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This is one post that should be locked, pinned at the top of the
messages section, and become visible at all times.
Excellent - many thanks, Super...
jose '-)
MetaStockTools.com
--- 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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