The answer to that question is a little more complex than you'd think. I thought about one method that would be like a contrarian entry point but with a trend following focus. Anyway, suffice to say my ideas changed quite a bit. I even looked at a strategy that was designed for a certain currency pair with short term parameters and when I looked at another currency pair with longer term parameters, I knew right away the method could be profitable. One of the issues of course is how to get in to ride a large wave without getting stopped out. I mean the size of the stops and how to position myself. But, after looking at all kinds of ideas for 18 months, I think I've finally nailed it. I just have to work the fine details.
Fading an unsuccessful strategy?
- Thread starter clambill
- Start date
The answer to that question is a little more complex than you'd think. I thought about one method that would be like a contrarian entry point but with a trend following focus. Anyway, suffice to say my ideas changed quite a bit. I even looked at a strategy that was designed for a certain currency pair with short term parameters and when I looked at another currency pair with longer term parameters, I knew right away the method could be profitable. One of the issues of course is how to get in to ride a large wave without getting stopped out. I mean the size of the stops and how to position myself. But, after looking at all kinds of ideas for 18 months, I think I've finally nailed it. I just have to work the fine details.
I haven't read all the intervening posts, but I still wanted to chime in as a response to the initial post in the thread because this is something I base a lot of trades on.
I have this rough principle that guides some portion of my entries that has to with a kind of theory of the evolution of market movements on short time frames. Basically, something that has been working consistently will draw a lot of traders over time into the setup. And that, over time, creates a kind of self-fulfilling prophecy in terms of the setup appearing, but not necessarily working.
A good example is something I did a lot during the period from early Nov 2008 through April 2009 in the leveraged ETFs in the financial sector, and also in the spoos. It was a setup I called "in the pocket". Anytime there was a sudden sharp drop (and, if you recall, there were an awful lot during that period), as soon as we got a bounce, I would wait for the market to try to pound down into the body of that bounce (mostly watching 1-min charts when trading this). The assumption was that a ton of shorts would pile in looking for the continuation move. I would just start buying about half way back down the lows, scaling, maybe taking 5-10 contracts, then adding a few more, then doubling up. As soon as saw any sign of support in that "pocket", I would hit the gas pedal and load up. The result was some of the best returns I ever saw as these types of patterns would bend and squeeze out all the shorts. Even if it didn't continue a lot after popping, I was still banking a good return.
But over time, I think lots of other traders started to put big risks on in the same area (b/c you could see this sort of thing going on time and time again).
Because of that, the "signs of support" part of the pattern became suspect because it became the self-fulfilling prophecy I talked about above: in other words, short-leashed traders were making the support buying "in the pocket"...rather than shorting. So, of course, that pattern became the best short you could imagine, as that sign of support only meant that a bunch of short-term traders were loading up long in the face of real sellers. The result was a few bad losers on something that had been working again and again in the recent past.
I think this sort of thing is going on all the time -- the shift from one side to the other in a particular setup. The market teaches you what to do, and by the time the lesson is clear, it's no longer correct.
This is a big stumbling block for the program trading crowd.
I think thinking in these terms (what is creating the essence of the setup, and is it getting too popular so as to be self-fulfilling in its appearance) is hugely important. There comes a point when fading what's been working is the right thing to do simply because it isn't made of the same underlying dynamic.
Quote from charts:
"Think" about it ...For the last 30 days you left home every morning without wearing a raincoat. You got rained on 27 times. You "realized" that you should wear a raincoat from now on. What do you "think" you'll "realize" after another 30 days?
Actually, it is nice to have these traders. They provide the profits that the real traders take home...