Synthesizing Tharp and Alexander

expiated

expiated

I began creating threads on this forum in September 2017 to assess my proficiency at trading foreign currency pairs online. As of June 2019, I regard that task as having been completed, and have therefore resolved to more-or-less refrain from contributing any additional thoughts about my day-to-day trading.

So, having finally finished developing my trading system in its entirety, I now plan to look at a couple of educational resources on the topic and use them to evaluate why my methodology is so successful, just in case I have opportunity to teach it to others at some point in the future.

I have been able to access text from Trade Your Way to Financial Freedom by Van K. Tharp, and Trading for a Living by Elder Alexander, via the Internet, so they are what I will be using for this purpose…
 
SYNTHESIZING THARP AND ALEXANDER:

Which method or methods of making trade decisions will serve one well in the long run?

I don’t disagree with the notion that fundamental analysis (studying economic conditions) can help spot trading opportunities. But from my perspective, even well-educated guesses involve a significant amount of conjecture/speculation. Consequently, given the amount of time and effort it would take for me to master fundamental analysis to the point where I could perform it independently, it’s just not worth it to me. In the end, I still consider a guess to be nothing more than a guess.

On the other hand, technical analysis (focus on market behavior) does the same job as fundamental analysis (helps spot trading opportunities) but does so based on what is actually happening rather than on judgements about what might be potential effects. Moreover, when it comes to technical analysis, the reactions of prices or rates to fundamental factors and influences are "baked into the cake." Hence, this is the decision-making process I prefer personally.

As for tips, they can be tricky. As noted by Alexander, they almost always come late, and sources that tell you when to buy almost never tell you when to sell—unlike technical analysis, which does both. And though insider information can be timelier, using it is a criminal offense in most developed countries, whereas a good trader using sound technical analysis is his or her own insider.

That said, a good analytic method is only one of three pillars required to achieve successful trading. The other two are sound psychology, and careful money management.
 
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In Trading for a Living, Dr. Elder notes that trends may point in different directions at the same time…in different timeframes, such as when the trend is up on the daily chart but down on the weekly, or vice versa. He also points out that a trend-following indicator may be giving a buy signal while an oscillator is giving a sell signal, or vice versa. He then sights the “Triple Screen trading system” as a means of managing such contradictory signals.

The Triple Screen trading system combines trend-following indicators with oscillators. It is designed to filter out their disadvantages while preserving their strengths. The system applies three screens to each trade. The first screen analyses a time frame one order of magnitude greater than the chart one plans to use to trade. It identifies the direction of the tide (the larger trend) with a trend indicator.

Triple Screen demands that you examine the long-term chart first. It allows you to trade only in the direction of the tide—the trend on the long-term chart. It uses the end of waves that go against the tide for entering positions.

Again, the first screen uses trend-following indicators such as the slope of the MACD Histogram to identify long-term trends (tides). The second screen applies oscillators to the intermediate chart in order to identify deviations from the long-term trend (waves). The third screen identifies the ripples in the direction of the tide, using intraday price action to pinpoint entry points. As such, the third screen does not require a chart or an indicator. It is a technique for entering the market after the first and second screens give a signal to buy long or sell short via a trailing buy-stop technique in uptrends and a trailing sell-stop technique in downtrends.

The Triple Screen trading system is based on the observation that every timeframe relates to the larger and shorter ones by approximately a factor of five. However, this perception has not been replicated by my own observations, and consequently, does not figure into my own trading system, which I call Numerical Price Prediction (NPP).

In that I am not a position trader, I do not care so much about the longer-term trend as I do about the longer-term price range. For me, this is a key distinction. So instead of focusing on only trading in the direction of the tide, I place an emphasis on only entering positions when price has reached either the top or the bottom of the tide’s corresponding price range (statistically significant deviation levels from the long-term trend line).

For this reason, executing trades that go against the tide is acceptable with NNP, though the probability of such trades ending in success is of course lower than when executing trades that are aligned with the tide. Nonetheless, most such trades are still profitable in the vast majority of cases. (The odds that they will be successful trades is still very high.)

So again, NPP does not rely on trend-following indicators such as the MACD Histogram. The direction of the waves, and the range of the tides provide sufficient data for making informed decisions on when to enter and exit positions. And finally, graphics representing the tide, waves, and ripples are all plotted on a single chart, making it unnecessary to switch back and forth between different time frames.
 
Dr. Elder’s analogy to tides, waves and ripples is not going to work for me. Tides go in and out, whereas waves go up and down. As for ripples, I think of them as being like minuscule waves on a calm body of water. Numerical Price Prediction (NPP) is more like an athletic field or athletic court where the ball is passed back and forth across the playing surface, or like a highway where vehicles are able to change lanes. So at least for the time being, instead of tides I’m going to refer to a track (as in track and field). And I’m replacing waves with path, where the path of a runner might cross over into the inner or outer lanes, or even veer completely off the track. The best substitute for ripples I can think of are wobbles.

I already mentioned that NPP conceptualizes the track in terms of a range rather than a (trend) line. What I failed to mention was that it does the same with respect to paths (focuses on their ranges rather than their underlying trendlines). In fact, it does the same even at the wobble level. So, if I were driving on a race track with the path of my vehicle veering back and forth across the lanes, I could have my passengers leaning (wobbling) this way and that, but for even smaller movements, I would need something like my passengers passing items back and forth, and it would be at this passing level that I would enter and exit trades.

