep in mind when trading the FDAX. All this came from the Fat Tails webinar and use of the Session Pivots.
1. The VWAP is an effective filter - go long above it and go short below it
2. Consider taking profits when the price level hits the 2nd standard deviation but definitely take profits if it touches the 3rd.
3. Just because you have taken profits doesn't mean the trend is over. Wait for pullbacks and enter as close to the VWAP as possible. Entries within the 1st SD are less risky than other entries further out of the money.
OK - this small set of rules helps me focus on the "right" price action for my market. I don't take countertrend entries because they are much harder work than the with trend ones and because they cause me to focus on the wrong direction. I miss the real deals.
I wrote down all my observations and then where appropriate coded them.
With your experience you must have tonnes of such rules, or patterns of behavior built into your trading.
I would encourage you to write them down so that you know why you are taking trades and can filter out the best ones and the worst ones. If you do write them (and you are a pretty good writer) then I'm sure that you can analyze which rules are a little trickier to decipher in real time. You could code those ones into some sort of indicator if you choose.
The facts of screen trading 6E or any futures contract are that it is simple but not easy. The price is going to go somewhere from where it is now and that could be profitable. So I am tempted to be in all the time whilst being in just for 20 minutes a day is more optimal.
Anyway, I like to think of the rules as liberating and not restraining. I write them down because they are my "intellectual property" if you like.
What do you think ?
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Are rules simply promulgated discipline. Write these down, code em up and apply them to AVOID pain. That is what I'm hearing. Is that incorrect?
Buy it and do not sell it until it goes up 50 ticks. Is that a rule? What makes a rule and how do you decide the qualifications that constitute a rule? Seems like the view of many is that rules are to avoid loss. Even where that claim is countered...look at the rule and see what the impact is.
I mean nobody seeks losing trades. It is natural to try to avoid pain. I think this is a right path wrong mountain situation. What rules do we have coded to increase profits, either frequency, or size. There may be a few...but way way overtaken by attempts at coded discipline? By nature rules cast limitations.
So, we create limitations to compensate for limitations.
For me it has been a long and at times painful process. There have been periods where I lost a Sh!tl0@d of money. I did not start making regular when I found the right rules. I started making regular when my focus was on making.
Is the market a random walk? Are prices normally distributed? I mean, that it may be harder to find the correct universal rules than it is to make good trades. Do rules apply certainty to uncertainty? Begin with only one consideration. What is my risk from entry here. Limiting risk is as simple as the click of a mouse. Let winners run. I'd put forward that targets based solely on price is a losers game. Exit winners when the premise for entry or the momentum of the move is no longer valid.
So, how do you identify high probability set-ups? That is what everyone wants for trade entry. In that, I do believe that an if this then this string leading to an entry trigger is the basis for a good discretionary model. But I still hold that rules are limitations and that each potential set up has to be considered YES within a framework, but on a case by case basis...the essence and definition of discretion...again imo. Especially dangerous when indicators are/become the "rule".
I'm sure that I have some trading rules but I'm not conscious of them at this point. Perhaps they have become conditioned response as part of discretion?
Anyway, I want everyone to build and develop based on what works for them. To do that you have to consider many things so I'm grateful for the dialogue.
Last edited by wldman; April 23rd, 2013 at 10:59 AM.
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from an article that will be in this months issue of Technical Analysis of Stocks and Commodities magazine. The author Sylvain Vervoort, is someone that I have had dialogue with in the past. His idea is the basis for the Heiken Ashi indicator that I have displayed on some of my charts. Vervoort is a respected authority. This was his statement from the article,
"Before you can make any money, you need a trading strategy with reliable trading rules that has been shown to make money in backward and forward testing using historical data. To do that, you need to learn the basics — that is, technical analysis, money & risk management, and trading knowledge — and you need to gain experience."
I agree completely with everything after the word data in the second line. Backward and forward testing using historical data, however, is a total waste of time from my perspective. While I do not "reject" rules, I do believe that it is statements like the one quoted here that start people toward the right destination but possibly from the wrong path.
"Reliable trading rules that has been shown to make money in backward and forward testing using historical data", right, and if the queen had balls she'd be king. If this hallowed set of rules was even remotely possible wouldn't the smartest rule making programmers have all the money in the world by now? Traders make money, not a set of rules. Discretionary traders that think in the context of the situation relative to their accumulated experience and guided by a set of empirical notions based on math, statistics, or the "secret settings". Those are not "rules" they are theoretical based on some notion.
Has the wldman lost his mind?
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Sometimes I wonder. There is all kind of anecdotal stuff that gets accepted as law. Some threads that might be mostly nonsense get thousands of views. Guys with no business creating a "following" lead the unsuspecting trader on the quick trip toward peril. In other cases there are threads and posts that are worth millions that never gain any notice. This thread is really neither. I'm just trying to engage guys in a meaningful dialogue.
