How to resolve Unknowable Uncertainty?

bbmac · Dec 7, 2011, 4:58pm

In a sense I am a pattern trader...Ie I trade repeating proprietary hi-probability set-ups (patterns) that are comprised of a confluence of repeating tech factors based around price action which indeed is the trigger for entry at such a set-up. These set-ups also develop a secondary and most important pattern - repeating hi-probability combinations of these individual set-ups across different time frames. These set-ups/set-up combos are traded at repeating hi-probability combo's of potential support/resistance/sbr/rbs factors identified on the t/f (s) above that they develop on...all this giving a full repeating hi-probability 'full set-up' for market entry. I also keep a running record of the probability of a break or bounce and in what market conditions at these repeating combo's of potential supp/res factors, and these are graded accordingly for risk.

I have my own running stats (excel files) on the running strike rate and win/loss distributions of each set-up and set-up combo etc and this enables me to work out the running probabilities.

In other words, I know my edge, I know what to typically expect and what it may expose me to (ie it's likley maximum consec losing run over any given sample- albeit that this is very low probability - I leverage accordingly such that should this occur it does not destabliise me. This puts me ahead of most other traders. All of this takes work and effort but this is the price of a consistently profitable trading edge. Knowing this info gives me the confidence to trade the edge in that it is the greater expectation (provided I stick to the rules) that entering the market will result in a gain. [y proprietary set-ups were developed in the live market and I have been keeping these records in this format for over 3 years now with a very large total sample.]

With a postive expectancy ( more important than a high strike rate-per say) every trade is a winner even if it loses.

Ie lets say you have for example a modest-good strike rate of 65% (winning trades as a % of total trades) and a risk reward of 1:2, so 65% of trades win at twice the loss/trade of the remaining 35%. Using 20pips as the target and 10pips for the stop (risk) just to keep the maths simple tThe expectancy is therefore (65x20 = 1300) - (35x10=350) = 900 . Now divide by total number of trades in the sample = 100 and the expectancy per trade (win or lose) is a positive 9 pips/trade.

You need of course to ensure that the edge/set-up/pattern you are trading has a positive expectancy over a large sample preferably forward tested as well as back tested. Knowing the edge is at least theorteically profitable over a typical sample is the starting point in giving you the confidence to trade it.

G/L

Chartsy · Dec 7, 2011, 5:34pm

Quote:

Originally Posted by adrianjm

I have been trading for a long time, and to date I am barely breaking even, so I firmly still belong to the 90% of retail traders out there. So even though I am long in tooth in terms of trading, I still can't say I am beyond the new trader stage.

I'm doing a reasonable amount of soul searching, as I agree with the statement that a trader should spend as much time observing themselves and understanding their own motivations, as they do searching for systems. I have just realised that for me, and perhaps for you, that there is an irony in trading that prevents many of us from being successful. Here is a typical process of the unsuccessful trader:

1. Find or develop a system you think will work;
2. Trade the system;
3. Experience a few losers and discard the system;

Now this is not new to me, I have done this often, and have read many times, from many esteemed traders that this is one of serious flaws for new traders - how easily they give up on a system as soon as they experience a few losers.

But why is this so? Why do new traders give up so easily, when successful traders follow through?

Confidence - I can't make that word stand out enough. I fail because I don't have confidence in the trades I take. A winning system is a losing system without confidence - I am sure about that.

The irony is that it's very difficult to develop confidence without the experience of winning. This is why I believe working with successful traders helps - you can develop a belief system (and thus confidence), in the actions of a mentor - that is what a mentor is for. Is it any wonder that so many of the supertraders we read about come from a background of working with experienced traders during their developing careers.

So for those of us who do not have that contact with successful mentors, what can we do to resolve the irony? (I am still at a loss here).

A proper methodology around systems trading can help. If you have the coding skills and the proper plan to understand how to backtest (in sample, out of sample etc), your process can help you to develop confidence in a system before you trade with real $$. You know the system and trade drawdowns you can expect, so experiencing them realtime is not as - dare I say it - painful, as not having that knowledge in the first place.

But what about discretionary traders? Is it at all possible to develop confidence if you don't know before hand that your discretionary behaviour will be successful? I am sure that without that special quality, you will never be able to handle holding your winners long enough, or never really know when you cut your losses.

