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I have been at this game for just over two years now pretty much full time. I started focusing on index futures just under two years ago and have been working on those ever since with some work on other futures contracts (currencies, oil, corn, etc).
I spent a ton of time with indicators in the beginning and then programming and testing strategies. I then started programming indicators and using these to develop customized methods for entering and exiting the market. I could never get to a positive expectancy on any of the methodologies I developed (or I wasn't able to work them into positive expectancy). My last year has been spent trying to understand price action ala Al Brooks and other similar instructors/authors. This effort has been the most rewarding in terms of feeling like I'm getting closer to understanding how and why price moves the way it does.
Now I'm up against a new problem: I think I am finally coming to terms with what probabilistic outcomes really mean for trading decisions. I am finally realizing that trying to PREDICT what the market is going to do next is just the wrong way to think about what profitable trading is all about. It may seem obvious to some but when I studied all the information about indicators, different price and volume representations (tick, range, haiken-ashi, candles, market delta, etc), and methods for understanding price action - it seemed like these were all ways to try to tell what the market was going to do next. Interestingly this last universe of "price action" market reading is the closest I've come to feeling like I was "getting" how and why price moves - and this was the most reinforcing of the idea that what we're doing when we are studying it is to PREDICT what the market is going to do next.
So now I realize that predicting is a trap - an EXTREMELY comforting and reassuring trap for sure - but a trap nonetheless. I realize that it is this idea - that when I decided to place a long trade it was because I had PREDICTED that the market was going to go up - that is the source of so many of my trading problems. This idea that I am PREDICTING causes me to get upset when I'm "wrong" (as if there is anything like the idea of right or wrong with respect to your trade outcome). This idea that I can PREDICT causes me to close a winning trade early because I have figured out the market has gone far enough. The idea that I can PREDICT causes me to stay in a trade that's just not doing what it should because I had "known" the market was going to go a certain direction.
You get the idea.
I now want to simply apply a set of consistent rules and principles to my trading decisions and accept the outcomes they produce (not mechanical mind you but only partially discretionary). My question is this - to all of you traders who've run the course through all the analysis and learning and market experience, how have you been able to break the habit of trying to predict? With all the knowledge of market movement, how do you resist the urge to PREDICT what the market is going to do? How do you let go of the knowledge you have so that you can apply rules to your trading? I know one answer: Just Do It. That's essentially where I'm starting - however, if any of you have words of wisdom or interesting methods to get better at rule following after so long in the discretionary saddle, please share them if you would.
One of the things I'm doing is keeping a daily scorecard with grades for how well I've done at rule-following. Another is cutting myself and screaming in front of the mirror. Actually I haven't tried those last two yet - I just wanted to see if you read this far into the post.
Instead of the price-predicting model, you could look into a risk-control model. In other words, your entries / setups would be based on controlling risk, not prediction. This way, you kill two birds with one stone: your losses would likely be small, and you would not be cemented into a particular market view that interferes with your ability to read price action.
You are never in the wrong place... but sometimes you are in the right place looking at things in the wrong way.
Something I learned from poker has proven invaluable to my trading. I played heads up exclusively. In that form of poker you're involved in every hand. And due to time limits and/or rake, you very quickly must ascertain what type of opponent you're up against otherwise you will bleed money. Once you have identified your opponent type you then watch for his specific betting patterns and behavior and exploit his tendencies.
I use that same mindset with my trading. I sat down and listed all possible market conditions and classified them. You know, Range, Trending, etc etc. And all the variations I could think of. Then I asked myself how I could best exploit each of those conditions. Of those I could exploit with my style which would have the highest probability of working? You can't know exactly what price will do but when certain conditions are present there is a good chance of particular things happening and thus I exploit them using the process above. Just like I did against my poker opponents. It doesn't always work out for each trade (or each play in poker) but most often it does.
Anyway, that's how I approached the markets and still do. Works for me. Maybe will work for you.
I feel there is a need to anticipate and let the market come to you. However what ever you name it when you put your $$$ on the line you are predicting( hoping) for the market to behave in a certain fashion ( move fast to your target or slowly to your target). I feel that is ok till that time.
Once you are in the trade , risk has to be managed. Some folks feel they need to assume they are wrong and let the market prove them right. Some folks want to be more aggressive to protect their $$$ so if the market doesnot move immediately in their favour they assume that the edge or initial assumption is not valid and they scratch out of the trade. Still others define the risk and stand back and let the market either move to their stop or the target. Once market moves towards the target they may move the stop to BE and move the target and so on. Personally I am not sure what approach I need to take. I have mixed results with all the above methods.
Back to the topic, there is a need to predict( anticipate) but also a need to realize that we are in a probablistic environment and put $$$ on the line ( not self esteem or ego). Analyse Risk to Reward ( this cannot be done without predicting). If it is a low risk ,high probablity and good Risk to Reward trade, go for it. Once in, manage hell out of your trade.
Thanks all. I need to give more thought to the idea of focusing on risk control - that may help, thx A.
I fear I didn't pose my question well enough. When you enter a trade because you think the market is going to go up (hopefully you bought if you think its going up) you have already fallen into what I'm calling the "trap of prediction". When you use your experience with price action or your indicators to form this kind of an opinion about future market direction you are orienting yourself towards your trading in a way that reinforces problem trading behaviors.
My realization is that in order to have the best orientation towards your trading decisions, you must focus on evaluating probabilities and take action based on what will generate the best outcome over a series of trades. When you have any kind of thought about trying to predict the market you have trapped yourself into thinking about THIS trade. When you think that what you're doing is predicting - in other words when you are trying to figure out what the market is going to do - you will almost certainly choose your actions in such a way as to generate a lower return than if you simply did the thing that would be MOST LIKELY to generate the best outcome over time.
I have Immanuel Kant's Categorical Imperative on a post-it on my monitor, it goes "act in such a way as that you would will your action to become a universal law". Currently I am trying to get rid of all my habits of thought that result in me trying to predict where the market is going to go. I'm re-orienting myself to think in terms of evaluating likelihoods and the intent of this thread was to seek some guidance from others who have struggled through this way of thinking and let go of it.
HAHAHA Very creative use of the Categorical Imperative... haven't seen that before.
The CI has several versions. One of them says: "Never treat others only as means, but also always as ends.".
My trading version says: "Never treat your trades only as means, but also always as ends." This means, from a psychological perspective, not to be focussed on 'making money', but making excellent trades regardless of the financial aspect. Of course, this sounds rather strange to most people out there... as the majority is perpetually moved by waves of greed and fear over their position.
PS I think what you're asking about is to how to manage your view of the market once you're in a trade. Well, what confirms your trade idea after you enter? What negates it? What has to happen in order for you to change your mind? Does it have to hit your stop? Or is some price action before that helpful or convincing? Depends on your make-up, setup, and objective.
You are never in the wrong place... but sometimes you are in the right place looking at things in the wrong way.