I do not know how to explain that. Like many other guys I definitely do not seek a following or futures.io (formerly BMT) notoriety. I do not need to be right and I seek more to learn than to teach. However in the context of how some have helped me, I feel like I should try to encourage people and try to get them thinking about their trading in a way that helps everyone to expand their understanding. Unfortunately that ain't the show the folks came to see, or I suck at communicating effectively.
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I'm trading rules right now - strict as can be - and have been for a few months. If a trader can create a set of rules that work in backward and forward testing, I can't see why that trader wouldn't use them.
Discretionary traders are always imputing a weak-minded motivation to the mechanical trader, but it's not that mechanical traders trade rules because they're weak. They trade 'em cause they got 'em...
That doesn't mean that the cliched stuff about "following the rules" isn't still group think. It is. If you get the fundamental idea behind trading probabilities, and have the capacity to act in the short term but measure success in the long term, then you don't need to repeat the mantra over and over again.
Better just to get to work.
I'll tell you another trading mantra that drives me crazy: "you need a system that matches your personality."
If you truly get mechanical trading, that doesn't make sense. A mechanical trader that can trade one profitable ruleset should be able to trade any system with a positive expectancy. Just look at the system characteristics and position size intelligently. All I care about is profit per trade and the drawdown profile. The rest is (uncomplicated) math and discipline.
All that being said, I'm also working on my discretionary trading, and your journal is on the short list of journals that I visit as soon as the notification hits my inbox. Both your approach to the market and your charts have had an impact, so thanks.
Oh - and as far as your sanity is concerned - I'd be more concerned about it if you were winning the popularity contest...
Quality over quantity.
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and I agree to the extent that every so often I look to find someone that can code up a set of strategy rules to automate an idea. Just to be clear though, there is a wide spectrum between these types of trading that all of us are whipping over like we are on the way home from grandma's to catch the hockey game.
HFT, algo black box, algo grey box, 100% mechanical manual entry through to discretionary. I have experience with black box algorithmic to open discretionary.
The freaking catbird seat would be the ability to code the discretionary methods as black box algos. The problem for me is I do not have those skills and have yet to find the right relationships to make it happen. If I typed in a way that reflected poorly on one type or preference over another that was not intentional. No doubt there are many many ways to get it done trading.
I was trying to communicate that the search for the magic "rules" is as frustrating as the search for the magic indicator and secret settings. I meant to say that this is the toughest most competitive business in the world. Short of developing knowledge and specific skills through incredible diligent hard work, and persistence...there is no easy or short path to trading riches.
I am happy that guys will add their opinion to that.
Rules based guys, I want to talk about your rules and see if you can help me draw out and describe my unwritten rules.
I see now what you were getting it with the comment on the original quote.
As far as this:
I am an unproven discretionary trader, but what I find most challenging about mechanically testing my current approach to discretionary trading is trade location. And there really is something like "feel" for a market you get from watching it day in and day out. Making that implicit knowledge explicit is a tricky problem.
Some people say it's impossible, but if we're honest we should probably admit that we can't know that ahead of time - all we can do (if we want) is try to make things as explicit as possible. I feel silly doing anything that approaches giving advice to you, since your experience clearly dwarfs mine, but here's the only road I know: print out 100 of your discretionary trades. Don't worry about screening out the losers, just try to capture what you saw that motivated your entry in as unambiguous language as possible.
There's no point in worrying about how you're going to code it. You have to have the idea clearly defined before you can stress about explaining it to a computer.
If you can embrace that tedium, you're wired in the right way for that road.
Since I didn't have a discretionary record to try to work with, I had to generate tons of ideas and test away. I also had help - someone to focus me in directions more likely to bring success. I now have binders full of charts with potential patterns, and long lists of concepts to test, probably more than I can ever work through...
a. who is to say that the Wildman ever was sane in the first place ... it's probably overrated
b. we are talking here about "being out of balance"
Lets get back to the group therapy.
If you find yourself saying "Oh no .. the market did something wrong and I lost/got stopped/missed a trade/exited too early". Then you have a simple balance issue. There are things you (I mean we of course) are not seeing.
If you find yourself saying "Oh no .. I saw that one and didn't take it ... " or you find yourself saying "Oh no .. I took that one and I knew I shouldn't" .. then the issues are with less than 100% clarity and/or confidence in your plan.
Out of balance issues occur when :
A. things happen too fast for the accumulated wisdom to kick in or when the relevance of the elements of the accumulated wisdom need to be weighted
B. there is too much irrelevant input/new information/distractions (too many indicators and screens) and the magic cannot happen
Anyway, in this community and using the means that we have to communicate, we can only help with what we can see.
Sylvain has some great ideas and the anaHA stuff from Fat Tails captures those ideas well. The question is how do they fit with your magic ?