Having spent countless hours reading, I have a few ideas I would like to run past people.
Here is some quite background info about where I am at. I first started to follow price action and watched the videos of Al Brooks. Eventually I found Elite, and stumbled upon posts by DbPhoenix, the forever helpful NoDoji (your reputation on here is extraordinary!), then discovered the amazing journal of "geez" where he used a 1:2 risk/reward ratio to rake it in, which transformed into the posts from "puddles" who carried on in his footsteps. I have seen the power of risk management and completely trust the math/statistics of trading. I am humble to the importance of psychology and taking all emotion out of a trade.
I am now doing research on developing a system/learning how to trade. As a side note, given all the continued importance placed on back testing, there are hardly any threads about how to do this. I see posts about various software programs out there for coding automated trading which seems to offer back testing, but these are quite complex. I also see that there are places you can buy historical data as well. But given how little information there is about this, it makes me think most people really aren't back testing and perhaps just learning from their own paper trading?
Anyway, on to my question. So what exactly would be a good edge? Watching the markets for the past few months and studying a bit of price action, just throwing an idea out there, double bottoms seem to work great. But can it be this easy? If you bought every double bottom, applied a 1:2 risk/reward ratio, even if you were right 50% of the time you would be in the money (as geez has shown). This seems too easy, but has anyone done the calculations? Sure you need to define what your risk and reward is, but lets say you keep it well within the average daily swings of the particular stock and are looking for small movements that are attainable... call it 10 cents on a $20 stock as just a crude example. (I personally love watching DUST and NUGT... the volatility is awesome, and buying ETFs is free from my account (only pay to sell) so the comissions are well controlled is my thinking)
How about gaps on open? Sometimes a stock gaps up, and keeps going up. But often I hear and see that it has to come back down to fill in the various levels where people are waiting to get out or in, so it comes down close to the previous close before it shoots up again. Once again though, what if you just found out that 50% of the time, a gap up does result in the stock slowly coming back down to the previous close, even if it does eventually take off again. You only need to be right 50% of the time anyway!
So throwing these two ideas out there, can it be this easy? Perhaps mostly people don't stick to their plan, but if you can be right 50% about something within your parameters of how far away your risk and reward is, then isn't this system more than likely to work? Al Brooks states that when you are thinking you are right, you are only about 60% right, and vice versa. Nobody would take the other side of the trade if your chance of being right is 90%!
I see that geez has 4 patterns that he mostly followed, and NoDoji I think loves to buy after a retracement with the trend (mentioned in the thread about why do people buy at the top), so is looking for an edge more easy than it looks? And how are people testing these ideas to begin with? I feel that most people just learn as they go so is all this back testing talk lost on most people?
And lastly, other than in a choppy market, if I am going to find I am only 30%, can't I just always do the opposite of my original though and be 70% right? (I know that to be right you have to hit your target before you hit your stop, so doing the inverse of this might not lead to an inverse of your % correct ratio as your stops and targets would be different)
Thanks so much everyone for reading and hopefully this will lead to a great discussion.
Here is some quite background info about where I am at. I first started to follow price action and watched the videos of Al Brooks. Eventually I found Elite, and stumbled upon posts by DbPhoenix, the forever helpful NoDoji (your reputation on here is extraordinary!), then discovered the amazing journal of "geez" where he used a 1:2 risk/reward ratio to rake it in, which transformed into the posts from "puddles" who carried on in his footsteps. I have seen the power of risk management and completely trust the math/statistics of trading. I am humble to the importance of psychology and taking all emotion out of a trade.
I am now doing research on developing a system/learning how to trade. As a side note, given all the continued importance placed on back testing, there are hardly any threads about how to do this. I see posts about various software programs out there for coding automated trading which seems to offer back testing, but these are quite complex. I also see that there are places you can buy historical data as well. But given how little information there is about this, it makes me think most people really aren't back testing and perhaps just learning from their own paper trading?
Anyway, on to my question. So what exactly would be a good edge? Watching the markets for the past few months and studying a bit of price action, just throwing an idea out there, double bottoms seem to work great. But can it be this easy? If you bought every double bottom, applied a 1:2 risk/reward ratio, even if you were right 50% of the time you would be in the money (as geez has shown). This seems too easy, but has anyone done the calculations? Sure you need to define what your risk and reward is, but lets say you keep it well within the average daily swings of the particular stock and are looking for small movements that are attainable... call it 10 cents on a $20 stock as just a crude example. (I personally love watching DUST and NUGT... the volatility is awesome, and buying ETFs is free from my account (only pay to sell) so the comissions are well controlled is my thinking)
How about gaps on open? Sometimes a stock gaps up, and keeps going up. But often I hear and see that it has to come back down to fill in the various levels where people are waiting to get out or in, so it comes down close to the previous close before it shoots up again. Once again though, what if you just found out that 50% of the time, a gap up does result in the stock slowly coming back down to the previous close, even if it does eventually take off again. You only need to be right 50% of the time anyway!
So throwing these two ideas out there, can it be this easy? Perhaps mostly people don't stick to their plan, but if you can be right 50% about something within your parameters of how far away your risk and reward is, then isn't this system more than likely to work? Al Brooks states that when you are thinking you are right, you are only about 60% right, and vice versa. Nobody would take the other side of the trade if your chance of being right is 90%!
I see that geez has 4 patterns that he mostly followed, and NoDoji I think loves to buy after a retracement with the trend (mentioned in the thread about why do people buy at the top), so is looking for an edge more easy than it looks? And how are people testing these ideas to begin with? I feel that most people just learn as they go so is all this back testing talk lost on most people?
And lastly, other than in a choppy market, if I am going to find I am only 30%, can't I just always do the opposite of my original though and be 70% right? (I know that to be right you have to hit your target before you hit your stop, so doing the inverse of this might not lead to an inverse of your % correct ratio as your stops and targets would be different)
Thanks so much everyone for reading and hopefully this will lead to a great discussion.
