im going to look up some of those dsp ideas your talking about because im not fulling grasping your cause and effect anology so much... maybe you can expand a little... but i think im starting to understand where our differing perceptions lay...
1st off let me apologize if ive come off a little crass, or if in my attempt to explain to you what works for me, if i have come across as trying to tell you what to do with your own business, this is not the case... as i have said before i am just doing my best to expand the probable (i started using this word after hearing a hindu analogy told by robert shiller in one of his yale financial markets lectures - free online) trade ideas my business generates by interacting with a larger online community... i have very much enjoyed the dynamic tempo & even the differing ideologies everybody has presented on this forum... at times however, i do become overly passionate about the topic and i recognize that i probably come across as a dick... i ask that you dont hold it against me... im just determined, i guess, to ultimately find that "holy grail", maybe even if it takes the rest of my life... dont tell my wife that.
this is really an issue of looking at the glass half full or half empty...
Yes. each and everyone of my trades does hold a directional bias. i do not attempt to make money trading the "spread". I understand the implications of this, and psychologically, it may sound overtly simple, but I just accept responsibility for it. and because i accept responsibility for every loss i may incur, i am also free to accept being wrong on any one trade idea my "mathematical" systems may produce... because at the end of the day, no indicator, no math, no anything can tell you what the market is going to do next. the absolute chaos that is a mall full of 100,000 shoppers, IS insane!!! cant be measured in a way that will foretell a path to a fortune filled treasure chest... nope, not happening. (Although companies like Home Depot, for example, use Risk & Inventory control measures to use past statistics of how their customer's orders are coming through the door to position themselves as best they can for what the needs of their future customers will be, & eventually, where their profitability will be, and to best determine how they will take their own profits from any given market based on current "technical" metrics they use to measure their own businesses. Chaos theory maybe? out of chaos comes order... quite possibly)
How does this simple fact produce a dominant trading strategy? I have found that i can dominantly trade a strategy if and only if i approach the market on my own terms according to the mathematically defined "rules of engagement" i have predefined according to any number of ideas that can be effectively used to trade the market. (I am actually proposing here that the strategy does not matter... what matters, which i do not discuss in this post, is the expectancy of a strategy, & even then, that is worthless if you cannot abide by the fundamental principles of this article).
what does all this have to do with half full/half empty? you see, although i am doing everything in my power to consistently make profits on a short/medium term directional bias over and over again throughout the year... the ONLY NUMBER I CARE ABOUT in every trade I execute... come on, somebody guess...
I only care about the amount of money each trade will lose. regardless of the "probable" outcomes that may arise. The amount of money I can potentially lose on any given trade, or my Risk (R), is absolutely the only number that can and will put me, and anyone who trades any market, out of business faster than you can say "I lost all my money".... The is the only guarantee the market will give you...
I dont know about you, but, Im pissing in my pants just thinking about how that last statement came together... it's so true! The markets are indeed a force to be reckoned with, and one must not attempt to let anything interfere with your grasp of that idea. the minute you think you got a handle on this baby, "the market", you get tossed aside like the next $2 whore... (sorry ladies)
So you see, i dont look at trading on a directional bias as an inherently bad thing. i have studied charts dating back to 1854 and the only common theme that can be found is that the markets are simply, volatile, and directionaly biased. why? because the inherent nature of human psychology is volatile... & biased. dont even get me started on group psychology, the stampede is insane! is it not?
with that said, although i am trading on a theoretically riskier "trade platform", if you will, by seeking out directional opportunities as part of my trading business' long term profit objectives. In all reality, my day to day trade management details, that are predefined and outlined in my business plan, state, that, my primary objective is to eliminate my Risk (R) as much as possible. Because trading on a directional bias is inherently more risky than a spread strategy, we will probably never eliminate risk in the "traditional" sense of the term, but I will spend the rest of this post making an attempt at explaining how i do it using what a gentleman by the name of Van K Tharp termed, the R-Multiple...
Generally I think that as traders, when we start researching these stats, we quite simply forget to work on ways of using the very quantitative mathematical methods we are calculating to improve our trading, in ways that are actionable so as to assist in actually turning a profit.
Just a theory, but i suspect that most traders calculate figures on back dated data without taking into account how you would actually trade each system... ie.. back-testing...
you with me so far?
what we all have to remember, is that these statistical and mathematical tools, no matter how you calculate them or what you actually calculate to measure your performance, must ALSO be measured against your actual performance in a way in which you can incorporate Risk Control metrics that work within the parameters of the system you are testing.
With the application of the "R-Mulitple", you are effectively measuring your actual Risk per trade and how you actually performed against the stated risk you said you were going to take on by executing the trade, FROM THE BEGINNING OF THE TRADE.
What the hell is an R-Multiple anyways?
If Risk is defined as how much you'll lose per unit of your investment (i.e. # of forex contracts) and you are wrong about the 'given' position, then the 'initial' Risk associated with the 'given' position is called 'R'. Or, 1R.
Example: If you buy a stock for $10 per share and it drops to $5 per share, your initial Risk for that particular trade is $5 per share. So in this example, 1R is equal to $5. If you buy 100 shares, then your total risk is $500...
