Fundamental truths about trading

I was reminded recently of the excellent Mark Douglas's Fundamental Truths of Trading and his 7 Principles of Consistency.

They have been referred to and posted many times before over the various trading forums, but I wonder how many of us that accept the premise contained therein, truly accept the Fundamental Truths and how far we are in implementing the 7 Principles of Consistency ?

The 5 Fundamental Truths of Trading:
1. Anything can happen.

2. You don’t need to know what is going to happen next to make money.

3. There is a random distribution between wins and losses for any given set of
variables that define an edge.

4. An edge is nothing more than an indication of a higher probability of one thing
happening over another.

5. Every moment in the market is unique.

The 7 Principles of Consistency:
1. I objectively identify my edges.

2. I predefine the risk of every trade.

3. I completely accept the risk or I am willing to let go of the trade.

4. I act on my edges without reservation or hesitation.

5. I pay myself as the market makes money available to me.

6. I continually monitor my susceptibility for making errors.

7. I understand the absolute necessity of these principles of consistent success
and, therefore, I never violate them.

That was well put....unless you have a repeatable, understandable edge you will probably fail in the long term. It is like that old poker saying, if you are sitting at the table and do not know who the sucker is, it is probably you.

Do you really know your Trading Edge?? Don't let it surprise you!!

A trading edge as described above, possesses a greater probability of a positive result than any other. Coupled with the correct money and risk/reward management a trading edge can be profitable....but I wonder how many of us know our trading edge?

It is probably fair to say that a lot of potentially profitable trading edges are mis-used because they are not allied/optimised to the correct money and risk/reawrd managemnet that would make them profitable overall.

It is also fair to say that confidence in a trading edge can be shaken because it's user does not understand it's potential for delivering a consecutive losing run over any given sample and how long that consecutive losing run can be. This in turn can lead to the mis-management of the trading edge re money and risk/reward optimisation resulting in a destabilising run of losses/loss that sees the edge discarded.

What is the winning strike rate of your trading edge (as a % of times it set-up? ) If you know this your trading edge can pull no surprises on you.

Find this out if you don't know, .....then using the table below that shows the most probable longest consecutive losing run at any given strike rate, optimise your money and risk/reward parametres such that your trading edge cannot cause you to suffer destabilising losses that might see you discrad an other wise potentially profitable edge....ie plan for the coningency...don't leave yourself exposed.

Strike rate / Possible Consec losing run over any sample
25% ---------------------------------17
26% ----------------------------------16
27% ---------------------------------15
28% ----------------------------------15
29% ----------------------------------14
30-31% -----------------------------13
32-34% ------------------------------12
35-36% ------------------------------11
37-39% ------------------------------10
40% ----------------------------------10
41-43% ------------------------------9
44-45% -------------------------------8
46-48%--------------------------------8
49-52%--------------------------------7
53% -----------------------------------7
54-60% ------------------------------6
61-63% -------------------------------5
64-68% -------------------------------5
69-77% -------------------------------4
78% ----------------------------------4
79-80% ------------------------------3

G/L

bbmac said:

.....then using the table below that shows the most probable longest consecutive losing run at any given strike rate, optimise your money and risk/reward parametres such that your trading edge cannot cause you to suffer destabilising losses

Click to expand...

This is good advice. Would though be keen to know what 'most probable' is defined as (80% wouldn't be probable enough for me, but then I always look 3 times before crossing the road).

Ben

bbmac said:

Strike rate / Possible Consec losing run over any sample
25% ---------------------------------17
26% ----------------------------------16
27% ---------------------------------15
28% ----------------------------------15
29% ----------------------------------14
30-31% -----------------------------13
32-34% ------------------------------12
35-36% ------------------------------11
37-39% ------------------------------10
40% ----------------------------------10
41-43% ------------------------------9
44-45% -------------------------------8
46-48%--------------------------------8
49-52%--------------------------------7
53% -----------------------------------7
54-60% ------------------------------6
61-63% -------------------------------5
64-68% -------------------------------5
69-77% -------------------------------4
78% ----------------------------------4
79-80% ------------------------------3

G/L

Click to expand...

This is pretty misleading for a couple of reasons.

Firstly, consecutive losers is not the primary concern - drawdowns are more important. You can go on a serious drawdown just by losing more than normal, not necessarily in consecutive trades, and this will happen more often than a genuine run of consecutive losers.

Secondly, there is a suggestion that these are the maximum possible drawdowns. Actually, as far as I can tell, there is more than a 0.5% chance of one of these streaks happening at any given point, which means you have to expect that they will happen, if you plan to trade for any reasonable amount of time. Also, there's nothing to stop you having a larger losing streak - it's less likely, but 0.5% is definitely not "never going to happen" territory.


