A simple price action approach

[1a2b3cppp]

Quote from JoshDance:

You're talking about a completely programmable, non-hands-on, automated system, right?

I'm talking about anything that can be quantified, so that there is no question about whether or not any signal should be taken. No room for interpretation. X condition occured, do Y response.

If so, do you have one example of one that has been profitable over the course of, say, 2 years?

The way I trade now is mostly quantifiable, although I make little adjustments here and there based on how I feel. I've been doing it this way for over 2 years. But people don't like it cuz it breaks all of the "rules" of trading.

Also, can you make up some entry criteria that a user of such a system might have? You said "conditions x y z..." ... So, can you give an example?

Conditions x, y, and z can be whatever you want them to be.

ET member IronFist quantified rules for jjrvat's day trading system a few years ago in jjrvat's thread, IIRC. jjrvat listed some concepts, but was never quite specific with answer to certain questions, and I think IronFist got annoyed with it and after backtesting, came up with rules to remove the ambiguity so that there was never a question of when you should or shouldn't be in the market and in what direction. It was specific. There was no long-winded rules that didn't say anything (Jack Hershey style), there was no ambiguity or overly complex yet vague rules (like most of the other "gurus" who post here). The thread was like 1,000 replies or something and I read it years ago so I don't remember exactly. IIRC, he was overall profitable (after commissions) for teh time he was running it, but that was a few years ago and maybe market conditions have changed? I don't know what he's up to now. I haven't seen him post in a while. Pity, cuz he's one of the smartest, bullshit free people I've talked to on this forum.

Anyway, he had an example of specific rules. It was like, go long if this, this, and this happen, but not if this happens. Close long position if and only if this other thing happens. etc. There was no ambiguity, and he followed it to the letter, without making excuses for bad trades. At any given moment you would know if you should be in a trade or not, and know exactly why, with nothing changing after the fact.

I thought it was cool, but I wasn't really interested because it was a system that tries to predict direction (trend following) and I don't believe that direction can be predicted well enough to make money.

I will try to find it. Hang on.

 

[1a2b3cppp]

Here is an example of quantified rules:
http://www.elitetrader.com/vb/showthread.php?s=&postid=1991888#post1991888

btw that thread isn't really worth reading. It's a bunch of ambiguity and then TRO kept spamming it.

jjrvat has some good concepts regarding HH/HL and LH/LL but seems to become more and more vague as specific questions were asked as the thead progressed, and posted lots of cherry picked charts.

jjrvat suggests scalping with his "method" but all of IronFist's backtesting suggested that scalping with that method was not profitable no matter what target profit size was used:

Quote from IronFist:
Using those parameters, having set target profits of 2, 3, 4, 5, 10, and 15 ticks leads to negative expectancy.

In other words, with trend following systems, you need the occasional home run to keep yourself profitable.

He also determined that preset stop losses lead to negative expectancy with this method and that every trade must be played out until his exit rules were met, whether profitable or not.

He basically disproved a lot of "guru wisdom" and it started pissing people off. IMO it was a great thread

 

[NoDoji]

Quote from 1a2b3cppp:

He also determined that preset stop losses lead to negative expectancy with this method and that every trade must be played out until his exit rules were met, whether profitable or not.

I don't really understand the concept he's trying to get across.

My preset stop losses (based on months of studying my chosen setups and how to manage them) keep me in profitable trades and take me out of trades that most of the time end up running further against me by more than my minimum profit target per trade. So the preset stop loss IS my exit rule to the downside. I do occasionally stop-and-reverse, but this never results in a loss larger than my initial stop loss.

So my question is, what is the difference between a stop loss and an exit rule? Wouldn't an exit rule sometimes result in a loss? Or is the distinction related to size of loss? In other words, did he have exit rules that sometimes resulted in very large losses, significantly larger than average profit on per trade?

 

[wrbtrader]

Quote from 1a2b3cppp:

Even intuitive trading or whatever is still rule based, it's just the rules are being analyzed in your brain nearly instantaneously and it's mostly subconscious and would probably be very hard to quantify even if they tried.

Often, just because someone is good at something, it doesn't mean they are a good teacher.

"How do you do that?"

"I don't know, I just do."

The point is that you can't backtest intuition trading via a code or manual due to the fact that an intuition trader is unable to explain what he/she does via defined rules...

As you noted, I don't know, I just do.

In contrast, you can manually backtest a discretionary rule-base trader because he/she will explain the rules of the method involving price action and market context.

Mark

 

[NoDoji]

Quote from 1a2b3cppp:

I thought it was cool, but I wasn't really interested because it was a system that tries to predict direction (trend following) and I don't believe that direction can be predicted well enough to make money.

To be fair to new and less experienced traders reading this, well-tested trend following systems not only predict direction accurately more often than not, they signal price runs that are significantly larger than counter-trend and range trading price runs.

Because you have not yet discovered or succeeded in trading good trend-following systems, doesn't mean they aren't extremely profitable.

