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Hi,
A very interesting reply.
Thanks for sharing your experience.
Regards,
Marco
Tom Sprunger a écrit :
I will weigh in also on this excellent subject.
Super's comment on the time required to become profitable if you wish to
earn a living is right on! I would definately agree that it takes 3-5 years
to do so. Depending on the individual and the type of trading he/she does,
it will take more or less. For some it could take 5-7 years. And I
heartily agree that the time is probably measured in hours. I would say it
takes 10,000 to 15,000 hours of study, testing, reading, and face time with
the charts to get there. That's why hobbyists can not earn a living. They
can make a little here and there, but not a living. You don't get to be a
surgeon by reading a couple of books.
On computers. Computers and software are both a blessing and a curse. They
are a blessing in that one can test ideas very rapidly. They are a curse
that it is too easy to believe what you test and model. They are a curse in
that people tend to rely on the indicators, mechanical systems, etc and
never learn about what really makes price move, or what the bars are telling
you. Don't use many indicators. Many people have 5,6,7 or more
indicators. All that does is confuse you and paralyze you. Take them all
off and learn to read price and volume, supply demand, patterns, etc
directly from the chart. Use indicators as "reminders" or flags that tell
you a certain thing is happening. It is this study of prices that takes so
long to learn. Use the computer to test your own ideas that you may have
from price behavior, not just to generate buy/sell signals from someone
else's indicator. Make your own indicators and helpers that are fit to your
own style.
It is amazing how many of the people that invented and wrote about
indicators don't ever trade. Here is an interesting story. We have a
monthly technical analysis meeting here in Dallas. A few months ago Woodie
of Woodie's CCI Club fame spoke. He uses the CCI to trade and has taken
that indicator and really learned it inside and out. He said that he met
the inventor of it, and the guy said it was not invented to trade with. The
guy was a computer programmer charged with building a test suite for a new
computer. He invented the CCI to test a computer, not because he thought it
might help him make money from trading. The fact that the CCI can give you
insight into trading turns out to be pure random luck!
Have markets become easier or more difficult to trade? Well, depends on the
market. As to the US stock market, they are more difficult now than a few
years ago. Everyone is aware of the price bubble that burst in 2000. But
there was a volatility bubble also and it did not burst until 2001.
Volatility has been contracting ever since, regressing to the mean.
Unfortunately it probably has further to shrink to get back to the mean.
Making profits from trading requires volatility. Systems that require high
volatility won't work in this environment. In a low volatility environment
you have to change your approach. We were all geniuses in 1999. When you
have a strong bull market with rising volatility, any idiot, (myself
included) can make money. A rising tide lifts all ships and all you had to
do is buy something and you made money. Times have changed. What worked
then, doesn't work now and won't in the future.
Enough for today.
----- Original Message -----
From: "superfragalist" <no_reply@xxxxxxxxxxxxxxx>
To: <equismetastock@xxxxxxxxxxxxxxx>
Sent: Monday, May 09, 2005 1:24 PM
Subject: [EquisMetaStock Group] Re: optimize--MG's question
No question these are matters of style and strategy. I took a
different approach to trading before I started doing it for a living.
When I had other sources of income I wasn't nearly as conservative and
of course, I wasn't as consistent either. I didn't need to be because
I could easily pay the bills and replace any money that I lost.
The information in my posts is not suppose to be taken as a matter of
fact, but only as a look at what someone else is doing. Nothing in my
posts say that these methods are the right way, the only way or the
preferred way to trade. Hardly.
I was reading a trading book this weekend in Barnes&Noble. I can't
remember the name of it. (I'll look later, and get another piece of
cheesecake while I'm down there.) In the first chapter, it said that
it takes someone 3 to 5 years to learn to trade well enough to make a
living at it, and it's going to cost them $50,000 to $100,000 in
tuition money to reach that point.
I agree with that statement except I would have added 3 to 5 years
working at it at least 4 to 8 hours a day. I've often said that
getting an MBA from Harvard is cheaper, and that it takes less time
and less work. (I've already explained in previous posts how nearly
anyone with a high school diploma can get into Harvard, so getting in
is not an excuse.)
For most people on here, trading is a hobby. That's a whole different
topic, and it should be approached from a different perspective.
A lot of people dabble with trading for a couple of years, have some
modest success and then decide to jump into it full time. Big mistake.