I once knew a very successful discretionary trader who never worked with a mentor before he was successful. I regret not being able to ask how he did it.

This is where I am up to in my trading career, and would appreciate any discretionary traders out there who can advise how they got over the hump to be confident in unknowable uncertainty.

Adrian

I can relate to this!

I am a discretionary trader, but I have mechanical setups, which I use when I feel the time is right. It's difficult, ambigious, conflicting signals left right and centre. It makes it hard but over time I have developed semi-mechanical rules.

I can never say ' last year I made 40%' because i'll say ' well actually if I was to take that trade now i'd do X etc'. It's obsessive but necessary I think.

Atilla · Dec 7, 2011, 5:47pm

Quote:

Originally Posted by adrianjm

I have been trading for a long time, and to date I am barely breaking even, so I firmly still belong to the 90% of retail traders out there. So even though I am long in tooth in terms of trading, I still can't say I am beyond the new trader stage.

I'm doing a reasonable amount of soul searching, as I agree with the statement that a trader should spend as much time observing themselves and understanding their own motivations, as they do searching for systems. I have just realised that for me, and perhaps for you, that there is an irony in trading that prevents many of us from being successful. Here is a typical process of the unsuccessful trader:

1. Find or develop a system you think will work;
2. Trade the system;
3. Experience a few losers and discard the system;

Now this is not new to me, I have done this often, and have read many times, from many esteemed traders that this is one of serious flaws for new traders - how easily they give up on a system as soon as they experience a few losers.

But why is this so? Why do new traders give up so easily, when successful traders follow through?

Confidence - I can't make that word stand out enough. I fail because I don't have confidence in the trades I take. A winning system is a losing system without confidence - I am sure about that.

The irony is that it's very difficult to develop confidence without the experience of winning. This is why I believe working with successful traders helps - you can develop a belief system (and thus confidence), in the actions of a mentor - that is what a mentor is for. Is it any wonder that so many of the supertraders we read about come from a background of working with experienced traders during their developing careers.

So for those of us who do not have that contact with successful mentors, what can we do to resolve the irony? (I am still at a loss here).

A proper methodology around systems trading can help. If you have the coding skills and the proper plan to understand how to backtest (in sample, out of sample etc), your process can help you to develop confidence in a system before you trade with real $$. You know the system and trade drawdowns you can expect, so experiencing them realtime is not as - dare I say it - painful, as not having that knowledge in the first place.

But what about discretionary traders? Is it at all possible to develop confidence if you don't know before hand that your discretionary behaviour will be successful? I am sure that without that special quality, you will never be able to handle holding your winners long enough, or never really know when you cut your losses.

I once knew a very successful discretionary trader who never worked with a mentor before he was successful. I regret not being able to ask how he did it.

This is where I am up to in my trading career, and would appreciate any discretionary traders out there who can advise how they got over the hump to be confident in unknowable uncertainty.

Adrian

If you are consistently wrong 90% of the time over a long period then have you tried doing your analysis and then placing the trade in the opposite direction

?

I know it may be like tickling one self, you should try it. You will learn to let go of your opinion and ego that one is right. You should have no opinion or care re: direction. It's all about psychology. Start from the premise your analysis is usually wrong anyway.

I hold the markets in contempt as trading is simply a daft stupid game which produces nothing of any real benefit anyway.

Don't bother understanding the sytem just screw it. When you have sex you don't study the physical biological mechanics of what you do and how much you enjoy it - do you?

You just get on with it until you reach satisfaction. Think of the markets as something you go in and come away from with a smile on your face.

Leave your brain behind. To much analysis is not good imho.

KISS it!

Dommo · Dec 7, 2011, 9:31pm

Quote:

Originally Posted by DionysusToast

This will probably get deleted - but it may resonate with what you feel right now.

Download it quick...

DT, isn't there a spring flowing into the bucket?

DionysusToast · Dec 7, 2011, 10:45pm

Quote:

Originally Posted by Dommo

DT, isn't there a spring flowing into the bucket?

LMAO!

Yeah - it's called the FED....

adrianjm · Dec 8, 2011, 1:10pm

Quote:

Originally Posted by bbmac

You need of course to ensure that the edge/set-up/pattern you are trading has a positive expectancy over a large sample preferably forward tested as well as back tested. Knowing the edge is at least theorteically profitable over a typical sample is the starting point in giving you the confidence to trade it.

