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superfragalist,
to make it short: EXCELLENT!
Everyone serious about trading should print this out and hang it
somewhere you'll always having it at hand!
Thank you for this FREE give away!
And don't bother too much about your writing style. Those who can't
stand it are FREE to skip it.;-)
Martin
--- In Metastockusers@xxxxxxxxxxxxxxx, "superfragalist"
<jackolso@xxxx> wrote:
>
> Someone asked about a system recently and said it seemed to work
well
> when the markets were trending upward, but not so good when they
> weren't.
>
> No surprise there. Most newbie's don't understand how the
> trend really works, and how it impacts systems, both for trading
and
> for development, so I thought I would share a little experience and
> opinion.
>
> I'm very sure there are some of you who won't believe what I
> write, and that's fine. You're free to do things anyway you
> want. After all it's your money.
>
> I don't want to write a book in order to educate the one or two
> people who will read this so I'm going to be as brief as I can
> and then you'll have to figure out the rest based on what I say in
> here. Also, I'm not going to put any lace on what I have to say. I
> usually don't anyway, but from now on I'm going to post a disclaimer
> saying you need to pay attention to information and not the style.
If
> you are easily irritated by the style stop reading now, and don't
> waste your time (or mine ) with posts or emails about being
> politically correct. So here we go.
>
> Newbie's are very concerned about finding a system that works
> across a long time frame, etc. They are especially concerned about
> entries. They want to hit the entry as close to the turning point
of
> a trend as possible. Both of those issues are a complete waste of
> time. The reality of it is when a market is trending either up or
> down, it really doesn't matter much what you are using for
> entries as long as you are entering in the direction of the trend.
> (Yes, this is true. Later I'll give you some more facts you can
> research on this.)
>
> A few simple trend indicators are all you need to see when to enter
a
> trade. Entries during trends require almost no brain cells. You can
> see this from the nineties when everybody was a wizard trader, and
> then got wiped out in 2000 on. They just didn't pay attention to
> what I'm explaining to you in this post.
>
> Once we have our entry, the problem becomes one of exit strategy
and
> money management.
>
> You should develop an exit strategy that works separately
> from the entry indicator. If you don't know how to do this, you
> can read many good systems development books by Chande, LeBeau and
> Kaufman. They discuss exits in great detail. They will also educate
> you on money management.
>
> Exit strategies are too numerous to discuss in a post.
> However, there is not such thing as the BEST exit. There are exits
> that work for your style of trading.
>
> To start the process of systems development, throw a few
> trend indicators on template and look at some charts. The do a few
> tests WHEN THE MARKET IS IN AN UPTREND. Most newbie's test
> everything across a broad range of all kinds of market conditions.
> That's doing things the hard way. They've heard this is a good way
to
> test systems. Wrong! The only people who need to test a system that
> way are the people who are trying to get you to pay $3000 to
$10,000
> for one. They want it work at least a little when the market is not
> cooperating so they don't have hear a lot of complaints. (If you
> want to read an interesting history of trading systems and the
people
> who sold them, Bruce Babcock has a history section in his book The
> (Dow Jones) Irwin Guide to Trading Systems. After you read that you
> want ever consider buying one. It's got all your old favorites in
> there Gann, Wilder, etc)
>
> Since you're an individual trader and you've studied the
> systems development books I've recommended, educated your mind
> and finally understand how trading actually works, you can change
> what you are doing according to market conditions. When that's the
> case, there is an easier and more profitable way.
>
> First figure out the trend. There are several ways to do this
> and they're all easy. On a weekly chart you can use a 10 and 40
> week moving average. When the index of choice is above the 10 week
> moving average the market is in an uptrend. When the index is in
> between the 10 and 40 week moving average, it's whipping around,
> consolidating, and screwing you out of money. That's what it's
doing
> in there. When it's below the 40 week moving average it's in a down
> trend. That's the easiest way to define things.
>
> You can also look at some set of moving averages on a daily
> basis, like the 4, 9, and 18 triple MA or something else close like
a
> 5 and 20 EMA or SMA. It doesn't matter that much. Pick one.