Numerical Price Prediction Universal (Track), Global (Path), and Local (Wobble) support/resistance levels:
ScreenHunter_5570 Jul. 02 16.50.jpg


So, in the above image, the gray zones represent “universal” support and resistance at the track level. The purple regions represent “global” support and resistance at the path level. The pink and sky-blue bands represent “local” support and resistance at the wobble level. And the “instantaneous” (zero-lag) trendline (not pictured) traces the direction of the passing that goes on back and forth between the various support/resistance levels.
 
Elder mentions three trade systems: (1) Three Screen; (2) Parabolic; and (3) Channel

I already discussed the Triple Screen in Post #3. The Parabolic is a reversal system designed to keep a trader in the market all the time, which might be a nice fit for me whenever I am doing full-time trading. When a Parabolic stops you out of a long position, it tells you to go short at the same price. If it stops you out of a short position, it tells you to go long at the same price and time. Supposedly, this method worked well during the inflationary markets of the 1970s, but led to many whipsaws in later years.

Given the particulars of Numerical Price Prediction, it sounds to me like the Parabolic system has nothing to offer me. NPP uses carefully selected non-standard or proprietary moving averages that supposedly serve as valid representations of the actual direction in which price is headed. Consequently, waiting to be stopped out before switching directions wouldn’t make any sense. A trader ought to switch directions as soon as the designated trend lines convey a reversal.

Moreover, a key factor in NPP trade decisions are typical price ranges (universal, global, and local). For example, if the trend were to turn bearish at the bottom of the universal price range, it would not be a good idea to short the asset, especially if price were also at the bottom of the global and/or local price ranges as well. In this situation, there would be a high statistical probability that things might turn around suddenly and at any moment, possibly quite dramatically, so automatically switching directions at the same price and time would not make any sense. Perhaps this is part of the reason the Parabolic system led to so many whipsaws.

Also, Parabolic is based on the “move your stops only in the direction of the trade and never against it” rule, but again, since a trader’s actions when using NPP are at least theoretically based on a valid assessment of which way price is actually headed, this shouldn’t even be an issue. One would never have to lower his or her stops because the trader would already be in a new trade headed in that direction.

I didn’t read the details on Channel trading systems, but at a glance, NPP would seem to kind of fit best in this category. Actually, my system uses multiple (3) channels, which is why I used to call it MS. MAE (for multiple simple moving average envelopes).

There seemed to be all kinds of things one can do with channels, but again, I didn’t read the details in that I’d feel like I was wasting my time unless someone could guaranty me that whatever I was reading would work, and of course, no one can do that. (Plus, the explanations were short on details regarding settings and parameters.) On the other hand, there is no question in my mind whatsoever but that what I’m doing now works, so I’m just going to stick with it.

Unlike what I did read, I don’t use Bollinger bands, the Commodity Channel Index, Stochastic, MACD-Histogram or anything else with my system—just simple moving average envelopes or proprietary envelopes (typical price ranges) and carefully selected or proprietary moving averages (valid trend lines) are all I need with NPP.
 
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In the forward to Trade Your Way to Financial Freedom, David Mobley, Sr. writes:

“The Holy Grail is not what you would expect it to be. It is something that is different for each person. It’s a hidden secret that you have to discover for yourself, but it is obvious—once it is realized. I must admit that when I first learned what Dr. Tharp was going to write about in this book, I was concerned. He was giving away too many of our secrets! However, I’m not concerned anymore because I now realize that those secrets are so personal. My Holy Grail is not the same as your Holy Grail. In addition, many of you will just let those secrets pass by you, so I urge you to be careful.”

However, I find the reverse to be true as well. Just as many novice traders will either ignore or fail to make themselves abide by the very steps or principles that would almost certainly guaranty them financial success, I notice that many experienced traders will insist that unless your secrets are the same as their secrets…yours are nothing but a pile of manure, and they will stand firm on this contention even in the face of evidence to the contrary. (If all else fails, they will simply dismiss what they see by stating it is destined to collapse…eventually.)
 
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It appears that after writing Trading for a Living, Elder might have replaced the parabolic and channel systems with what he calls the impulse system, which I read was designed to identify inflection points where a trend speeds up or slows down. The information I found said that the system is based based on two indicators: a 13-day exponential moving average and the MACD-Histogram; but I identify inflection points using my own set of trend lines, depending on the time frame I am viewing (as pictured below).

inflection points.png
 
Tharp lists 12 steps to developing a system, which include:
  1. Take an inventory of your strengths and weaknesses
  2. Develop an open mind and gather market information
  3. Determine your objective
  4. Determine your time frame for trading
  5. Determine the best historical moves in that time frame and notice what those moves have in common
  6. Establish the concept behind the above moves and how you can objectively measure your concept
  7. Add your stops and transaction costs
  8. Add your profit-taking exits and determine your expectancy
  9. Look for huge reward trades
  10. Optimize with position sizing
  11. Determine how you can improve your system
  12. Include mental planning for worst-case scenarios
 
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