How do you decide what to trade?

[Cannea]

I have not been part of this forum for very long, but I think I am really going to enjoy it here , there appear to be many really intelligent people shooting ideas back and forth :clap:. Luckly for me I think the best way to improve is to surround yourself with intelligent people and let them challange your opinions. With that spirit in mind Subarashi said:

Can your belief about the behaviour of the pixels predict the next probable location of a flaring pixel? Does your belief alter the behaviour of the pixels so they begin to conform to it, or are the pixels just flaring randomly and have happened to throw up a run of flares in close proximity to each other?

When it comes to pixels I would agree, your belief would have no impact on the behavior of pixels. But the market is different, price in the market is determined by supply and demand. In turn supply and demand is determined by the believes of a large group of people coming together and trading with the goal of making a profit. Some people believe a stock will go up and others believe a stock will go down. Then they bet money to see who is right.

Since there is allot of money to be made in the market, people will try to get an edge and a large percentage of these people study such things as technical and fundamental analysis, looking for repeatable patterns. So basically what you have is a large group of people looking for the same signals in the hope of making a profit, whether or not these signals really exist.

Now when the same large group of people (the ones that are betting and thus setting the price in the market) believe that they see a pattern emerging they will bet along with what they believe. If a large enough group of people comes to the same conclusion at the same time and make their bet they will create a trend in the market, you will then have a temporary consensus in an otherwise random situation. In essence what happens is a self fulfilling prophecy, a certain pattern has emerged temporary in the market because a large group of people has come to believe this pattern into existence, a temporary consensus has been reached by a large majority of people.

That is why I recently changed my mind about technical analysis, I used to think that it was worthless as charts only show you what has happened, but I came to the conclusion that the value of charts is not the historical value but as a litmus test of the believe of the majority of the market at a particular point in time.

Does luck come into play in the market? Sure I think it does, everyone has heard of someone lucky ******* who put some money on a stock, held on to it and then emerged a millionaire a couple of years later. Personally I have not heard of anyone discovering a way of successfully courting Lady Luck, so aiming to become lucky is not going to work. But aiming to develop skill and disciplined is doable, hard but doable.

Besides if you need further evidence that money can be made thru skill, take a look thru a book “Market Wizards” and you will find a small group of people who repeatedly year after year are beating the S&P 500 by a large percentage.

I am curious to see what you think,

Cheers, :cheesy:

 

[chump]

"there appear to be many intelligent people" etc ....you're probably right ,but unfortunately there are very few consistently successful traders amongst them. Make of that what you will ,but less emphasis on what sounds intelligent won't do you any harm ,in fact it would save you a lot of time in the longrun.

 

[subarashi]

Randomness

I have not been part of this forum for very long, but I think I am really going to enjoy it here , there appear to be many really intelligent people shooting ideas back and forth :clap:.

When it comes to pixels I would agree, your belief would have no impact on the behavior of pixels. But the market is different, price in the market is determined by supply and demand.

Prices are the outcome of supply and demand, as you rightly say, but the level of supply and demand is unpredictable. It may be the result of changing earnings estimates and the response of fund managers or a fad of the retail trading public. It doesn't really matter where the supply and demand springs from: all we know is the outcome which is random.

That does not mean the randomness is fair. I believe the market is deterministically random, in the way of a space filling curve which has one or more bounded random variables.

To that extent it is possible to estimate the likely price band any discrete price will fall into. My preferred method is to use a combination of Point and Figure and Equivolume charts together with the Average True Range and Ease of Movement indicators.

I generally set a stop loss at 1.5 to 2.5 ATR and establish a price target from the P&F chart. After that I try not to touch the set up at although I must admit to tinkering at times. It is a fault in me that I am trying hard to eliminate!

I am trying to reduce my trading because the real killers to consistent profits are the brokerage fees and taxes. I don't see why I should help make millions for brokers by falling into the excessive trading trap!