Another thing that attracts too many people to trading is the gambling
aspect of it. They want to make a big hit, get rich quick or whatever.
That's why they don't want to consider the Harvard approach. That
looks like work.
The point is that if someone is going to achieve wealth at all, it is
going to be built slowly. Sure there are exceptions. There are about
as many exceptions to that as there are janitors that have won the
lottery. So if you want to build wealth quickly and easily, buy
lottery tickets and be one of the janitor exceptions. It takes a lot
less time and energy than trying to do the same thing trading.
In hindsight, if I had it do all over again, I wouldn't have gotten
into trading, I would have applied the techniques from the The Four
Pillars of Investing and used a buy and hold strategy with the correct
asset allocation. I'm not saying I would have skipped trading because
I didn't make more money from trading than from buy and hold---(the
majority of people don't make more, especially after tax)--I'm saying
that because I underestimated the amount of time it was going to take
me to achieve those results.
On an after tax basis, I'm ahead of the the buy and hold strategy but
for me, I didn't make enough extra money to make it worth the time.
It's a question of thresholds. My question is "am I going to make
enough money to change my life in meaningful ways as compared to the
time it takes to do it?"
I enjoy the intellectual aspects of trading, no question, but I would
have also enjoyed spending time with my other interests, which have
been neglected because of the time I spend trading. If all I had to
keep me busy was watching the Oprah show, that's a different issue.
The one good thing, outside of income, that has come from my
investment of the time in learning to trade is I feel I could make
money under any economic conditions. That's a good thing.
The smell of money is a powerful seducer. It can make you do all kinds
of things you shouldn't be doing. Be careful when the smell waffs into
the room.
--- In equismetastock@xxxxxxxxxxxxxxx, mgf_za_1999 <no_reply@xxxx> wrote:
First of all, thank you super for taking the time to answer.
Specifically, regarding your previous posts as well, thanks for not
shunning detail but really giving something to chew on. Again, it
will take time to digest all of this and will greatly add to my
arsenal of market weapons if you want.
Look, I don't trade for a living. I'm part of a team that builds
models for a living, a lot of them for financial markets. I once saw,
in 1996, a trading firm make in one day, while we train them in using
a model built for them during the previous three months, and using
this model, more money than our whole consultation fee for that
period. Since then I've been more active in the market - sometimes on
a full time basis - after having traded only a little bit before. I
had to figure out answers to these types of questions with very little
experience and very little guidance and access to a forum like this
would have helped me quite a bit.
Obviously these questions are not directly related to building
technical trading models - as you observe - they are style related
questions. If this bothers anybody, super in particular, he does not
have to answer them and I'm prepared to live with that - style is
quite a personal issue. But I've learned to ask these kind of
questions and to value the answers from experienced people. But I
trust super's answers were neither forced, nor off topic and I believe
they deal with issues relevant to this group.
Regards
MG Ferreira
TsaTsa EOD Programmer and trading model builder
http://www.ferra4models.com
http://fun.ferra4models.com
--- In equismetastock@xxxxxxxxxxxxxxx, "dr.torque" <drtorque@xxxx>
wrote:
dear mg,
would you also reply the same questions that you asked?
personally, i believe that these questions being 100% dependent on
the style
of your trading -the answers would not fit any average trader- it is
also as
dependent on the market you are trading. i doubt the technical
knowledge of
anyone trying the very same indicator to any two markets without
changing
the parameters.
by these questions are you trying to analyze "a" winner's trading
style, or
just looking for a point to critisize a "winner's" style?
anyways, both lacks a point i believe..
torque
-----Original Message-----
From: equismetastock@xxxxxxxxxxxxxxx
[mailto:equismetastock@xxxxxxxxxxxxxxx]
On Behalf Of mgf_za_1999
Sent: Monday, May 09, 2005 2:10 AM
To: equismetastock@xxxxxxxxxxxxxxx
Subject: [EquisMetaStock Group] Re: optimize--MG's question
Hi superfragalist,
I am still working through this, chewing on the many interesting bits
and pieces in here. Some things I don't agree with, some I would
change but for the most part, this is very informative, very good and
well worth applying in trading. The one thing I would want to
recommend is that you be less biased towards long and equally prone to
keeping short positions! With that out of the way, I most of all
appreciate the fact, pointed out here, that this is what you do for a
living! Now, really as a matter of interest, but also to get some
practical guidance, could you please ellaborate on the following
points:
- Do you think markets have become easier or more difficult to trade?
