Quote from SProbability:
This is an extremely interesting thread. Thanks for initiating it. Hope you don't mind moi asking a few Qs.
1) Were you able to establish why your system that had an accuracy of 80% plus degraded to lower than 10%? Was it just one of those losing streaks that all systems encounter at some stage? Or was it because you violated the rules of the system?
Call it greed, a violation of the rules, and inexperience, then after experiencing losses, the progression of mistakes spelled out in the original post.
The system:
I entered or exited trades by using a previous day's low and the pre-market high for the fib calculations (or visa versa, depending if I was closing or opening a position). At that time I was only trading my ROTH (long trades only) account, and the general direction of the market was down. I tried to capture intraday pullbacks to enter the trade. I would use a similar technique once the opening low was in place to project forward for an exit point. Since I had no faith that the instrument would continue to rally after a bounce (bear market conditions), I exited pretty quickly. Also, if I worked with an instrument that was experiencing steep sell-offs, I would use a fib projection to get an idea of where the next low would occur (from the previous day's low). Sometimes I would hedge the bet by placing the order lower, or significantly lower than the projection. I was able to pick up trades on stop runs this way. So, the net profit on a trade was typically thin, but after a couple month's of this the account was actually up 50%.
The failure:
As the market was turning from bearish to bullish, I found myself exiting out of positions that really took off, which bothered me (greed--i.e., trying to get out on the top tick--by exiting with profit at the slightest evidence prices were starting to decline, not using trailing stops, and general inexperience). I stopped using the system and started trying different methods. It's not that the system failed, I failed to adapt myself and the system to a changing market.
Also, I was actually day trading, and an expert I followed at the time convinced me that day trading was a losing game. So, I tried to develop a way to position trade and swing trade. Another factor is that I learned to trade during a market decline, and didn't quite believe the positive momentum I was seeing as the market changed (beliefs over TA, and failure to adapt to a changing market). Those position and swing trades that I was "trying out" in order to not day trade, were against the bull market (i.e., after March). It was also about that general time frame I opened a general account so that I could short stocks (what timing!).
Quote from SProbability:
2) From your spraedsheets looks like your system is based on dinapoli Levels. Is that correct? If so have you added a lot of other stuff to create your own system?
That is correct for one of the spreadsheets. I learned about dinapoli levels later, so that is the newer spreadsheet.
Prior to that (with the first spreadsheet) I experimented with modifying the retracement percentages, because stronger stocks tended to not reach a retracement level, while weaker stocks would go through them. I basically picked highs and lows off of charts for a particular instrument and then observed where support came in on the next impulse or corrective wave. I would then use the box that was most accurate with previous reversals. The projections of the highs and lows (outside of the retracement areas) are calculated from the high and low, whereas dinapoli uses three points in his calculation.
Quote from SProbability:
3) I can't remember if you argued against or for trends, but IMO all systems based on Support & Resistance (like Fib levels) are in essence Counter Trend systems. I do think that "the trend is your friend" is one cliche that has been blown out of proportion.
Happy 2004 to all ETers!!
I argue for trends (that they occur).
Since I had never traded in a bull market, I used bear market techniques; i.e., I shorted resistance (I was not using the fib calculator at this time), then, when a breakout occurred, (not believing it was for real) I waited to see if it was a fake-out. I could not "believe" the strength of the market, so I ended up holding positions against the market. The 23 out of 25 losing trades is a great argument to
support trends and technical analysis. Had I used the very same TA to identify breakouts (i.e., instead of shorting resistance, waiting for the break to go long) I would have taken the opposite side of each trade, and been looking at better than a 90% win rate. Believe me, this is a painful realization.
This experience helped me understand how people lost money during the sell-off from nasdaq 5000. I can imagine traders buying support just to see it get taken out--severely. Then, figuring prices "just had to come back," holding and hoping. TA says if support is broken, prices are going lower--the "trend" is down. TA also says if resistance is broken, prices are going higher--the "trend" is up. I ignored that and became a hold and hoper, i.e, you did say "the trend is your friend" but I fell into the trap of fighting the trend. Let anyone who does not believe in trends take a position going the wrong way. After they get their head handed to them on a platter, they can make the argument that trends don't exist.
