Suggestions for mastering speculation

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trader_dante

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Aug 18, 2005
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#1
Here are some tips for mastering the art of speculation. I've made a few of these posts before but they can get lost.

Some of these are taken from books, some are my own comments.

1. Study the market every single day. No day should pass by without watching the tape, watching the market, understanding the correlations and feeling the sentiment.

2. Try and visit an exchange even if it is not related to the market you trade. I recently went to the LME (London Metal Exchange) where you can stand in the viewing gallery and watch the action. Watching the traders execute in the pit is as close as you can get to the heart of the action. Look at the emotions of the traders and how they transact.

3. Do not necessarily start with one product but start with one market first. The stock market is a good starting place.

4.Take one position at a time.

5. Keep your transactions to yourself. Do not boast about wins or lament lossses to other people - especially those that do not trade themselves.

6. Never trade out of boredom.

7. Keep a record of all losing and winning trades.

8. Make sure you have adequate capital to sustain a string of losses. Every trader has losing streaks. Be sure you can weather them out. If you cannot take at a very minimum, 10 losses in a row and still place an eleventh trade, you do not have enough capital.

9. Vary the size of the position based on your assessment of the distribution between risk and reward. There are benefits to risking a fixed percentage but there are times (and trades) when the reward is too good not to take extra risk. If you do not understand when these times are, you do not have enough experience.

10. Be awake and alart before the market opens. If the market opens at 8am, there is no point sitting down at your computer at 8.15am. You should be aware of news, sentiment and overnight moves (or related market moves) at least a full half hour before trading.

11. Take a break when you are losing.

12. Cultivate and nurture all emotions during the trading day.

13. Read up on the markets. Most traders read books on HOW to trade. I suggest that books by or about great traders are a far more important read. If you want to be the best you need to try and surround yourself by the masters of your art. If that has to be via their writings, then so be it.

14. Forget about the great prices you could have traded at. Should you enter, add or exit, right now?
 

timsk

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Mar 18, 2002
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#2
9. Vary the size of the position based on your assessment of the distribution between risk and reward. There are benefits to risking a fixed percentage but there are times (and trades) when the reward is too good not to take extra risk. If you do not understand when these times are, you do not have enough experience.
9A. Vary the size of the position (and the placing of your stop) based on the volatility of the instrument being traded. Using ATR is as good a means as any for evaluating volatility and appropriate position size, IMO.
 

new_trader

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Jan 1, 2006
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#4
9A. Vary the size of the position (and the placing of your stop) based on the volatility of the instrument being traded. Using ATR is as good a means as any for evaluating volatility and appropriate position size, IMO.
I disagree. Current market conditions have been the ultimate acid test of the wisdom and advice of Socrates. He is, no doubt, the Grand Master of trading.

OK, I will explain.

The single most important thing you have to concentrate on is limiting losses.
You do this by using stops.

As you become more procicient at picking winning moves you have to tighten your stop loss policy.

Limiting losses to the absolute minimum is the key. All else is peripheral.

Now that is a simple statement.

If everyone did this, everyone would survive long enough to eventually become proficient.

But very few have the self discipline to persist in this way.

I strongly suggest you follow the lead I have just given you.

I am specifically referring to Timing, the Point of Entry and the Point of Exit.

When the market begins to "talk to you" instead of just baffling you, the Point of Entry selects itself for you and the Timing is the right one. In consequence of this, you repeatedly and confidently experience the position going in your favour immediately. The stop, which is a crucial safeguard for everybody, is now quickly left behind. With progressive increases in proficiency leading to accurate entry and perfect or near perfect timing, the stop can now be narrowed and squeezed to the limit, taking into account the spread. The other thing that happens is that the exit point becomes clearer and clearer, as you begin to detect exhaustion or imminent reversal.


[STOPS are] dependent on the skill level of the trader and not dependent on market gyrations.
I have been using a stop on the ES contract of 1.25 points since the start of September 2008 (this year). Yes, every session.
 

Jaydee

Well-known member
Sep 19, 2005
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#7
I have been using a stop on the ES contract of 1.25 points since the start of September 2008 (this year). Yes, every session.
As you have a fixed stop regarless of the volatility of the market, do you also have a fixed target or do you also try to feel when the trade momentum is slowing and exit based on a similar idea to your entry?

I see what you're saying regarding the entry, but a lot of traders will only have access to charts and not the order book. Consequently, they are likely to enter slightly too early or late - in such situations they may have to wear some of the volatility before going onside. (Also, regarding trading like spreadbetting, stops which are too tight in volatile conditions can end up costing a trader a fortune in spreads as they have to keep re-entering over and over when it would be more cost effective to wear some pain).

I think both yours and Tim's ideas have their merits - it's based on circumstances and whatever makes money at the end of the day.
 

new_trader

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Jan 1, 2006
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#8
As you have a fixed stop regarless of the volatility of the market.
I am not saying 'regardless of the volatility'. I am saying that volatility does not really enter into the equation. Volatility is a backwards looking description of the market whereas speculation is the art of looking forward. Do you see or do you not see?

In other words, volatility is what has happened, speculation is what will happen.
 

Jaydee

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Sep 19, 2005
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#9
I am not saying 'regardless of the volatility'. I am saying that volatility does not really enter into the equation. Volatility is a backwards looking description of the market whereas speculation is the art of looking forward. Do you see or do you not see?

