Article

The Market Holy Grail: Fact or Fiction

Introduction
The Holy Grail is quite possibly the most famous piece of Christian mythology. Almost every archaeologist, historian, Christian and capitalist would love to find it, and many dedicate their lives towards its pursuit. It is said that those who drink from The Grail will be blessed with eternal life, whether that is spiritual or physical is open for debate (unless you have read ?The Da Vinci Code? where the last thing you would do is drink from it!). Perhaps that explains why Indiana Jones may appear in a fourth film despite his increasing age.

When we talk about the Market Holy Grail we don?t mean a cup that promises ever lasting life, more a cup that you can dip into the markets and pull out a never ending supply of money. But wait a minute, this sounds too good to be true? Or does it? Warren Buffett and George Soros have made billions from their investments in financial markets, maybe they found The Grail. The Internet is teaming with market ?gurus? who offer to teach the secrets of The Grail for a princely sum of around $250 a month. So why do so many traders retire frustrated, mentally exhausted and a few thousand dollars worse off, never having found what looks so readily available to them?

The reason why traders? attempts are often futile is because they spend their time and money looking in the wrong place. By saying they are looking in the wrong place implies that there is a right place and we are not dealing with a myth. So where is it? Fear not intrepid explorer, we will show you where to look. If you concentrate hard enough you might even see the treasure map hidden within our words.

What the Market Holy Grail Is Not
The majority of first time traders will go through a process like this, or something very similar:

  1. Read a little about the market and decide to try you luck.
  2. Discover that the Internet is full of magic indicators and gurus.
  3. Start trading and realise that it is a lot harder than the gurus said it would be.
  4. Come to the conclusion that this strategy doesn?t work and try again or?..
  5. Give up with a sore head and a sore wallet.

Confusing isn?t it? That is because, as you probably already know, learning to trade is a very confusing business. It often seems like the more you learn the more confused you become. The more confused you become the more you think you should learn and so on. If you are unable to get a combination of indicators to work surely someone has a combination you can buy. Alas, no matter how hard you try, following either of these two paths never seems to work. That is because the Market Holy Grail is not an indicator, strategy, method or charting package.

So What is it?
If it is not something that you will find on your charts then it is not something that you will be able to understand after one night?s study. Just as many people dedicate an enormous amount of energy towards researching the Christian myth of the Grail, you will have to do the same when pursuing the market incarnation. That is a very important point; being a successful trader isn?t easy, nobody ever said it would be. That is why the rewards for becoming consistently profitable are so high. There is no doubt that most, if not all, combinations of indicators work. However that does not mean that they work all of the time but they do work well in specific conditions. The success of every indicator-based strategy is dependent on your ability to read the conditions of the market and apply what you have learned. It is also down to the internal thought process that occurs every time you come to place a trade. So what is the magic factor? The answer is: you.

What Does This Mean?
Wait a minute; we can?t be serious, can we? Well let us think about it for a while. Think back to the last time you tried to trade a ?Holy Grail? system or a system you researched and back tested yourself. If it failed how many of the following weaknesses hindered your efforts:

Inexperience: No matter how many times you read that trading manual nothing can prepare you for live trade. As all of your indicators begin to line up you get confused, miss signals and react too quickly or too late. After your first hectic day you realise that your strategy was OK and you can attribute your loss to your lack of experience.

Greed: Buying a strategy almost inevitably comes with a statement telling you how you can make a boatload of money with relatively little work. When designing your own strategy you will automatically look for the highest winning ratio rather than best risk/ reward. This will lead to classic over trading (if you are destined to win why not increase your earnings by trading more), inability to cut losses (your strategy predicts market direction so all you have to do is wait and this loss will turn into a profit) and believing the market will move further in your direction than it actually does (setting a target that gives you as much profit as you want rather than as much profit as the market can give you).

Fear: After being burned a few times by the greed and inexperienced stage you will have probably changed strategies at least once. After all it isn?t your fault it must just be a dodgy strategy. Now it is time to hit the books and find another combination of indicators to use. The more you learn the more indicators you can find that help you make money. Or if you prefer to buy another ?Grail? system it must be more complicated like something the professionals use. Unfortunately all of the extra knowledge, indicators and complication leave you almost paralysed when it comes to entering a trade. Coupled with the losses you incurred during your ?greed phase? entering a trade becomes scary. That moment of doubt where you question your indicators or the market?s recent behaviour causes you to miss your entry and forget about the trade altogether. As you know only too well this trade was the best of the day or possibly even the whole week!

Another common mistake associated with fear is late entry. All of the characteristics of complete failure to enter are there but rather than miss the trade completely you enter late. This completely destroys your risk reward and an unsuccessful trade costs you much more than it would if you had entered at the correct time.