You might say I am developing, or trying to follow a limited Buy and Hold style. I hope for moderate gains in excess of fees etc. and take a good enough attitude to the outcome of a trade.

I take losses the same way I accept my car devalues the moment it leaves the showroom. An inevitable cost of enjoying trading.

Besides if you need further evidence that money can be made thru skill, take a look thru a book “Market Wizards” and you will find a small group of people who repeatedly year after year are beating the S&P 500 by a large percentage.

I have the book and it is an enjoyable read. Unfortunately I firmly believe that most of the successes claimed are still the result of random outcomes. After all the sample is somewhat biased.

 

[chump]

post 23 now see post 22

No disrespect, most of us started somewhere with an opinion and nothing to support it other than our preconceived ideas and bias.

 

[Cannea]

I am trying to reduce my trading because the real killers to consistent profits are the brokerage fees and taxes. I don't see why I should help make millions for brokers by falling into the excessive trading trap!

Subarashi, please do not take this as critism or an insult, since I am asking this out of genuine curiostity:

If you believe that market price is totally random and therefore cannot be predicate, and since it appears that you discount the role of skill, why trade? Would it not be better not to trade at all, and just stick money into a mutual or index fund? Since hisotrically the marke goes up.

Addmitangly I have not been at this for very long, but I think that you are right and I agree with the above, I think trading too often would kill an account in a speedy and efficent manner, you would just hand your account to your broker piece by piece.

 

[jasont]

Finding Your Niche

Hey Guys,

I posted this below in a different section but thought it would suit here as well to help some people. I don't claim to be some fantastic trader but I have spent two years finding my niche that suits me in my trading. It just outlines how I found what to trade and offers some advice on how people can do it themselves. Grab a coffee or beer because it is pretty long. It may help those looking for their niche to write down their findings as well.

When I first started trading I was foolish enough to jump in without doing my homework. I jumped into trading a time frame that wasn’t suited to me and trading an instrument (options) that didn’t utilize my personal talents and advantages. So over time I managed to find the right instrument and time frame to trade but how did I go about it?

I actually found the time frame and instrument a bit blindly to be honest. I actually stumbled across them and then did the following stuff afterwards to clarify that it was the right thing for me. Hopefully if you’re reading this you can do it before backtesting or simulation trading a method so you don’t waste your time.

After reading a great book by Brett Steenbarger entitled “The Psychology of Trading” I realised the importance of finding a trading method that suited my personality. It is very important that you are trading a time frame that suits your personality, this doesn’t mean one that suits your other out of market commitments, that is very different.

Just because you work a day job doesn’t mean you should be trading according to daily time frames because the only time you can get to the screen is for fifteen minutes to see the close. First find what time frame suits you and then figure out a way to do it around your work or outside commitments. Being that we are in the thick of global economies you can trade any market around the world from you own home pretty much. So how did I the right time frame and market instrument and how can you find it?

Look at Past Activities and Sports

I started by looking at past activities and sports I enjoyed. By doing so I managed to find an interesting pattern. I always seemed to play sports that were reasonably fast paced. They included football (Australian Rules as I am from Australia, Ice Hockey, Basketball and Tennis). The one I liked the most out of those was Ice Hockey because there wasn’t really a dull moment for any player whilst on the Ice.

Another pattern was particular video games I used to enjoy. They were always ones that were action packed but still required strategy. Shooting games that needed you to be quick but at the same time take everything in that was on screen and work out how you’re going to get to the next area. I didn’t mind the thinking type games such as Command & Conquer and Sim City but I always found they took too long to get things done.

Another fast activity I enjoy is riding my motorbike. I like riding around the mountains going as fast as I can but still leaving something in reserve should I need to avoid a road hazard or get out of a bad situation. Here was another clue, I didn’t like putting myself totally on the line, something to keep in mind for risk management.

So looking at my history of things I enjoyed, I realized they were all pretty fast moving activities. Previously I had been trading longer term instruments where trades would last for weeks. Obviously not fitting my past activities I enjoyed.