Note: I realize that you didn't mean to mislead people, and your overall point was sound - most people don't realize how dangerous trading is. Just thought I should clarify that it's even more dangerous than you suggest!

Lets say you place a spread bet up or down on the FTSE 100 with a stop loss and limit both 100 points away. What is the probability of winning/losing the bet? 50:50?

Sam.

megamuel said:

Lets say you place a spread bet up or down on the FTSE 100 with a stop loss and limit both 100 points away. What is the probability of winning/losing the bet? 50:50?

Sam.

Click to expand...

If you place the bet completely at random, and don't exit until one of the exits is hit, then presumably 50%. The idea in trading is to find a point where the odds are in your favour, so there is an unusually high chance of being profitable. You'd probably find that the probability of winning in the circumstances you describe depends whether or not you enter in the direction of the trend, whether you enter near an important level etc.

So if you were always to bet down in a bear market and up in a bull market could this make the probabilty of being right more than 50% in your favour?

Sam.

megamuel said:

So if you were always to bet down in a bear market and up in a bull market could this make the probabilty of being right more than 50% in your favour?

Sam.

Click to expand...

I have no idea - you'd need to look at past data to figure it out. It's worth remembering that there's much more to trading than being right - you can profit winning 30% of trades, or lose while winning 80%. You also need to figure out what the definition of a bear market is in real time - it's easy to spot in hindsight, but that's just like saying "buy if price is about to increase".

Thanks for the reply,

Yes I remember reading in one of my books that many profitable traders have more losing trades thatn winning ones, its just that their risk/reward ratio is such that they still profit. I was only asking as I am beginning to look at developing my own trading system and just wanted to get right down to the basics. I.e. Start with something that wins 50% of the time and then improve your odds with technical analysis and following trends.

Sam.

Elder's Triple Screen

megamuel said:

So if you were always to bet down in a bear market and up in a bull market could this make the probabilty of being right more than 50% in your favour?

Sam.

Click to expand...

Sam;
Please Google "Elder's Triple Screen" and you will see what you are talking about is commonly known technique for increasing the odds.

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Thanks bmaber, great read! Some food for thought there!

Sam.

I can't find it quickly, but there is also supposedly a pit traders' "rule" to the effect that you never buy in a market that is lower than the day's open, and you never sell in a market that is higher than the day's open.

This may have applied to particular type of market though.

I have never attempted to check the veracity, or otherwise, of this "rule" though.


Regards,
M.

Fundamental truths about trading

Click to expand...

if it can go wrong it mutha fukcing will do.

it is NOT UNDER ANY CIRCUMSTANCES just as easy to profit than lose with a random trade entry.

The odds of success ARE FIRMLY STACKED AGAISNT US. 90% fail for a reason.

Dont listen to half the crap from anonymous strangers that u read on trading bulletin boards. its fantasy land bs.

JTrader said:

if it can go wrong it mutha fukcing will do.

it is NOT UNDER ANY CIRCUMSTANCES just as easy to profit than lose with a random trade entry.

The odds of success ARE FIRMLY STACKED AGAISNT US. 90% fail for a reason.

Dont listen to half the crap from anonymous strangers that u read on trading bulletin boards. its fantasy land bs.

Click to expand...

So you are saying that if we place a random trade in any direction without even looking at the charts and then enter a stop loss and a limit order at 100 points away in each direction, you're saying its more likely to go against you and hit the stop loss first? Why is that and what would you estimate the probability of winning would be? Thanks,

Sam.

megamuel said:

Lets say you place a spread bet up or down on the FTSE 100 with a stop loss and limit both 100 points away. What is the probability of winning/losing the bet? 50:50?

Sam.

Click to expand...

The reality (sadly due to algorithmic interference) is that on average you will lose 85% of time and in volatile times closer to 95% no matter which way you go.

We have tested this with live sums on live accounts. AT ALMOST ALL TIMES OF DAY!

The best time to get perhaps a 75 to 80% chance is in that period between 15.15 and 16.00 UK Time.

This is the reality.

The percentages increase in your favour if you are prepared to 'sacrifice' an initial placement, but that is only about a 5% improvement.

Most people are 'fooled' by using the 'simulations' because they are not swayed by the algorithms eating your money...

I myself turned £1000 into £47,000 in just 4 weeks playing that bit of fakery...

Most people will 'sort of' accept that playing with real money clouds their judgement and that is why they lost, this is a falsehood, you lose because the massed algorithms eat you up.

Horrible truth... sorry.

lulz

Ratio of losing is more than the earning profit, and the above mentioned 5 fundamental truths of trading are really suits in our life.