Wherein Lies the Fallacy?

T

TriPack

I'd appreciate hearing your take on the following scenario:

Joe trader in watching the market identifies what looks like to him as an early Pattern X recognition. Pattern X is Joe's signal to buy. So Joe, seeing that Pattern X is developing jumps in and buys. Joe's position soon is showing a loss, and thinking that "long is wrong" so short must be right, he reverses and goes net short. After a short period of time the short is showing a small loss, and Joe in reevaluating the market is more sure than ever (I was right all along he thinks) that Pattern X has finally set up fully so he switches to Long again.

Wherein lies the fallacy?
 
Not sure what you're looking for, but here goes.

Noticing a pattern is the easy part. Timing the entry is the hard part.

If Joe sees a buy setup, then he should take that buy. If he gets stopped out, oh well that's part of the game. Just watch for next pattern and be consistant in the applying the trading plan. Hopefully, Joe has a profitable system over the long run.

SARing is tough to do. The reason of "long is wrong" is NOT a reason to short. If his reason was "I fade the pattern" then that's another story, but from the "long is wrong" reasoning, he has no SAR plan.

Best to take the entries, if they don't work out, then wait for the next setup according to the trading plan and take it without reflecting back on the last loser.
 
Joe is not familiar with the concept of random fluctuations.

the shorter the time frame, the less likely a pattern of movement has sustained meaning and the more likely it is a random fluctuation.

if Joe were paying zero commissions and getting zero slippage his fast reversal ways might not hurt him because they would net out close to even over time. But even dirt cheap commissions and super low slippage can put the smackdown on trigger happy traders.

i'm also skeptical of the reversal notion in the first place. if i'm not 100% sure of which direction i want to play a trade, then i leave it alone because i don't have enough of an edge to warrant putting my cash at risk. if you are flipping a coin, then your odds are 50/50 MINUS commish/slip costs, which make them the same odds as roulette, which is a waste of time and an unbeatable game.
 
I'd appreciate hearing your take on the following scenario:

Joe trader in watching the market identifies what looks like to him as an early Pattern X recognition. Pattern X is Joe's signal to buy. So Joe, seeing that Pattern X is developing jumps in and buys. Joe's position soon is showing a loss, and thinking that "long is wrong" so short must be right, he reverses and goes net short. After a short period of time the short is showing a small loss, and Joe in reevaluating the market is more sure than ever (I was right all along he thinks) that Pattern X has finally set up fully so he switches to Long again.

Wherein lies the fallacy?
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This is such a complicated question, I am not sure I can answer it without feeling uncomfirtable.

OK, look. A pattern, no matter how good it has done historically, can violate _FIRST_PRINCIPLES_ of trading, which may be what is happening to you.

I use/discovered something that is uncanny - it's like printing money on some stocks. However, the other day, the pattern on those stocks changed (which is another possibility in your case,) so I had to adapt, or find other stocks to trade with it (I watch about 100, so I know they are there.) At other times, the "pattern," even on those stocks that it was like printing money, would signal a trade, but it would violate a _FIRST_PRINCIPLE_, so no trade is taken.

I would watch still just to see how I would have faired. In some cases, the "pattern" was right, others, it wasn't. In fact, it is more right than wrong even in those cases. The percentage had dropped to the point where I no longer felt comfortable (had the required edge.) I have learned to seperate the result from whether the action should be taken or not.

I can tell you this for sure. If you are using a pattern that you think will completely remove you from the _RESPONSIBILTY_ of trading the markets, you will be spinning your wheels alot (it will start to make you second guess yourself - if you just accept that you will need to continue to adapt to the state of the market, it is just another blip.)

_CONTINOUS_RESEARCH_IS_A_MUST_IN_THIS_MARKET_


nitro
 
Originally posted by Fitz
Not sure what you're looking for, but here goes.

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I'm not particularly looking for any kind of answer, just good solid analysis of the situation (like you provided). I have some ideas of my own about the scenario but that doesn't make my ideas any more right than anyone else's. I'm really looking for new perspectives on this scenario, and trying to see if I really do understand what is going on. Thanks for posting.
 
might also be worth remembering that no method is immune to tough beats. no matter how good you are, every once in a while you just have to screw the pooch. if you still believe in what you are doing after a tough beat, just grit your teeth and move on. the key is knowing when to stick it out and when to bail on your method. but always have hard and fast rules for everything, because if you start playing it loose you give room for emotions to creep in and then you're dead.
 
first I would suggest stop play switch from one side to another (from long to short and back again) this is EXTREMELY difficult mentally, if second switch doesn't work you might feel emotionally devastated. after that whatever you( I ) do will be wrong . Your trading become revenge game.

to make long story short problem not techniques but more psychological imho

if you read " The disciplined trader" it should help you identified the problem,

unfortunately there are no easy solution :(


Mike
 
Originally posted by darkhorse
but always have hard and fast rules for everything, because if you start playing it loose you give room for emotions to creep in and then you're dead.
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This reminds me of my experience yesterday. I was talking with a couple of traders about the market action and noticed that I was really angry and stressed out just listening even though all they were doing was talking about the actual moves. I finally realized that even with the market closed I was still fighting. I immediately accepted the truth of what had happened and all the anger and anxiety immediately vanished. It is no coincidence that I also violated my stop loss rule 3 times yesterday, once with success and twice got burned.

For me the stop loss is there to remind me to get out of bad trades quickly. The only reason my stops are hit is if my positioning is exceptionally poor or the market is being very fast or very volatile or I fail to react (often related to fighting which means I need to regroup). Also thanks Mike for your comments - it is definately psychological and I'm working on it.
 
Although the initial scenario is not based on an actual experience of mine, it is similar to some that I have had. The variation that occurred today was:

See what looks like Pattern X set up for the buy. Buy and watch it go up a small bit. See Pattern Y setting up (indicating a sell) and realize that Pattern X was not really present. Get out of long position then go net short. After 2 minutes of being short and being crunched (seemed like 20 minutes of torture at the time) get out with small profit, then watch the market tank.
 
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