So first thing you need to do is look at the activities you have enjoyed in the past and the nature of them. You may enjoy Baseball, Golf or playing Poker which are activities that give you more time to think about your next move.

So I had found that I needed something which had a bit more action and was quick. I then needed to find out my personality traits and talents. To do this I looked at how I interacted with people on a social level and what my subjects I gravitated towards in School. You can do the same for College or University or even look at your job.

Finding Personality Traits and Talents

First starting with school. I was always someone who picked things up very quickly, I’m a fast learner. Another clue to what I should be doing. I never enjoyed nor was I good at History, Math and Science. I enjoyed English, Graphics, Theatre/Drama and Sport. Right there if you read between the lines it tells you that I don’t like the subjects with heavy calculations and rules. I liked subjects with creativity but didn’t like the rules accompanied with Math and Sciences. History required intense study of the past and remembering of facts and information. So I realised I had a liking for and a talent of the creative subjects but without using hard statistics.

If you think about your School or College/University days and your current workplace, you can find out what areas you were good at and just as importantly what areas you enjoyed. You need to find areas that you enjoy and that you are good at. Both are important.

I then thought about my social life and what I tended to do in conversations and groups. I noticed that I was a quick thinker when it came to talking with people. When I am in a conversation I think about what the person I am talking to will say in response to what I am going to say, before I say it. So like a Chess player who thinks moves in advance, I think conversations in advance. I then try to lead the conversation to the direction I would like it. That was another clue, I seemed to put possibilities together before they happened.

I also noticed that I would constantly look for signs in people to tell me that they are enjoying the conversation or looking for something different to talk about. This is when I realized that I liked looking for things people were saying without saying it verbally. Another clue for trading that I tended to look for things that were being told but without being obvious. The last thing I realized was that I was creative in my humor. I would not tell a joke straight, I would make a comment that would get people to think about the joke. Instead of telling a punch line I would give people a reference to come up with the punch line themselves. This was another clue into my personality trait of thinking ahead and my creativity.

At School I always was a bit different to everyone else. I wouldn’t do things to fit in, in fact I deliberately would go out of my way to do the opposite of what most people did. Yet some how I managed to still be well liked by the majority of people in school. This was another clue that I didn’t like to follow crowds, I also didn’t like to follow the rules of the School. If there was a rule I thought logically didn’t make sense, I wouldn’t follow it. Things such as wearing a tie with the uniform or being cleanly shaven.

Just take some time to think about your own social experiences. You need to be honest with yourself. If you were someone who was comfortable fitting in with everyone else, write that down. It will help determine whether you should be following the trend or going against the grain. There is no point going against the grain if every time you do, you feel unsafe and sick in the stomach because it doesn’t fit with your personality. You also want to think about how you interact with people and whether you are quick in your responses or whether you like to take your time to think about what you say. That can tell you if you suit a fast paced market or a slower moving one.

How You Drive Your Car

The last thing I thought about was how I ride my motor bike and drive my car. I look for people in their cars turning their heads to see if they are going to change lanes. I look at the front tires of a car to see if they are going to come into my lane. I watch the car and how they move within a lane to see if they are a reasonable driver or a terrible one that is moving from one side of their lane to another. I drive a touch faster than everyone else on the road because I rather keep my eyes on the people in front of me instead of having to watch people next to me and coming up from behind me. These are clues to what I tend to gravitate towards. I am observant of things that aren’t so obvious and I am very individual.

There are many things you can find out about yourself in regards to how you drive your car and if you follow the rules strictly or believe it is safer for you to do something else.

Think about anything else you can to tell you what your personality is like. I wear clothes in the same style I have worn for ten years. I don’t care if the fashions change, I know my style and I stick with it. I am “street smart” more than academic smart. I like to learn on my own more than being taught by someone else because I think I can learn it myself.