>
> The dailies will tell you when a correction is taking place
> in an up trend or down trend market. If the long term market bias
is
> up, but there's a correction going on, you will want to take
> shorts only and expect to hold them for a very limited period of
> time. This means use tight stops and don't let things run just to
see
> where they're going to go. You only do that when the daily trend
> agrees with the long term trend.
>
> Okay, now we know how to determine the trend, what comes
> next? As I said, stick a couple of trend indicators on a
> chart—your choice of which ones—they all work about the same.
There's
> no BEST one.
>
> See how they look on a chart with a few symbols---during a
> period of time WHEN THE MARKET IS IN A DEFINITIVE UP TREND. Then
put
> them in your systems tester and test them on a bunch of stocks like
> the S&P 500. Use the same trend indicator formula for entries and
> exits—reverse the entry please—don't worry about exits at
> first. If the trend indicator returns a reasonable amount of money,
> has a rational number of trades, etc then you're in business.
>
> Next develop your exits. Exits need to fit your personality
> more than entries. What I mean by that is too many people look at
> what makes the most money and then they can't trade it because
> the draw downs, trade frequency or other problems cause them
hysteria
> in the knickers. Pick exit strategies that you are comfortable
with.
> Look at them on a chart. If you feel good about what you are
seeing,
> put them in the tester. If the tester gives you reasonable results--
-
> even if they're less profitable than some other set of
> conditions—you're in business.
>
> One of the first steps to becoming a pretty good trader is to
> understand that you don't, shouldn't and can't maximize
> everything. Don't even try. If it fits and you can trade it, you'll
> learn to improve it over time. However, you won't throw it out
> because you hate the way the system messes with your emotions.
>
> Now run the system over all the time frames that show the
> market is in an up trend and that you have data for. Break the
> periods into subparts and see how the system performs. If it does
> pretty good during all the up trends, then you've got your up
> trend system.
>
> Reverse the process for down trends. Most decent trend
> indicators identify down trends just a good as they do up trends.
> Remember to test your down trend system WHEN THE MARKET IS IN A
> DOWNTREND. Seems obvious, doesn't it. Okay!
>
> If you test you're up trend system when the markets are in a
> down trend, guess what—it will perform poorly. Now why would you
> trade it during a down trend. Well, here's a clue---don't
> trade it during a down trend unless you have a death wish, and some
> of you do.
>
> If you don't like shorting, then stay out of the market when
> it's not in an up trend. Let me repeat that, STAY OUT OF THE
> MARKET WHEN IT IS NOT IN AN UP TREND IF YOU DON'T LIKE SHORTING.
>
> Well, you've read that the markets only trend 30% to 40% of
> the time. So how is this good systems development?
>
> If you test your system during up trends and it has 6 winners
> for every 4 losers and it makes 3X the profit for each 1X the loss,
> if you run the tests when the market is in a sideways pattern, the
> systems test results are going to go down. Now it produces 4
winners
> for every 6 losers and only 1.5X the profit for 1X the losses. You
> can trade the system during sideways markets but get ready for more
> losers with smaller profits on your winners. In addition, you
> won't be able to hold the trades for as long. Sideways markets may
> require tighter stops, and different exit conditions. Do you know
how
> you figure that out? Well, it involves using those market bias
> charts I talked about earlier when the market is in the sideways
> pattern.
>
> You may find that of three up trend systems, one works better
> in sideways markets. However, it's not going to work much better.
> Nothing will because sideways markets baffle everybody. Up two
days,
> down three days is hard to trade, period.
>
> You may want to stop trading in sideways markets. A lot of
> people do. You may want to consider a sort of market neutral
strategy
> where you are taking longs and shorts at the same time. Just
> don't expect to make as much money. It ain't going to happen.
>
> In a sideways market if you violate the rules of good money
> management and exit strategies, you are going to pay, and pay and
> pay. This is the time when money management and exit strategy is
> everything.
>
> Now you're thinking that can't be true, he's saying
> entries mean little, and that I can use almost anything when the
> market is in an up trend or down trend. Yes, that is what I'm
saying.
