Money management, is this all you need?

I

Indrionas

Hello,

This is my first post on EliteTrader forums. I always wonder what makes one trader better than other. What's his secret?

I've read alot and most of the time you stumble upon "money/risk management is the most important thing, blah blah blah". So basically, you should be able to make money with risk management only, right? What about entry? Is there really any "magic" entry points? Can you have "an edge" in the markets?

A good entry means you have power to predict future, which also is said to be impossible. So what makes one trader better than the other? Assuming they trade the same timeframe and make the same amount of trades per given period, and they are both psychologically fit to trade.

I read Van Tharp's book, there was this part called "beating the random entry". The idea is very simple. You need to assume that the entry means almost nothing and the main concern should be exits. So the idea is simple - toss a coin. You will get "indicator" of 50% of realibility (there are only two possibilities, either short or long). Add a trailing stop of, say, 3 times of ATR and you should get a "profitable" system. So I programmed a tester following these rules. And guess what. About 33% of trades were profitable. The total result was sometimes positive, sometimes negative. I tested it on 3xATR trailing stops, as well as 2xATR, 1xATR and 1.5xATR. Tested on 15 min bars and daily bars. It was almost the same - about 1/3 of the trades were profitable. Given that moving averages and channel breakouts provide similar results, I am convinced that indicators are somewhat useless. They just filter out price action.

What do you think?
 
"A good entry means you have power to predict future, which also is said to be impossible."

Your entries should have nothing to do with predicting. You take all the signals as long as the profitable trades outweigh the losing trades and you use stops. This is the key friend. This is the holy grail.
 
Quote from wave:


Your entries should have nothing to do with predicting. You take all the signals as long as the profitable trades outweigh the losing trades and you use stops. This is the key friend. This is the holy grail.
More...


How do you know when your signals stopped providing profitable trades that outweigh the losing ones? You can't until you lose so much that you start to see the market has changed and your signals don't work anymore. It is okay, but one thing is vital here: you have to lose alot before you know your method is outdated.
 
Quote from Indrionas:

I read Van Tharp's book, there was this part called "beating the random entry". The idea is very simple. You need to assume that the entry means almost nothing and the main concern should be exits. So the idea is simple - toss a coin. You will get "indicator" of 50% of realibility (there are only two possibilities, either short or long). Add a trailing stop of, say, 3 times of ATR and you should get a "profitable" system. So I programmed a tester following these rules. And guess what. About 33% of trades were profitable. The total result was sometimes positive, sometimes negative. I tested it on 3xATR trailing stops, as well as 2xATR, 1xATR and 1.5xATR. Tested on 15 min bars and daily bars. It was almost the same - about 1/3 of the trades were profitable. Given that moving averages and channel breakouts provide similar results, I am convinced that indicators are somewhat useless. They just filter out price action.

What do you think?
More...

I think you are wasting your time reading Van Tharp's books. Try instead developing your own system, one that will provide you with an edge, a small winning bias.

I know of a fund manager who has annual returns of over 80% in the past 5 years and he is using simple moving average crossover indicators. This tells you that trading is more of an art than a science. If you are looking for a scientific explanations of trading and indicators I'm telling you this is the wrong start. Try looking at trading as an art and a science combined.

Ron
 
Replace predicting with the idea that you can take entries that are statistically proven to provide a measure of prediction and you are under way. To some extent you can predict, in the near term, in other words. One guy proved with an artificial intelligence system that anything more than about 5 days out is not predictable.

Van Tharp is a trading coach. What he says may apply more to a trader's psychology than to development of a trading system. The trader is the single biggest risk variable in most cases.

What traders are up against is their own irrationality. The human brain is not very good with risk/reward calculations. I have exited trades with a small profit because of the discomfort of being in a trade, only to see the trade work itself out to the plan with a bigger profit. I am comfortable before I enter, I am comfortable after I exit, but during.... a little nervous..

Some overcome their irrationality by working at it until they are good, others work on their systems to improve their confidence and that is enough for them, they can follow a system all day every day.

Regarding indicators, many agree they are nearly useless. I could get by without any at all nowadays. I was a big indicator junkie and backtester for years but for the most part it was not too satisfying.
 
Quote from Indrionas:

Hello,

This is my first post on EliteTrader forums. I always wonder what makes one trader better than other. What's his secret?

I've read alot and most of the time you stumble upon "money/risk management is the most important thing, blah blah blah". So basically, you should be able to make money with risk management only, right? What about entry? Is there really any "magic" entry points? Can you have "an edge" in the markets?

