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Nicely put! I look forward to reading your article in Roy's newsletter!
Cheers,
Ben
At 22:42 21/01/2005, you 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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>
>Yahoo! Groups Links
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>
>
>
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