Just when you thought fear could only influence your entries it turns around and has a bite at your exits too. Exiting too early can cause you to take an unnecessary loss. Picture the trade: you enter correctly and the market moves a little way in your direction. All of a sudden the market turns around hard and your position starts to represent a loss. Rather than sticking to your stop loss (your defined risk) you exit early and think that you have saves yourself some financial pain. Just as you exit or just before your stop loss is triggered the market turns on its heels and ends up reaching your initial target.

Scenario two causes you to take your profit too early. The market approaches your target and goes through a natural correction. As you see the market eat into your profit you decide enough is enough and you get out while you are still in the black. Of course the market resumes its initial direction and hits your original target.

Fear will cause you to develop a lack of faith in your chosen method. Depending on how many times this has happened before you will either go back to the drawing board with your method or lose faith in your ability to trade at all. You start to believe that surely nobody makes money from trading.

This is the point at which many traders have what they call the ?aha moment?. All of a sudden it becomes clear that successful trading isn?t down to the system at all it is down to the person using the system. This is the moment when each trader realises where the Grail can be found.

Finding The Grail:
Do we need a system at all?

If the secret to the market Holy Grail lies within each trader then what is the point of a system at all? Simply put a system represents a reason to enter the market. If you don?t have a system then you have no reason to enter the market at all.

The Basis of a System:
Every system should be comprised of the following:

Trading science: Whether you use technical indicators or fundamental analysis this is your science. It doesn?t have to be complicated; in fact simple is often much more effective. This will generate your buy or sell signal.

Money Management: Arguably more important than your signal is how to manage the resultant trade. You have to set strictly governed rules that determine how much of your trading capital you will risk per trade. Part of money management is your risk: reward ratio. If you have a risk: reward ratio of 1:4 then a profit factor of 0.5 (50%) you will be banking a very handsome profit indeed!

Discipline: If you don?t have the discipline to stick to your trading science or your money management then your system may as well never have existed. Being disciplined will help eradicate late entries and early exits. In short it is the most important factor in every system.

It is very hard to apply discipline to something you have no confidence in. Therefore we recommend starting from scratch with a new strategy, something simple. This does not mean you should fork out hundreds of Dollars on a new system. Our Scalping For Forex ebook outlines a proven, simple approach that is an ideal tool to help you on your path to the Market Grail.

There is No Substitute For Experience No matter which strategy you use to help build your discipline and money management there is no substitute for experience of the market you are involved with. This experience includes knowledge of price action, chart patterns and momentum cycles to name but a few. For example, if you are trading using a momentum breakout strategy there is no point in trading during a slow, choppy market. This is something that you can only learn from experience of price action and you shouldn?t hope to grasp it over night. Once again, trading isn?t easy and it certainly is not a get rich quick scheme.

David Thorpe writes articles for http://www.passion-trading.munbuns.com This site is dedicated to bringing its visitors free resources that will allow them to develop their learning and better manage their own money in the financial market.Born in Somerset, England in 1982 he began his independent trading career at the age of 20. David now has four years of experience with foreign exchange and stock market trading. All of the knowledge he has gained has been down to his research and daily experiences with the market. Mr.Thorpe can be contacted at ptsupport@munbuns.com

Pat494

Well-known member
Mar 27, 2004
13,037
1,221
223
#2
Largely what every intermediate trader knows only too well having usually found out the hard way.
 

Legion

Active member
Nov 5, 2006
160
4
28
#3
what constitutes a grail though ? does it have to be 100% 80% or proved beyond a random guess rate? for puposes of discussion assume the stop exited & targets meet a min 1 unit risk = 2 taken reward.

what would be considered grail any consensus?

.
 
Oct 1, 2006
35
1
18
#4
essentially, a holy grail only has a finite life since in my experience the markets are always changing; and also, I use the word "grail" with a degree of leniency since I'm sure we're all quite aware that nothing in the known universe is guaranteed and hence there is always at minimum a .0001% or so.

As a result, these proprietary black-box solutions and other swindles generally only work for a certain period of time before something will change and gradually whittle away at its success rate; it's the precise reason that I find I am always on the lookout for the first signs of trouble with any of my own strategies that I have developed, and will aim to adjust them accordingly; generally I manage this by being a lot more stringent with my trades as I find the market becoming more difficult and then eventually figuring out a way to adjust myself to the new playing field.

by the same token, some people will also find consistency works, and I apply a consistency nontheless in other aspects, but again, I thought I'd offer my 2c.
 

new_trader

Well-known member
Jan 1, 2006
6,163
1,252
223
#5
Excellent article, I can identify with every single word of it. Blood, sweat and tears...but I think that "aha" moment has finally arrived.
 

