Mental Ceilings and self fulfilling prophesies

...somebody got the stupid idea to start developing a trading plan and tracking performance.

We had a simple approach...draw a line and be long above it, be short below it. I did some looking on the web and found something applying to the task at hand...that is, find a simple method to see if it is possible to break the mental ceiling of 1.5 pt. average per day. At least that's the way I understand it.

Anyway: "If you want to be successful in a complex environment, then you absolutely want to avoid a 'game plan'. That's a rigid strategy that drives you in a particular direction. There are too many variables and shifting forces in the system. Strategy in complex systems must resemble strategy in board games. You develop a small and useful tree of options that is continuously revised based on the arrangement of the pieces and the actions of the opponent. It is critical to keep a number of options open. It is important to develop a theory about what kinds of options you want to have open. There is an aphorism in game strategy, 'Don't make big mistakes.' Little mistakes allow you to recover, but big mistakes can be fatal. Do not walk over a cliff. Even a crude model will be able to tell you where the cliffs are located." --John H. Holland

 
Where to draw the line? Natalie suggested using the opening price. Inandlong suggested using the current price and Oddtrader modified that by suggesting we use a 5-tick Stop entry both above and below the line with a trailing Stop of 10 ticks.


So that's an option. Here's a little bit more. We have just experienced a runup in he $NDX of 80 points since Aug. 11th and a runup of 20 points in the $INX since Aug. 11th. Wouldn't it have been nice to catch that move? Since predictability is as difficult as ever we could use a volatility rule to estimate the move. It is called Square-root Volatility. First we notice that by the 11th both indices have come off their lows. Then we wonder how high they might go. An easy way to estimate the move is to find the square-root of each indice's closing price on the 11th. The $INX closed at 980.59, call it 981. The $NDX closed at 1223.14, call it 1223. Now, all we have to do is calculate the square-root of them.

Square-root of $INX = 31.32, call it 31.
Square-root of $NDX = 34.97, call it 35.

The square-root rule states that in a market advance all stocks change in price by adding a constant amount to the square-root of their beginning prices. Well, we have the square-roots of both the major indices prices on the close of Aug 11th. If we add the number '1' to each square-root and then square the result what would be the index price advance of our estimate?

$INX = 31+1 = 32. 32*32 =1024 is the estimated move for the $INX.

$NDX = 35+1 = 36. 36*36 = 1296 is the estimated move for the $NDX.

The $INX closed this evening at 1002.35.
The $NDX closed this evening at 1299.69.


Perhaps this is easy enough to remember, "Just add '1' to the square-root of the price and then square (or double) the answer. The result is an estimate of the market advance. This rule is applied to individual stocks as well as indices.

Good trading to all.
 
Quote from OddTrader:

why +1, how about -1?

ps: x and y (rather than simply 5 and 10) should be determined statistically.
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I was speaking about a market advance, not about a market decline.

How do you determine x and y statistically?
 
Quote from bdixon619:



I was speaking about a market advance, not about a market decline.

How do you determine x and y statistically?
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how do we know the market would be advancing, not otherwise?

probably from daily charts, or else.:confused:
 
Quote from bdixon619:

Oddtrader,

I described in my post how I determined that the market was advancing. How do you determine x and y statistically, please?
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Trial and error.

Using 5 and 10 (or anything you think fit) would be fine to start with for real-time papertrading (as described before). Modify them if required, according to individual needs, expectations, markets/instruments, capital/risk, etc., I would say.

As the user of the method has to do some real-time papertrading herself/himself to actually validate the method as well as practically decide the values, I wonder there would be any ideal or perfect values per se that could be clearly stated here.

Maybe someone on the board would have better ideas to specify them with a better approach.

We thank both Natalie and inandlong for their bringing up their methods.

:confused:
 
Q

The market soon smooths out and begins to look like a market involving the agents of classical economics.

Then one of the agents finds a rule that exploits the market's "inertia", making money by selling a bit "late" in a rising market.

Other agents begin to anticipate trends, and the whole learning process yields a market which makes these trend projections self-fulfilling - for a while.

Over time, after enough self-fulfilling prophecies, the behavior becomes more and more exaggerated, leading to a bubble and eventually a crash.

The whole process seems quite natural, and not the least surprising, in this framework.

When we "dissect" the agents, we even find sets of rules that mimic, in this simple setup, well-known market strategies such as "chartism".

UQ

:confused:
 
Quote from OddTrader:

Q

The market soon smooths out and begins to look like a market involving the agents of classical economics.

Then one of the agents finds a rule that exploits the market's "inertia", making money by selling a bit "late" in a rising market.

Other agents begin to anticipate trends, and the whole learning process yields a market which makes these trend projections self-fulfilling - for a while.

Over time, after enough self-fulfilling prophecies, the behavior becomes more and more exaggerated, leading to a bubble and eventually a crash.

The whole process seems quite natural, and not the least surprising, in this framework.

When we "dissect" the agents, we even find sets of rules that mimic, in this simple setup, well-known market strategies such as "chartism".

UQ

:confused:
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Hi Oddtrader,

That is a nice quote from Holland. Unfortunately, it reminds me of what I had hoped we could avoid here...another long-winded chart study. We all have charting capabilities far beyond what traders from earlier years relied upon. Livermore read the tape! How hard that must have been.

The excitement that a gambler feels when making a bet is equal to the amount he might win times the probability of winning it. --Blaise Pascal

I'm not suggesting we all become tape readers here. I'm suggesting there may be some simple methods for arriving at and even occassionally surpassing the tendency for 90% of us to fail at trading. I'm saying that, at least, we can make one good trade a day that we and others can learn from. This avoids long discussions about how to set up your charts, what time frames must be monitored to find the setups, etc.

I think there are enough people interested in making just a few good trades a day that if each of us thought about what we trade and how we trade it, we could present a high probability trade others can learn. Natalie, Inandlong, you, have all used a very simple example to get us started. I described a simple rule to use at observed tops and bottoms on daily charts. Isn't there any more than this? Just how important is what you do that nothing of it can be shared with others?
 
Quote from bdixon619:
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Thanks bd.

I have to confess that I only know very little about trading (that's why I am here), particularly if anything worthwile to share. I am still struggling daily like many of us in the trading world. We all need to improve ourselves constantly.

Sometimes I think it might be fairer and better that we as traders in these complex financial markets have to spend and input adequate time, energy, efforts, capital, stress, emotions, etc. in order to generate fruitful results. This thought can be based on too many physical and psychological factors and reasons beyond our description.

Just another thought!

:confused:
 
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