The trend-following system I use doesn't require any home runs to be very consistently profitable. I review the results of all my setups using a fixed profit target (rather than a dynamic target based on S/R and momentum, which allows for home runs) just for comparison purposes and it's never turned out unprofitable despite that significant constraint.

There are at least five ET members who spent a lot of time with me and my system who can confirm this.

 

[1a2b3cppp]

Quote from NoDoji:

So my question is, what is the difference between a stop loss and an exit rule? Wouldn't an exit rule sometimes result in a loss? Or is the distinction related to size of loss? In other words, did he have exit rules that sometimes resulted in very large losses, significantly larger than average profit on per trade?

I think you exited the trade when the slope of the HMA changed, whether that was for a win or a loss.

That way, the market's action would cause you to exit. You wouldn't miss out on huge runs.

I'll PM him and page him to this thread.

 

[1a2b3cppp]

Quote from NoDoji:

To be fair to new and less experienced traders reading this, well-tested trend following systems not only predict direction accurately more often than not, they signal price runs that are significantly larger than counter-trend and range trading price runs.

Because you have not yet discovered or succeeded in trading good trend-following systems, doesn't mean they aren't extremely profitable.

Oh, I absolutely believe that they are extremely profitable. Trust me, I would much rather trade all in from the beginning in the correct direction than to do the averaging in that I do now.

The trend-following system I use doesn't require any home runs to be very consistently profitable. I review the results of all my setups using a fixed profit target (rather than a dynamic target based on S/R and momentum, which allows for home runs) just for comparison purposes and it's never turned out unprofitable despite that significant constraint.

There are at least five ET members who spent a lot of time with me and my system who can confirm this.

Cool. I still want to have our chat, I've just been super busy. I felt bad for never getting back to you.

 

[bearmountain]

Quote from wrbtrader:

The point is that you can't backtest intuition trading via a code or manual due to the fact that an intuition trader is unable to explain what he/she does via defined rules...

As you noted, I don't know, I just do.

Mark

Mark, I find it hard to believe that there are traders making trading decisions based intuition and are profitable?

Could it be that these traders are just not aware of their decision making process.

Doctors, experienced doctors, old doctors have been know to diagnose patients intuitively and then the results are backed up by lab tests etc. I think its very hard to do in trading, emotions get in the way....

 

[NoDoji]

Quote from bearmountain:

Mark, I find it hard to believe that there are traders making trading decisions based intuition and are profitable?

Could it be that these traders are just not aware of their decision making process.

I had an interesting experience today that backs up this hypothesis. I logged on to Skype during the midday mush today to chat with PA and I had a standing order to trigger a short position if a particular level broke. We were typing in Skype because he had no mic and so I was paying attention to another computer and not looking at the charts. I'd erased all my earlier TLs/channels and hadn't updated to reflect the consolidation range channel.

Suddenly my order triggered and it went rather quickly in my favor over .30. I looked at the chart and immediately had the urge to take profits, but decided that the break to the downside meant more downside. I then had an overwhelming urge to at least lock in .20 of that move, but I stopped myself from doing that as well. Price ran all the way back and stopped me out b/e.

I was annoyed and wondered why price didn't move lower which would've been the "normal" sort of follow through. I drew the channel and saw that price pivoted almost to the exact tick off the LTL. And that was where I had the urge to just take profits. I guess I've been doing this channel thing long enough that my subconscious knew the trend line was there and I should at the very least lock in something on the trade.

 

[wrbtrader]

Quote from bearmountain:

Mark, I find it hard to believe that there are traders making trading decisions based intuition and are profitable?

Could it be that these traders are just not aware of their decision making process.

Doctors, experienced doctors, old doctors have been know to diagnose patients intuitively and then the results are backed up by lab tests etc. I think its very hard to do in trading, emotions get in the way....

Hi,

It's not uncommon for new traders to trade without a trade method or trading plan and be profitable their first few days, weeks or months until things go bad from intuition trading. Some refer to this as luck and then unlucky.

Just review some of the ET journals the past few years. Several traders admit they are trading without a method or trading plan along with saying they were profitable prior to their trading getting bad...prompting them to start a trade journal for help. Simply, they are intuition traders even though that's not what they call it.

In addition, its not uncommon for veteran traders (profitable or losing) to do intuition trading because they think they have enough market experience or they intuition trade not intentional (it just happen). Yet, they quickly go back to their trade method or trading plan if/when the intuition trading goes bad or some fear shows up when they realize what they are doing.

Regardless, the more profitable you are at intuition trading...the chances increases that you'll continue doing such. It's just human nature regardless if its intentional or not.

***********

I remember in high school playing football I had scored a touch down when I intentionally did my own route instead of the designed play the coach had sent in. Luckily the quarterback didn't panic and was able to get me the football. When I came to the sidelines the coach grabbed my face mask and told me to take a seat on the bench. He didn't let me play the rest of the game and later told me that the next time I do such I could cost us a game...lesson learned.

Just the same, if you can't handle the risk of intuition trading...don't do it especially if someone is the type that easily instills bad habits.

Mark