Been working hard, and I'll finally be back tomorrow and Friday.
The works been hard but good. Waiting for the good context looks like it's going to take discipline and patience.
--JS
JS:
Good to hear back from you.
Thought to share some experience that I feel might be of help to you as you go about
filtering and understanding your signals. In some ways, what I am going to say could be considered ‘next steps’.
However, before I go about sharing my experience, it might be helpful for you to understand my belief about the market so that you can better understand my direction/thoughts and make adjustments to anything you might find interesting to fit your belief on markets.
I view markets as a pattern generating, self-organizing complex system as opposed to a random system. Why is this distinction important to me? Because, if a system is random, one concedes that the best a market participant can do is have access to
partial information. This means that there is no use digging for more information from the market, and every single signal has a 50% probability of working (i.e. we don’t know if a given trade will work or not), although in the long run the winning percentage can be positively skewed. This is the view @
Redneck adheres too (@
Redneck, please correct me if I am wrong). Technically, the above statement about "positive skew" in a Random system is incorrect, but I am going to brush it aside and say that the random system I am talking about is
partially random (the more important point being randomness implies partial information and not complete information availability).
In believing that the markets are pattern generating, self-organizing complex systems, I am of the view that it is
possible for a market participant to extract
complete information from the market. However, we cannot predict when that information will be available. In other words, I believe that information drives trades. Look at it this way, if we are looking at a support level, one way of looking at this would be, the support could hold or will not hold, and stop there. This is consistent with the Random System view of markets. On the other hand, if one frames the issue like this: there is
something that market participants are seeing that will either (a) make them commit their hard earned dollars to take the trade; or, (b) not make them make such commitment. That something is *information*. If the market participants make the commitment, the the support level will hold; if they don’t, the support level will not hold. This thinking is consistent with a complex system view. As you can see, the difference is subtle but very important for it provides one with direction for research: (a) concentrate on discovering signals and contexts, in one; and, (b) concentrate on discovering signals, contexts, and information in the other.
Now, on to what I wanted to share with you:
When I first started out
filtering signals, I started with the assumption that markets are Random Systems. I did not change my belief about the market, but started out with the assumption of randomness for the simple reason that it is the easiest way to filter our signals in a context. However, to me this was just the first step.
After I had the set of signals for a context, I then removed the randomness assumption and started looking for
information within the context which, when properly extracted, should help me align with the majority of market participants. This to me was a critical piece — reading price action at it its best. As I currently stand, in few of my contexts, I can tell, with a high degree of accuracy, as information arrives, what type of result is to be expected of the signal — these have now become my
high probability signals (bread and butter trades). One thing you will notice, should you decide to following this path, is that once you get to this stage in your analysis and place trades, you will become
part of the large volume that usually accompanies the move in your expected direction. Yes, you will become part of what some traders call “large” traders. For the sake of clarity, I want to emphasis that I don’t look at volume to place trades, but I become
part of the volume that others might look at to place trades.
Another thing you will notice is that, once the information is make available, it
does not change — I can only postulate why this might be so. May be, because so many traders are committed to their position based on the
information that was make available, that it becomes a self fulfilling prophecy. But then, that is how a self-organizing complex system is supposed to work in the the first place! This line of thought could be expanded to analysis of risk and price discovery, but such discussion is not appropriate for this present post.
I am still working on deciphering information in other contexts. However this is not at all easy. I found that in order to do all this, one has to work with raw data. Any type of summarization of data (be it time-bar, volume bar, tick bar, range bar, PnF, etc) abstracts away valuable information. In Statistics, we summarize data so that we don’t have to deal with a lot of information. However, in trading, we want all the information as possible to make the best possible decision. Summarization becomes a death knell in trading.
As you can see all this takes a lot of work and effort. I find it interesting when people say trading is easy or simple — it has never been to me. Trading takes a lot of
ongoing pre-market analysis to properly understand context, a lot of focus to properly extract information from the market to trade the signals in one's context, and on top of it all, the need to constantly deal with one's urge to make love to that beautiful lady who goes by the name emotion. None of this easy or simple, but does become a routine.
All the best.
Regards,
Monoid.
PS: The
information I am talking about here should be confused with the information (or its efficiency) as discussed in EMH.