R Represents a method in which to compare the initial risk of different trades equally and objectively against all other trades, and it therefore represents your initial risk per unit. the reason you want to objectively quantify this info is because all of your profits & losses should be related to your PREDETERMINED initial risk. you want your losses to be 1R or less. that means if you say (before you get in the trade) that you will get out of the stock when it drops from $10 to $5, then you actually get out when it gets to $5. If you get out when it drops to $0, than your loss is much bigger than 1R. its twice what you planned to lose or a 2R loss. you want to avoid that situation at all cost. as a matter of fact you want to keep all losses as close to 1R as possible or less... (i.e. you want to actively work on taking your (R) down to zero (0) throughout the life of your trade. Effectively, you want to work towards the feasible elimination of the Risk (R) associated with the trade... if you're able to get it down to 0R, ie. break even, you've won the game.)
the opposite holds true as well. the few times when the trade DOES go in your favor you want to hold those trades as much beyond a 1R Gain as possible. that means that when the market decides to reward you, you must close the position in the given example at $25, therefore giving you a 3R Profit or 3 times the initial risk...
This is the mathematical procedure of ensuring that you cut your losses short & hold your winners longer...
but its difficult to get that info out there, i know.... The R-Mulitple is simply the Division of the Total Profit or Loss (including commissions & Fees) by the Initial Risk. You want to keep this as close to +1 or greater than +1 as possible. (No Less Than -1R for Losing trades)
ill tell you though, most of my winners are 1 to 1 with a few 1 to 3 Risk/Reward Ratios, so it is difficult to achieve trades with higher R Multiples but it is possible...
so you see, at the end of the day, with the knowledge that since 1854, markets have consistently moved up, down, & sideways in a volatile & biased fashion; my primary objective is simply to put myself in a position to participate. nothing more. because i want to be a "trader", and because i want to make money, then all i really want to do is to "Participate" in as many of those movements as I can catch. Furthermore, the only way I can catch those directional moves, is to "Test" the market at certain points of market extremes, where it always seems that panic has struck deep into the hearts of the "Stampeding Cattle", that i find myself entering into a directionaly biased position based on the rules i have dictated that allow me to "Engage my Targets" that show characteristics of having the lowest "probable' & quantifiable Risk (R) available to me at that particular point in time...
As soon as I have executed a trade, we go back to the beginning: the only thing I care about, at that point in time, is where my stops will be trailed to. As a matter of fact, I go into every trade EXPECTING TO LOSE!!! The sooner price action tells me I can move my Stops to break even the better, usually after a .382 retracement of the previous trend... for example... if this were to occur, I would be involved in an absolutely risk free, directionaly biased trade as soon as stops moved to break even. would I not?
You see fundamentally speaking, what has to occur in the traders "Mental State" is a sincere understanding that Losing is very much a part of this business. an acceptance of those losses is what is needed in order to give in to the fact that we will never know the future... holding a position beyond your defined stop loss, is simply a function of not being able to take a loss. when you cant take a loss, you are in essence saying that you cant accept being wrong. You rationalize a trade to find excuses to stay in it all the while losing more and more equity... you see, this is why psychology is so important, and please forgive my crude understanding of it, but at the end of the day, you have to put your ego & pride aside to be able to say, "This Trade Idea I had, was a horrendously bad idea; I need to get out ASAP"... that is as best as I can explain it... Set your ego aside, if your wrong get out, if your right, THEN get to Break even and let the market just do whatever it is going to do... (you can't control the market, as you already know, it will move with, or without you. your goal has to be one of Objective & Quantifiable "Participation"...)
the problem with this, is that the inherent freedom the market gives us to make money, is also a sword we can use to slice our own throats with, because it also gives us the absolute freedom to make a Decision to not obey our Stop Loss orders, or to trade without strict adherence to our predefined plan....
In order to combat this reality of undisciplined and inconsistent action which results in substantial monetary losses, one must undergo a "Paradigm Shift" where the glass goes from half empty for taking a simple trading loss, to half full for taking a small monetary loss thanks to the foresight & mathematically laid out definition of your trading plan.
When you take a small loss after having executed your trade according to your game plane, and on your own terms, THEN, it's actually a Win. why? because you will have not broken the 1st rule of Fight Club, er... Trading:
Protect your Wealth & Don't Lose your entire Stake!
Do I have to go into what Jesse Livermoore has to say about this?
so really, at the end of the day, i guess that's why i really dont care about cause because the cause doesnt concern me... beCAUSE its been happening over and over and over again since 1854...
All i have to know, is how my decisions to execute the trades that allow me to participate in these markets actually EFFECT my equity curve... the markets will tell me I'm doing wrong if I am losing money... in the mean time i will keep doing what I am doing, & sharing with anyone who wants to "have at it"...
If you've been with me this long... Thank you for listening
On a side note. I cannot take the credit for this knowledge because i did not invent any of it. It is all knowledge that I have obtained from researchers whose works extend as far back to 1854... I simply just read every last word and started putting it to use...
I know how frustrating it could be to read worthless books that provide no real material benefit to your bottom line. In the theme of sharing the knowledge on my website I have also established a list to links where you can buy all of the books that have helped me to harness the butt load of data that has helped to express myself today... if and only if you're interested in obtaining the breadth of knowledge that i have made a sincere attempt at condensing for you today, then please just visit what I call the "ProTrader Library" portion of my blog... The entire list of books needed to absorb this knowledge is located here:
TradeSocial Network ProTrader Library & Bookstore
you guys are the shiz... much love! and always, TakeYourProfits!!!!