In other words, volatility is what has happened, speculation is what will happen.
Not sure if I agree in principal that speculation is looking forward - speculation to me is trading what is happening not what you think is going to happen.

Volatility is backwards looking, but historic volatility is one of the few things that often continues into the future. The market doesn't move in a 30 tick range, for example, one minute and then 5 ticks the next. There is a gradual decay in volatility over a period of time. It's one of the few times where historic data is useful.

That said, however, increases in volatility are difficult to plan for because news can randomly come out, etc.
 

new_trader

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Jan 1, 2006
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#10
Not sure if I agree in principal that speculation is looking forward - speculation to me is trading what is happening not what you think is going to happen.
Ok. Would you agree with me, in principle at least, that if you look at what is happening now, and then looked at what happened before it happened, you would see a correlation between the two. Cause and effect so to speak?

Would you agree with me, in principle at least, that if you look at what is happening now and take note of what happens after it , that you could, in principle, speculate on what will happen the next time you see the same thing happening again?
 
Jul 28, 2008
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#11
Rule 16

Here are some tips for mastering the art of speculation. I've made a few of these posts before but they can get lost.

Some of these are taken from books, some are my own comments.

1. Study the market every single day. No day should pass by without watching the tape, watching the market, understanding the correlations and feeling the sentiment.

2. Try and visit an exchange even if it is not related to the market you trade. I recently went to the LME (London Metal Exchange) where you can stand in the viewing gallery and watch the action. Watching the traders execute in the pit is as close as you can get to the heart of the action. Look at the emotions of the traders and how they transact.

3. Do not necessarily start with one product but start with one market first. The stock market is a good starting place.

4.Take one position at a time.

5. Keep your transactions to yourself. Do not boast about wins or lament lossses to other people - especially those that do not trade themselves.

6. Never trade out of boredom.

7. Keep a record of all losing and winning trades.

8. Make sure you have adequate capital to sustain a string of losses. Every trader has losing streaks. Be sure you can weather them out. If you cannot take at a very minimum, 10 losses in a row and still place an eleventh trade, you do not have enough capital.

9. Vary the size of the position based on your assessment of the distribution between risk and reward. There are benefits to risking a fixed percentage but there are times (and trades) when the reward is too good not to take extra risk. If you do not understand when these times are, you do not have enough experience.

10. Be awake and alart before the market opens. If the market opens at 8am, there is no point sitting down at your computer at 8.15am. You should be aware of news, sentiment and overnight moves (or related market moves) at least a full half hour before trading.

11. Take a break when you are losing.

12. Cultivate and nurture all emotions during the trading day.

13. Read up on the markets. Most traders read books on HOW to trade. I suggest that books by or about great traders are a far more important read. If you want to be the best you need to try and surround yourself by the masters of your art. If that has to be via their writings, then so be it.

14. Forget about the great prices you could have traded at. Should you enter, add or exit, right now?
9A. Vary the size of the position (and the placing of your stop) based on the volatility of the instrument being traded. Using ATR is as good a means as any for evaluating volatility and appropriate position size, IMO.
15. Trust the little voice in your head. It usually knows best.
good post arabianights, that signature of yours to .......classic :)

"Caution: I change my mind constantly, and I suspect if you slavishly copied everything I talked about on t2w you'd have blown up well before now! "

16 That little voice can be a real pain in the asssssssss Holllllllleeeeeeeee !! if you let him get the better of you

Make sure your little voice is in agreement with your well thought out rules and not going on one for emotional reasons :)

good thread td

Andy
 
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Joey25

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Mar 30, 2005
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#12
I am not saying 'regardless of the volatility'. I am saying that volatility does not really enter into the equation. Volatility is a backwards looking description of the market whereas speculation is the art of looking forward. Do you see or do you not see?

In other words, volatility is what has happened, speculation is what will happen.
Financial markets are often characterized by non-constant variance (heteroscedasticity), and tend also to be backward-looking in nature (autoregressive).

In the case of the indices, forward volatility is a function both of previous volatility and trend - i.e if the trend (or drift) in the time series is up, volatility tends to fall.

These effects are readily observable both in the implied vols of the options market and in the case of the S&P500, the VIX index.

http://www.cboe.com/micro/vix/VIXoptionsQRG.pdf
 
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Jaydee

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Sep 19, 2005
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#13
Ok. Would you agree with me, in principle at least, that if you look at what is happening now, and then looked at what happened before it happened, you would see a correlation between the two. Cause and effect so to speak?

Would you agree with me, in principle at least, that if you look at what is happening now and take note of what happens after it , that you could, in principle, speculate on what will happen the next time you see the same thing happening again?
Yes, in principle that all sounds fine to me - what you said is how I see it.

Going back to the topic of wearing some pain relative to the volatility, do you see how in some cases (speadbetting, longer term trading, etc) it isn't necessarily a bad idea? For example, on a two week ES trade, you wouldn't have a 5 tick stop in such a situation would you? I know you're only a short-term trader, but hypothetically how would you work this?
 
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jm99

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Dec 15, 2004
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#14
fwiw, in relative terms my position size is substantially reduce in the current condtions.

on a atr% basis, spooz is now moving faster than in 00-02 (ie most recent similar market conditions), but way under 87, and 29-32 (which peak at approx 12% in places)
 
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