G/L

Thanks bbmac, you have given me some stuff to think about.

Positive thinking is great - I think there are many with enthusiasm before they begin trading, and think this will hold them together, but you really need to put in the effort to know the behaviour of your setups before you trade - I guess it once again comes down to the confidence in your setups.

You have clearly indicated the importance of knowing before acting.

Adrian

adrianjm · Dec 8, 2011, 1:14pm

Quote:

Originally Posted by Atilla

If you are consistently wrong 90% of the time over a long period then have you tried doing your analysis and then placing the trade in the opposite direction

Hi Atilla,

I never said I wrong wrong 90% of the time. I presently below to the 90% of traders who are unsuccessful.

Thanks for the coments.

Atilla · Dec 8, 2011, 1:31pm

Quote:

Originally Posted by adrianjm

Hi Atilla,

I never said I wrong wrong 90% of the time. I presently below to the 90% of traders who are unsuccessful.

Thanks for the coments.

Ok good luck Adrian. All I can say is it is a long journey and after 7 years I hate and loath the markets. I have several systems and they pretty much all work. The spanner in the works is thy self.

One of the simple ones with no bearing on anything is counting squares. Not interested even in levels. Move two boxes up buy. Move two boxes down sell. It is effectively scalping but system does work. Works with just about any instrument too.

Having dissasociated my self from my ego and thinking I understand or comprehend or predict what's going to happen has been my biggest hurdle. I was told this by past legends here but I recall arguing with them. Now don't care for much what the markets do at all.

I am interested in current affairs and economics but that's about it for FA. It's all about TA. Good luck and don't give up.

Old beliefs [may] not lead you to new cheese.
by Spencer Johnson, M.D.

Dec 7, 2011, 4:58pm	#9
bbmac Legendary Member Member Since Jan 2003 3,589 Posts	Re: How to resolve Unknowable Uncertainty? In a sense I am a pattern trader...Ie I trade repeating proprietary hi-probability set-ups (patterns) that are comprised of a confluence of repeating tech factors based around price action which indeed is the trigger for entry at such a set-up. These set-ups also develop a secondary and most important pattern - repeating hi-probability combinations of these individual set-ups across different time frames. These set-ups/set-up combos are traded at repeating hi-probability combo's of potential support/resistance/sbr/rbs factors identified on the t/f (s) above that they develop on...all this giving a full repeating hi-probability 'full set-up' for market entry. I also keep a running record of the probability of a break or bounce and in what market conditions at these repeating combo's of potential supp/res factors, and these are graded accordingly for risk. I have my own running stats (excel files) on the running strike rate and win/loss distributions of each set-up and set-up combo etc and this enables me to work out the running probabilities. In other words, I know my edge, I know what to typically expect and what it may expose me to (ie it's likley maximum consec losing run over any given sample- albeit that this is very low probability - I leverage accordingly such that should this occur it does not destabliise me. This puts me ahead of most other traders. All of this takes work and effort but this is the price of a consistently profitable trading edge. Knowing this info gives me the confidence to trade the edge in that it is the greater expectation (provided I stick to the rules) that entering the market will result in a gain. [y proprietary set-ups were developed in the live market and I have been keeping these records in this format for over 3 years now with a very large total sample.] With a postive expectancy ( more important than a high strike rate-per say) every trade is a winner even if it loses. Ie lets say you have for example a modest-good strike rate of 65% (winning trades as a % of total trades) and a risk reward of 1:2, so 65% of trades win at twice the loss/trade of the remaining 35%. Using 20pips as the target and 10pips for the stop (risk) just to keep the maths simple tThe expectancy is therefore (65x20 = 1300) - (35x10=350) = 900 . Now divide by total number of trades in the sample = 100 and the expectancy per trade (win or lose) is a positive 9 pips/trade. You need of course to ensure that the edge/set-up/pattern you are trading has a positive expectancy over a large sample preferably forward tested as well as back tested. Knowing the edge is at least theorteically profitable over a typical sample is the starting point in giving you the confidence to trade it. G/L __________________ *I can stand the despair - it's the hope I can't manage (John Cleese - Clockwork.)* Last edited by bbmac; Dec 7, 2011 at 5:29pm. Reason: typo's

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