DiscussionPapers

Discussion Papers

The details matter

Trading: an art or a science?

Is trading an art or a science? Discuss. Here are my thoughts. For a new trader it needs to be a science, a calculated approach until they gain experience. For an advanced trader does it turn into an art? Does a pro just look at the market, get a feel for it, and place a trade? Yes, sometimes, but this does not mean it has become an art. Even when a pro looks at the market and gets a feel for it, the feel is based on previous backtesting, number crunching and documented observation.

Creating a trading plan is an art, in that, if you have the ability to create weird, crazy and wonderful trading ideas to backtest, you’ll be ahead of someone who can’t. But now we are discussing plan creation, not trading. So it is an art in thinking up ideas to backtest, but still a science when trading them. The defined boundaries you put to your creative trading plan makes it a science.

As you may know, (conservative stats) 25% of the FX market positions and 50% of the US stock market positions are now triggered from algorithms. Have people managed to program art or discretion? The smart ones to a point maybe, but if it is programmable, it must come down to yes / no conditions, ie a science. Ok, what about those who still trade manually, maybe they have an edge because they can trade as an art, using the human brain as a supercomputer, observing via the human eye more subtleties which applied with experience can be the best mix for trading as an art. I don’t see a human trading by discretion (art) outdoing computers. There is one weakness humans have here, we are emotional by nature. The algorithm trading systems are not emotional. What is the one weakness computers have here? They’re not creative and wacky, humans are.

Conclusion: Trading is a science, have your trading plan lock tight with yes/no black/white conditions, and trade it with a small account to keep the emotions in check. Use your creativity and artistic flare to think up new trading plans/market patterns to backtest, some of which you’ll be happy to turn into a trading plan.

And one day if you get the chance, put your plan on automatic so the computer can execute it for you flawlessly/unemotionally, freeing your time up to focus on creating another artistic and colourful trading plan. I give it three years maximum before this approach becomes common place.

Trading rewards the artistic scientist.

Happy Trading.

Greg.

Price levels matter

One of the best things I read on a forum was ‘the only thing that counts is price levels, everything else is handholding’. And what I got from that was, key price levels matter, indicators that wiggle and wobble around just give you an excuse to enter. So after this fresh thought I spent a lot of time looking at what could be key price levels, and I’ve since build a great system around the GAP level. And its interesting because with this one plan I have with the GAP, I use an oscillator as an excuse to enter, but really its just that. Price levels matter.

Hope this sparks some thought for you guys.

Happy Trading.

Greg.

Hard yards in the beginning

When I first started taking my trading very seriously, I was trading the nasdaq100 off the daily chart, holding positions for about 3 days at a time. In order to build trading systems I was happy with, I purchased a 120 page A3 Derwent Visual Art Diary, applied every signal indicator that come with my charting software at that time and studied how the indicator moved with price over the last 3 years. I printed off screenshots of each significant finding and wrote notes all over it. It took me 4 months to fill up the Diary, and I keep it proudly on my bookshelf. I later read a massive A-Z book on indicators and was surprised at how different my findings were to the apparent general way particular indicators are said to be used. The lesson this reinforced for me was, let the chart show you how the indicator should be used. To such a point that if I spot a new indicator, I’ll apply it and see if I can find a few ways I could use it first, well before I look up ‘how to use it’ on the net. After a while the indicators blur into a few main categories, and when I look at a new one, I see ‘ah yes, its just another oscillator’ or trend indicator. After looking at a heap of indicators you get a few that become your favourite, and spend more time focused on price itself , as that’s the true indicator.

Happy Trading.

Greg.

Can I recommend a trading book?

Sure.

The Zurich Axioms, Max Gunther, ISBN 0-285-63095-4, pick it up second hand online for $10.
Happy Trading.

Greg.

More than 1 trading plan ?

Regarding Your question about 1 trading system or 2: Without a doubt, do them both.

I currently have 17 trading plans. (the number I have changes weekly)

You could think, maybe if I just focus on 1, I'll do it well because it’s getting all my attention.

As you know from my article, creating a trading plan is an art, executing it flawlessly is a science.

Sometimes you can get very frustrated with your art work (creating a new plan), the more paint you apply, the uglier the painting looks, so I say it is refreshing to have many canvases, so while one painting is not something you are happy with, hopefully your other paintings are looking better.

Also, by having a short term and a long term as you suggest, it better helps you understand the full view of what the market is doing, and your thoughts from one will support the other. So your observations from the longer term, will aid your opinion on bias for the short term.

Having more than 1 trading plan, is a great idea.

Regards

Greg

Divergence Re-entry

I might add to this thread.

To answer your question as I read it "is point A good enough for a divergence trade, if yes, and you entered and was stopped out, would you enter again at point B".

A key to successful divergence is to have 'min number of candles between zeros' as a rule. So in this case if my rule was 'must have 12 candles between zeros' then the first trade A would not be valid, trade B would be. If my min was 5 candles between, then both would be valid, and so yes, i'd take both, be stopped out on the first and then also take the second. However when you crunch the numbers you'll find yourself setting 'min number of candles between zeros' at a level where it filters out the noise so you won't be in the situation where you're in, stoped out, in, stopped out etc. Hope this helps.

Having spend 12 hour days for the last 2 years making a study of divergence, I've got lots to say on this topic, and will do so in our online members meeting in a few weeks, it will be a focus session on divergences that work :) And as always, I'll be giving you homework.

Happy Trading

Greg.

Notice the full circle?

Regarding the journey from novice to pro trader, notice the full circle? A new trader may look at the charts, get a feel for the market and place a trade (a disastrous approach for a novice), and yet for some pro’s, this is exactly what they do, the only difference being, the pro has experience from having done major chart time, having spent many hours studying the markets.

Not every pattern is tradable

As you know and agree from my style, I'm convinced the market only produces tradable patterns every once in a while. Once or twice a week on hourly charts. A similar ratio on any other chart, ie 4 times a week on 30min chart, 8 times a week on a 15min chart,

At all other times the market is just moving in new and interesting ways (which appear to be a heap of patterns seen before, but truly don't give a particular outcome or edge to trade).

Having built mathematical models and profit lines to show this for many years now, as a part of my daily search for good systems, I say my opinion is well based on fact.

Not understanding this point alone is the biggest stumbling block for a new trader, the biggest reason why new traders fail, the biggest incorrect sales pitch market educators use to sell product, and the biggest task I have in Unteaching people, before I can teach them.

I think 20pips a day as you suggest is very achievable, using market move and/or monkey systems. Layered if need be for more signals, as covered in the coaching.

However I'm sure you know and agree with all this, so now to your question.

For what you want, I'd say look at using the MACD (maybe diff crossing zero), and somehow combine it with Brendon’s Apex, Triangle, Flag style.

If one insists on having a trading system that provides 1or 2 signals a night, this is about the best approach as Price Action is king in this context, and the MACD is a universal filter for many systems, and can still be helpful when stepping away from indicators, such as in this case with using price Apex.

Hope this helps,

Regards

Greg.

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