> LeBeau, Van Tharp and others have tested all kinds of random entry
> strategies and random exit strategies and guess what. During the
> trending markets they made money with all kinds of dart throwing
> crap.
>
> In the sideways markets, very few strategies made money. You
> have to scratch out profits where ever and when ever you can find
> them.
>
> These are all the secrets you need to know to be successful.
> Okay, there's one more success factor worth repeating. Quit
> trying to maximize everything, Stop it, stop it, stop it.
Maximizing
> will kill you. There is no one best method, strategy, theory, etc.
> There are one or more strategies that fit you and that will allow
you
> to trade with enough success to make money. If you try to find the
> maximal money making strategy, it will wrap itself around your neck
> like a boa and choke the life out of you as punishment for
violating
> the common sense rule that maximization only works in theoretical
> mathematics and engineering classes. In real life, it is going to
eat
> your fruits and nuts until you starve to death.
>
> If you take your up trend system and run it when the market
> is in a down trend, it's going to look very, very bad, and it
> should. If it didn't it wouldn't work worth a crap in an up trend.
So
> don't struggle trying to fix it so it finds the one long trade out
of
> the hundreds of short trades that are there.
>
> Let's summarize. You have two systems—one for up trends'
> which is long only' and one for down trends, which is short only.
> You use them according to the market bias derived from the weekly
and
> daily charts that I mentioned. You learn that almost any half
decent
> trend indicator will work when the market is trending, so you
> don't worry about the perfect setup, etc. You simply take the
trades
> when the trend indicator tells you to take them. You spend some
time
> finding both a money management and exit strategy that fits your
> personality but is not the optimal strategy for making the most
> money. When the market is moving sideways you use your up and down
> trend system, but you recognize that trades are going to be quick
and
> you're only going to make a little money. You will not fall in
> love with semi-meaningless words like over bought and over sold
> because you understand there really is not way to determine that.
You
> will, however, recognize that almost every indicator is right part
of
> the time. Your job is to figure out which ones you LIKE and when
they
> are likely to be right. You will understand which market
conditions
> cause your favorite indicator to decline in its predictive
abilities,
> and you will adjust as need be using the market bias trend
detection
> system. And finally, you will erase from your mind the thoughts
that
> it is possible to maximize or minimize any thing for any reason
> regardless of your educational back ground, profession or belief in
> higher powers.
>
> I think I'm going to write a detailed article on how to make
> all of this work for Roy's newsletter. In it I'll explain
> what the better trend indicators are and how to use them, and I
think
> I'll give more detail on testing and trading these systems.
>
> Sign up, I think you'll find it very enlightening.
>
> www.metastocktips.co.nz
>
> No, I don't work for Roy. I don't get paid for writing
> anything in the newsletter. Roy lives halfway around the world from
> me. So why do I recommend his newsletter all the time. For the same
> reason I recommend system development books.
>
> Because the newsletter is directly on point with a whole lot of the
> questions I read on the boards. If you won't spend $120 a year to
> get your questions answered, improve your trading systems
> dramatically and learn how to code your own stuff, then why should
I
> spend my time answering your pleas for help on the boards. If you
> won't help yourself why should anyone else bother with you.
>
> You'll notice I mostly recommend systems development books rather
> than trading books. Systems development books tell you what works
and
> what doesn't. Most trading books talk about somebody's
> personal trading system, or a system that newbie's can't seem to get
> enough of. Ninety nine percent of the time, after you've spent a
lot
> of money and time learning some guru's pet system, you'll wind
> up giving it up and doing what I'm telling you to do. You never
hear
> the guru's tell you their system only works well when the market is
> in an up trend. You know why they don't tell you that, because you
> wouldn't buy their system.
>
> Do you know how many of the guru's trade from a large capital
> account—almost none of them. At least a few of them admit it. Most
> of their money is in mutual funds. They move it in and out of the
> mutual funds using the trend identification methods I've told you
> about. They don't trade with their serious money.
>
> Rather than follow the guru's, develop your own simple methods.
> It will serve you much, much better as will learning how to see the
> market bias without Gann or Elliot or some other complex as hell
> method.
>
> Have fun!
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