List Your Findings

Whatever you think of, slice it up and look at the hidden meaning behind it. Then once you have a list of things you do, you then need to see how that relates to trading. I wrote my list that looks something like the following.

Don’t like to follow rules unless I agree with them
Good at seeing between the lines
Like being creative
Like things fast paced with action
Don’t like to overexpose myself and feel unsafe
Don’t like following the crowds

Look For Markets That Suit Your Findings

So how did I know to trade futures in an intraday time frame? Well I learnt from a past mentor that certain markets should be traded at certain timeframes. Here is the following:

Equities should be traded using daily charts
Options should be traded using weekly charts
Futures should be traded intra day
Forex should be traded intra day

Now this is not set in stone and only my opinion. I am sure there are people out there trading these instruments in different timeframes to what I have mentioned. The reason these are like I have listed them above is because of the volume traded. Equities are traded a lot but there isn’t the liquidity to get in and out of positions as easily as forex and futures. Don’t forget I am from Australia and our market is not as Liquid as the US or London markets.

Considering I wanted to trade quickly, not be exposed to things out of my control and have a bit more discretion in my trading, I realised the Futures were my most suited trading vehicle. I trade them looking at a 5 minute basis and e-minis in particular have high liquidity. I trade against the grain but follow the overall flow of the market. I use the NYSE Tick to tell me that the equities are doing something different to the index futures, looking between the lines. My other indicators are guides and not strict rules where I must do X if Y occurs. I have the freedom to interpret markets.

If you get your list of what you are after, you can find a rough time frame to trade such as intra day charts, daily charts, monthly charts, or maybe no charts at all. You may find you are good at reading business statements and use fundamentals.

You can then work out your style of trading whether you like to trade with the grain or against the grain. There is no inbetween. Your either trading as the market is moving or your trading as the market is stalling looking for the opposite direction. You can find out if you need strict rules to tell you what you should be doing or whether you trust your own judgment to make the strict rules simply guides.

This should hopefully get you headed in the right direction and give you some guidance. Once this stuff is figured out, look for a mentor who trades in a similar way to what you’re looking for or ask around forums for what people recommend according to what you’re looking for. At least you will start in the right direction and can focus on the plan instead of asking whether you are in the right niche.

 

[subarashi]

98%

Subarashi, please do not take this as critism or an insult, since I am asking this out of genuine curiostity:

If you believe that market price is totally random and therefore cannot be predicate, and since it appears that you discount the role of skill, why trade? Would it not be better not to trade at all, and just stick money into a mutual or index fund? Since hisotrically the marke goes up.

98% of my capital is in bonds and index trackers. I have 2% left to satisfy my wilder inclinations!

 

[Cannea]

98% of my capital is in bonds and index trackers. I have 2% left to satisfy my wilder inclinations!

Obviously we have different believes about the market, I think that the market while being random can return superior returns if a person has the training and the skill, and you believe that the market is totally random and therefore can not be anticipated no matter the skill or the training. Taking in account you're believe structure, your investment strategy makes perfect sense (Iam with Jason on this, your personality should dictate your trading style).

By the way Jason I liked you post so much I am going to paste it to an email and send it to a friend of mine, who like me is starting to trade, thanks.

 

[jasont]

Hey Cannea,

I am glad that you got something out of that post as I had the mentality that if one person did, it would be worth the effort of writing.

As for the talk of randomness and predictability of the market, I personally have walked on both sides of that in trading. I have traded a purely mechanical system and a more discretionary method. Both have their merits and I don't have the right to say if one is better than the other for you. I will say that there is a basic law to the market that no matter what system you decide, it will never change. The law is that the market has to go up and the market has to go down. There is no changing that otherwise you are left without a market at all.

So what I am saying is that even though you may not know when the market will go down, you do know that it has to go down after it has gone up. The real challenge is knowing when it will go down and judging by how much it will go down. Just find something that can help put probability on your side for those two factors and you will find yourself with a good system. Making sure you follow it is something else all together that you need to work on.