Legion

Active member
Nov 5, 2006
160
4
28
#6
what if the black wasnt Black but kind of opaquey transparent in nature ie you code a few thingies but based on dynamics of price itself and then market behaviour itself.... how could the market fake its own behaviour or rather who would be doing this? and what would it look like?

does a grail have to be boxed in black?
 

new_trader

Well-known member
Jan 1, 2006
6,163
1,252
223
#7
Legion said:
what if the black wasnt Black but kind of opaquey transparent in nature ie you code a few thingies but based on dynamics of price itself and then market behaviour itself.... how could the market fake its own behaviour or rather who would be doing this? and what would it look like?

does a grail have to be boxed in black?
12 months ago I would have been asking the same question so I get the impression you haven't reached the 'aha' moment yet. The 'Grail' is YOU and has little or nothing to do with the system you are trading even though it is a component of successful trading. I have spent many, many hours manually back testing a strategy. It takes around 3-4 hrs/ 1 month of data but the knowledge I have gained is invaluable. There is no way I could have automated this back test and made it profitable.

Computers don't learn from experience but people do. I made my first live trade yesterday since I developed my new strategy and I have never before made a trade with such confidence. I had my stops set and trailed them, just like I did in my manual back test and it was absolutely perfect. I expect some losses to come my way but I am not bothered at all.

If you are going to manually back test you must be completely honest with yourself and open and close trades according to your strategy. This can be difficult to do when your strategy says you must trail a stop and close it for a 2 point profit when you can see the chart would give you an extra 7 points if you kept your position open until market close.
 
Likes: rols

damianoakley

Active member
Mar 12, 2003
542
57
38
#8
The Holy Grail is different for everybody.

One person's perfect system could be another person's failing system if the two people have opposite personalities.


Thanks

Damian
 

rols

Well-known member
Sep 10, 2004
1,621
335
93
#10
new_trader said:
12 months ago I would have been asking the same question so I get the impression you haven't reached the 'aha' moment yet. The 'Grail' is YOU and has little or nothing to do with the system you are trading even though it is a component of successful trading. I have spent many, many hours manually back testing a strategy. It takes around 3-4 hrs/ 1 month of data but the knowledge I have gained is invaluable. There is no way I could have automated this back test and made it profitable.
.
Good post.
 
Last edited:

Legion

Active member
Nov 5, 2006
160
4
28
#12
damianoakley said:
The Holy Grail is different for everybody.

One person's perfect system could be another person's failing system if the two people have opposite personalities.


Thanks

Damian
yes agree to a point, but if the grail whatever it is, (I mean can anyone define it a set of minumum criterior etc....) matched (by evidence of it being played out that way) then I would of thought most personalities would see common ground of using an identical system.

Unless the personality is intent on continually obtaining negatives for the owner no matter what they pursue..

so to be classed as a grail it has to be what exactly?

Simple beyond subjective ambiguity?

Profitable

Reasonable hit rate (Beyond 70% ,80%?)

Able for the layman to understand within a short timespan ?

The system is based on logic tailored to the market therefore it actually makes sense and can be understood by the users after simple concepts of behaviour is explained, this is of course backed up with empirical evidence ,meaning they can watch it realtime,check it historically

low consecutive losing trades how many ? no more than 2?

with the personalities using a system it wont match etc I see this as explaining a basic softball game of using bat to hit the ball and giving 2 people with very different personalities and saying o.k would you like to use the Bat or a piece of cooked spaghetti to hit the ball?

wouldnt they both use the Bat ?

Now the grail I suggest has to be that clear yes? if it aint, it cannot be classed as a grail...
 

Charlton

Well-known member
Nov 23, 2003
1,501
325
93
#14
Article shows you where to look

Climb every mountain, search high and low
Follow every byway, every path you know.
Climb every mountain, ford every stream,
Follow every rainbow, 'til you find your dream!

A dream that will need
all the love you can give,
Every day of your life
for as long as you live.

Climb every mountain, ford every stream,
Follow every rainbow, 'til you find your dream!
 

rols

Well-known member
Sep 10, 2004
1,621
335
93
#15
Charlton said:
Climb every mountain, search high and low
Follow every byway, every path you know.
Climb every mountain, ford every stream,
Follow every rainbow, 'til you find your dream!

A dream that will need
all the love you can give,
Every day of your life
for as long as you live.

Climb every mountain, ford every stream,
Follow every rainbow, 'til you find your dream!
Thanks for that Charlton. Love is all you need etc.
 

Attachments