Quote from Scientist:
"You're doing all the wrong things..." - LOL!
Baruch, how long have you been trading for? You seem to think you know what's "right" and what's "wrong" in the markets. Watch out!
Fortunately, you're just at the beginning of your journey. As you do this for a few years, you will likely go through some crazy times of invalidation of your own older theories, times of hardship and times of total despair, when nothing seems to fit together. It's those times when you get most inspired to look beyond what the books say and what everyone else does. It's those times that you get some true insights into what the reality of trading really means.
One of the greatest realities of trading you will eventually learn about is that whatever the majority of people considers "right", will by very definition, be "wrong", if you want to extract profits.
Why is that so? Well, it's simple: The markets are an arena where a minority of people consistently derives a profit from a majority of people. Perhaps at the end of the day, 45% of participants take money off 55% of the others. Or perhaps 5% take money off 95% of the others. It doesn't matter. What DOES matter is the mathematics of this equation. The mathematics logically prohibit a majority to make money out of a minority, since you cannot squeeze blood out of a stone, so to speak. There always has to be a losing majority in order to make others profit. Otherwise, nobody would trade the markets.
Once you have understood this, the next point to understand is that the (losing) majority uses similar methods in approaching the markets - namely popular methods - most of which are found in all the myriads of trading books out there. I love some of those trading books, because the are a great reference for what your "opponents" in the market are looking at. Now that you're aware of it, all you have to do is fade those common practices, and you will more likely make money.
Matter of fact, it doesn't matter what technique you look at - once a majority of people has adapted it, it will become invalid, and other, minority-used techniques, will become rewarding.
Have you ever talked to really good traders and asked them how they think about going with the majority? Matter of fact, the few master traders I know are uncomfortable, no, literally afraid of positing themselves with the majority. When everybody is long, they really sit in the trench and wait for a good place to go short.
The quintessence of this wisdom is that the majority (and their beliefs, as portrayed in trading books and here on ET) is usually wrong, and that the only thing that's "right" in trading is whatever generates money. If it generates money consistently, with a decent R:R and / or hit rate, then it is right. In my case, what I do is "right", despite what you say about it being wrong. And I am sure I make more money than you. So, in relative perspective, I am "right", and you are "wrong".
Don't forget that while your foolproof trend-following approach works beautifully today, it might just make you give back everything tomorrow, if a ranging mode occurs. Think you're a hero yet? Think again. You will find over time that the markets usually follow what I call the "Pawlow's Dog Pattern". The Pawlow's Dog Pattern is my interpretation of the way "the market" likes to "train" people to certain behaviours, by making them frequently reoccur, until a simple stimulus, such as a chart pattern, or an MA crossover, can trigger you to take action. This "Pawlow's Reflex" will soon manifest as a behaviour pattern amongst the larger crowd, and become a beautifully exploitable pattern for a minority. To our further convenience, the guinea pigs / dogs - once trained - tend to remain with their old methodologies for quite some time longer, giving their money away in the meantime. Eventually, the reflex will fade as a consequence of the pain triggered by large losses, and that's when people change to adapt new patterns, and the whole thing blows up and starts over again...
I am sure you are familiar with Pawlow's reflex experiments and theories. If not so, I recommend you read up on it, because it has fundamental implications for market behaviour. I was familiarized with the Pawlow concepts already in highschool.
So, the conclusions are:
- Don't take things for granted, never judge anything as "right" or "wrong", since in the market, this depends 100% on a minority / majority factor, not logic or anything else. If you think otherwise, you're kidding yourself. There is no academically justifyable set of reasons for any market action. There is only a mathematically quantifyable equation which constantly shifts - to the favor of the most flexible.
- Always stay humble. Use the best times to prepare yourself for disasters. The more success, the more humility is required.
I hope this gets you thinking a bit. And if it doesn't, then the upcoming losses you will face as a consequence of this inflexibility / bias surely will.
Regards
Scientist
