The ACD Method

[redbaron1981]

Well, I guess back to the bat cave. LOL.

If I may I will take a go at these;

1. I am neither bullish nor bearish, because I don't like to to go into the week with a pre-set idea of what I think, or want to happen.

2. Not sure on this one but I would say that risk is priced by premium above the risk free rate.

3. Opportunity costs in trading are a traders time and capital, in relation to allocation for trading activities. To take a quote stolen from yourself: The cost of owning something is not just the price of that product, but also what you are giving up to own it. i.e Your time and capital.

4. Not sure where your going with this one but I think that Variance is what could potentially cause the upset. A trader can have 100% winning trades but without accounting for variance and opportunity costs the strategy could become a net loser.

5. Asset B would have the highest expected rate of return. Even though we are expecting are expecting a random return, with asset B we also have the advantage of being able to time our sale. With this one I think we can leave variance out of it since you stated both assets are highly correlated to the s&p 500. Because we are able to time our sale with asset B this also means thats we have the ability to reduce our opportunity costs and maximise our return.

Please let me know if I need to go stand in the corner

 

[m1nt]

"When the price of a stock can be influenced by a “herd” on Wall Street with prices set at the margin by the most emotional person, or the greediest person, or the most depressed person, it is hard to argue that the market always prices rationally. In fact, market prices are frequently nonsensical."

"I'd be a bum on the street with a tin cup if the market was always efficient."

-Warren B

 

[koolaid]

Walk me through the last trade you did and I'll see where you are going astray.

Hey, thanks Mav...always appreciate how you're always coming back on here to help out even though the thread has been years and years ago since you started it.

So I bought FB calls for an intraday bounce off the intraday A down level. FB released good earnings. My 30 NL was confirmed early April then it went below ...down to 0 on 4/28 and then shot back up to 4. So I guess I jumped the gun on this one but I thought it had good action and the general market was down. So on 5/5...i bought some calls on the rejection of the A down level...I waited until the first major green candle. I usually give it 3 candles for a rejection and if it doesn't happen...i move onto another setup.

https://imgur.com/UZCYuf6

Anyway...got stopped out on that. This was me trying to time the strengthening of the NL. Too early on the trigger?


Here is my next ticker that I am looking to move in for a longer holding period:

https://imgur.com/SiychPS

Good price action....a bit of a rejection of the monthly A down. Now, do you value how big the rejection is? Maybe this rejection isn't too good because of that doji (previous bar)? I feel like you personally can take one quick look at something like this and know if you got a trade or not...I kinda want to get to that level. What do you see for this chart if you were analyzing it?

Thanks Mav for everything. Everyone else can chime in too...thanks all.

 

[redbaron1981]

It's a pretty thinly traded stock not sure using acd for it would work. The gap down you mentioned where it lost 7% on no news happened on 2.8k shares traded.

I understand what your saying DT3 but I do know of others applying ACD on other illiquid products, some of the AGs for example. Mav talked about trading thin markets in this post.

 

[redbaron1981]

Now, do you value how big the rejection is?

Maybe this post here will shed some light on this for you.

 

[koolaid]

Hi Koolaid,

Just thought I would give you my 2c on this, and explain the stage that I am currently at in my own studies.

With the number lines it seems hard at least in my own experience to detract from the fact that a number line is in no way similar to moving averages etc. You should think of the number line moreover as a scorecard for price action. If a number line is strong it doesn't mean that you would buy the instrument, it should be clarifying what you already know, is the product is acting strong or weak. Think of looking at number lines like looking at a league table in football etc i.e You can tell who the strong teams are but that still doesn't mean they are going to win the next game.

Personally I was never happy with the way that a confirm works, my reason for this being that you cannot trade Apple in the same way as you would trade Natty. The problem I see with the original Fisher version of the number line, is that for example Natty may confirm faster than Apple since they are both unique products. Its unlikely that one setting will work seamlessly with two separate products. If you watch a lot of different instruments, you can see that by the time you get a confirmation the meat of the move has already occurred. As Mav & running_bare have pointed out, you really want to identify moves before other participants do and avoid rush hour. Another thing I would like to point out on this is as Mav says, the number line is only a foundation to build from. But the foundation Fish has given us is rock solid, especially for relative analysis and identifying marginal change.