A good entry means you have power to predict future, which also is said to be impossible. So what makes one trader better than the other? Assuming they trade the same timeframe and make the same amount of trades per given period, and they are both psychologically fit to trade.

I read Van Tharp's book, there was this part called "beating the random entry". The idea is very simple. You need to assume that the entry means almost nothing and the main concern should be exits. So the idea is simple - toss a coin. You will get "indicator" of 50% of realibility (there are only two possibilities, either short or long). Add a trailing stop of, say, 3 times of ATR and you should get a "profitable" system. So I programmed a tester following these rules. And guess what. About 33% of trades were profitable. The total result was sometimes positive, sometimes negative. I tested it on 3xATR trailing stops, as well as 2xATR, 1xATR and 1.5xATR. Tested on 15 min bars and daily bars. It was almost the same - about 1/3 of the trades were profitable. Given that moving averages and channel breakouts provide similar results, I am convinced that indicators are somewhat useless. They just filter out price action.

What do you think?
More...
First you need to do some big-picture analysis, to get the direction of the main trend.

Then you need some SIMPLE technical analysis to spot entry points.

You can exit using tech analysis and/or money management.

Doing this you are done. Experience will give you the edge and this takes time.
 
Quote from maxpi:

What traders are up against is their own irrationality. The human brain is not very good with risk/reward calculations. I have exited trades with a small profit because of the discomfort of being in a trade, only to see the trade work itself out to the plan with a bigger profit. I am comfortable before I enter, I am comfortable after I exit, but during.... a little nervous..

Some overcome their irrationality by working at it until they are good, others work on their systems to improve their confidence and that is enough for them, they can follow a system all day every day.
More...

Based on personal experience and that of others, I'd say you are being very generous when you say "a little nervous". A premature need for adult diapers might be more accurate....:)

The only way to overcome this is to work at as you mentioned (it has absolutely nothing to do with methods), and it isn't in the least bit easy. But there are little tricks you can employ to help you get used to staying with a trade. One I call "skillful neglect" which simply means 'leave the screen'. It may sound funny but it works.
 
i remember somone a while ago was doing a live test where they would randomly or at pre determined times everyday based on like a simple criteria go long or short a market no matter what it was doing and practice strict money management and stop loss and target rules, i dont know the outcome... i think woody did it
 
This is really funny, but I have been debating the ideas of MM, game theory, and stats for a good month now. Hopefully my post will add to this thread and not highjack it. I understand the basics of game theory, stats, and have read Tharp's book Financial Freedom.

So let's say you have a method that runs 2-1, 3-1, reward to risk with better than 50% closer to 70%. It's a descretionary method and I determined these stats by looking at 200 trades minimum manually backtesting. If I have 3 losing trades in a row, which my stats show is the max consecutive loss out of 200 do I take the next trade because it should be a winner? Or do I quit as I did because I was at max DD per contract ( I trade e-minins ). Since there is a degree of discretion in the trade set up, I stopped because I felt I was out of tune with the market that day. Do you agree? Tharp says that 200 samples is probably too small. I could have atleast 10 straight losers in 90% win over 100 trades. So which is right, which is better. A backest of many trades over atleast 30 over the last few weeks of give market condition. Look forward to some thoughful replies. :cool:

Dan
 
Quote from dandxg:

If I have 3 losing trades in a row, which my stats show is the max consecutive loss out of 200 do I take the next trade because it should be a winner? Or do I quit as I did because I was at max DD per contract ( I trade e-minins ). Since there is a degree of discretion in the trade set up, I stopped because I felt I was out of tune with the market that day. Do you agree? Tharp says that 200 samples is probably too small.
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For me, 3 losing trades would indicate that the market is either trending down or changing direction. If the indexes are obviously trending up, though, 3 losing trades would be a fluke and the next one should be fine.

I disagree that 200 samples is too small. Just finished reading the autobiography My Life As A Quant and the concluding chapter mentions that in any analysis the goal is to compare/predict using similar equities/derivatives. 200 samples of stocks with similar beta and/or standard deviation and/or market cap and/or fundamentals would be more than enough IMHO. I find that backtesting 6-8 trades a month for 15 months is more than sufficient. (8 * 15 = 120.) This is because I restrict the analysis to specific narrow ranges of market cap and fundies, so the stocks are similar enough to be consistent and thus "predict" the future.

YMMV and one should develop one's own system, but restricting/specializing trades to a certain kind/category of equity has been the key, for me.
 
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