So I have been looking at a way of speeding up the confirmation process, there are two possible ways I can see of doing this. The first is as Wappler and co mentioned in this post, by optimising your number line confirmations on a product by product basis.The second is as Mav has mentioned by using ACD derivatives.

From my own analysis I like Mavs idea of using ACD derivatives. The 30 day indicator is excellent for gauging the strength of the trend. Because it is over a larger timeframe, it is much smoother than shorter timeframe ACD indicators such as the 5 day. What this means is that the 30 day is far less susceptible to noise. If you follow a 30 day over a long enough period of time you will see what I mean.

What I am currently working on is distinguishing the difference from what may be just a bump on the 30 day line to what might actually be a change in trend. The best way I can see of doing this is measuring the slope of the 30 day, then ascertaining the direction of the trend(slope +-), strength of trend(slope steepness), trend transitions(slope changing from pos to neg). This in itself is a lot of useful information and should be a great aid in identifying when the market is experiencing regime shifts. This is still all work in progress but looks highly promising thus far.

Something I used to ignore on this thread was the other posters saying that you really must make ACD your own. The more and more ACD grows on me, the more I seem to be using this advice and the greater confidence I have in applying it to my trading.

Hope this helps and apologies for repeating, what Mav or others may have already written.

Thanks redbaron for chiming in and helping me with my thought processes. I too struggle with this confirmation timing issue. I know I shouldn't base my trigger on the levels and I dont. I use it as a line or wall to lean back on when entering or exiting. However, I do use the NL to confirm an uptrend or downtrend...kinda like ichomuku...if product A NL is over 8 for a few days...I consider that an uptrend and begin to look for long entries.

Like you said, the problem is that the confirmation will be late and when it does confirm and you're looking for long entries...product A starts to selloff (you're the last person to the party). I do use different settings for each of my top 8 products and it has been helpful. I just cannot imagine doing that for more than 10-20 products because then it gets overly messy and just not practical to have unique settings for everything.

I am looking at 1st derivatives...like the rate of change in the NL. It hasn't yielded anything substantial though.

 

[wow12]

"When the price of a stock can be influenced by a “herd” on Wall Street with prices set at the margin by the most emotional person, or the greediest person, or the most depressed person, it is hard to argue that the market always prices rationally. In fact, market prices are frequently nonsensical."

"I'd be a bum on the street with a tin cup if the market was always efficient."

-Warren B

Im gonna take the counter argument (lol play devils advocate) and say what's not to say Warren Buffet had good dose luck. (George Soros is a better example based on the amount of trades but once again a outlier ) , not lot of people actually beat average market returns few do with that said some people confuse skill with luck.

my personal hypothesis regarding the market is that it shifts from efficiency to inefficiency but is largely efficient 80% of time with 20% being inefficient (i would love to analyse world class traders trade record and see his distribution of returns probably mostly break even with 20% where large amount of money is made ? Mav your thoughts...) with that being said behaviour economics is pretty cool to study ( influenced by prospect theory lol an mav) which helps shed some light why price might move from efficiency to inefficiency, i guess it come down to how people perceive the end outcome relative risk which one can argue is driven by emotion.

 

[Maverick74]

OK guys, there is a lot of misunderstanding about random walks and it's actually really important mathematically to understand what it is and what it is not. A random walk with or without drift does NOT imply efficiency. In fact think about this from the perspective of a quality control engineer. They are trying to impose order and structure which is anything but random to make a process efficient. So that is just one example but we need to understand this.

Another misunderstanding. Random walks can't have trends. Of course they can. You can see this yourself using excel and the random number function. You get all sorts of trends.

Also, a random walk process does not imply markets are always priced correctly or as you guys refer to as "efficient". Quite the opposite. Markets can be very very predictable while being random especially if they follow a stochastic process. Also random means over long periods of time. You can have these "repricings" as you guys call them all the time. The weak form efficient market theory states not that they don't exist, just that your ability to capture them will be random.

I could go on and on and on and on and on and on, well you get the idea, about this topic. Understanding it is very important because 99% of ET doesn't have a clue. Their evidence against randomness is they caught a long trend in AAPL last year in their IRA. LOL. Guys its really easy to test these theories mathematically without prejudice.

But just so we are all on the same page here, let me explain the widely accepted definition of market efficiency. It does not state that the expected long term return is zero. Quite the opposite. What it says is, that the long term expected return of a given strategy in a given market under a given time frame will be equal to the mean return of those variables when measured in units of risk (variance or standard deviation).

Let me say this again, when guys come on here and talk about their returns that they made 500% or some nonsense, you have to remove leverage and risk. Why? We need to compare apples to apples. Once we remove leverage and account for the variance of a given strategy, what weak form EMT is saying that your long run expected return should be the average of everyone else's holding risk and leverage constant. It also means if you are willing to deviate from this, i.e. add massive amounts of leverage or accept higher risk, then you can earn multiples of that long run expected mean. This does NOT refute the efficiency argument.

So does this mean that one should not even try to beat the market? That question is more complex and I will devote more time to it later, but it does not mean that people can't beat the markets long run expected return, it simply means the lengths which one has to go to are great. Do most people go to the lengths? Of course not, ET is a case in point. Because people put in an avg amount of time and effort they are going to get the avg expected return giving those constraints. Again, all this solves mathematically and can be shown to be statistically significant under a massive sample of data.

I'll get to the other questions from the quiz later after others had a chance at them.

 

[wow12]

[

Markets follow a random walk with drift. In futures the drift equates to the shape of the forward curve. In cash markets the drift is equal to some interest rate factor.

I would ask traders these questions:

1. Are you currently bullish or bearish in any particular market right now? If they answer, I don't bother with the rest of the questions.

2. How do you price risk?

3. Define opportunity cost as it pertains to trading.

4. If a trader is right 100% of the time on his market calls, can he have 100% losing trades any why? What is the mathematical term that describes this phenomenon.

5. You are given a choice between buying two assets. Asset A you expect to return 7% over the next year (avg return of market). Asset B you expect to have a random return. Both assets are highly correlated to the sp 500. You have to hold both assets for one year. Asset B allows you the opportunity to time your sale. Which asset has the higher expected return mathematically? Which asset would you buy and why?

i might aswell take a crack aswell

1) no1 can guess the future (maybe on very small small time scale lol) we can at best react accordingly

2)interest rates , forward curve lol , time , price and volitility

3)Oppertunity forgone same as redbaron

4) i think your refering to variance.

5)Asset B due the ability to time (exit the market) the market , ideally since both correlate to the s&p500 i would try structure some form of a hedge. i dont how but i would find a way lol.

 

[justrading]

I actually believed it was quite the opposite, the hypotheses that is. Since markets are efficient, price cannot but describe a random walk, given there is no reason to do otherwise.

Doesn't the Random Walk Hypothesis posit that the past movement of a stock price (and such) cannot be used to predict the future price movement of the instrument? That price takes a random and unpredictable path?

Isn't it based on the idea that since price movement is random, it is not possible to beat the market without taking on additional risk?

Yet, the very existence of trends means the market can be beaten without taking on additional risk. Buffett epitomises that. Edit: not epitomising trends, but that the market can be beaten and hence price is not random. Sorry, should have made this clear, he isn't a Turtle Trader.

If price were truly random, none of us would be here. We all profit when price moves from A to B and we ride that movement. If it were otherwise, then let's just do what Surf advocates, toss a coin, enter, and manage the position.

I didn't mention leverage, so please let's not complicate things.

As for any math theories, full disclosure. In form 5, year 11 in your system, I had a maths teacher who did the whole a+b=c shit, and he made it so boring and irrelevant to real life that I shut my mind off and switched to the arts stream, what you would call humanities. So I'm afraid I can't discuss that, but logic still prevails, and I think I'm making a decent point thus far.