Given the 'online', real time environment we operate in coupled with
powerful software such as Metastock, trading should be easier. But is
this offset by an increase in volatility? Or whatever?
- How much time do you spend analysing the markets. Is it a 24/7
thing, two hours a week, one day a month? Do you spend more time when
you make/loose money, in up- or downtrends or at say month end.
- How long do you keep a position? Of course, 'it depends', but I
once talked to a trader, I guess in a similar situation as you, who
would be very uncomfortable to keep something for more than say two or
three days. He knew this and easily shared it. So if you have
something there, let us know.
Thanks a lot for your inputs.
Regards
MG Ferreira
TsaTsa EOD Programmer and trading model builder
http://www.ferra4models.com
http://fun.ferra4models.com
--- In equismetastock@xxxxxxxxxxxxxxx, superfragalist <no_reply@xxxx>
wrote:
Good afternoon, MG. Your questions are interesting ones as usual.
Because of your major contributions to the forum, your
background and
your experience, I would like to respond to all of your
questions with
a reasonable amount of detail, which would probably provide more
energy for further discussions that might benefit others as well as
ourselves. However, I am somewhat limited in my detail as a
result of
having to respect Roy's newsletter and the people who pay a very
modest fee to subscribe.
I agree that subjectivity in a trading system is a tricky subject.
I've always believed that a mechanical system is highly unlikely
to be
traded as a strict mechanical system when that system is in the
hands
of an individual. It's very difficult to remove judgement or emotion
from someone who is not only executing the system but tracking it's
performance with their personal funds. Anyone who has the iron will
and stomach to stick strictly to a mechanical system as the
drawdowns
grow, is someone who has the discipline to trade without such a
system. I think various research projects by Future's Truth Magazine
has shown this to probably be true.
On the other hand, mechanical systems make sense for money managers
with larger amounts of capital and staff resources. The corporate
structure is usually diversified, disciplined and monitored
sufficiently to get the best from a mechanical system.
For me, I feel the human mind is the fastest, most flexible CPU
there
is and I don't want to remove it from my decision making even though
sometimes the human CPU can be significantly disrupted by all
kinds of
events. Unfortunately, I don't see Kalman filters as an indicator of
how much I should train my neural nets. Everyone in my family thinks
they're in charge of that task.
In my trading, I look for four kinds of markets: uptrends,
downtrends,
consolidation with leadership in tact and consolidation with
rotation.
Consolidation includes sideways markets, normal pullbacks and
various
other gyrations that aren't trends.
Regardless of the market conditions, I use the same methods for
finding my prossible trades. Mine is a combination of TA, quants and
fundementals along with a pure TA exploration that is very
effective.
I don't vary that technique because I haven't found a method that
produces a better pool of candidates.
The size of the pool of candidates changes as market conditions
change. In an uptrend, I'll find 50 to 100 trades that look
reasonable. I have a set of chart rules that I use to evaluate which
of those candidates I'm willing to take a risk on. My chart rules
don't change according to market conditions, either.
In a consolidating market with leadership in tact, the pool of
candidates might shrink to less than half as many as when the
uptrend
is clearly visable. Obviously downtrends stop my long trading
and I go
short. Markets consolidating with rotation, or alternatively
that are
directionless, calls for no trading, or very, very short holding
periods.
How much subjectivity is there in the chart rules? I would say that
there is little flexibility and subjectivity in creating the pool of
candidats, but somewhere in the area of 40% in the evaluation of a
chart as to which of those possible trades to take.
I've used systems testing to create the part of my system that
selects
stocks for inclusion in the pool. I've tested that system in all
four
market conditions and I know the trade statistics that are likely to
occur in each case. I've developed a method for figuring out which
market condition exists, and I have a pretty good idea of what to
expect from the pool based on how I see the market at that moment.
However, when the 40% (plus or minus of course) subjectivity comes
into the final selection of which stocks to buy, then the systems
tests are of little value. I've figured out those trading statistics
by analyzing the final trading results. This gives me feedback
on how
my chart reading rules are working.
I have a standard chart template I use to look at stocks. I only
use a
couple of indicators to confirm what I think I'm seeing. While I
don't
use the indicators as a reason to buy, I sometimes use them as a
reason not to buy. I'm mostly looking at price volume action,
with the
indicators as a back stop in case I'm reading that wrong.
In addition, to the total number of stocks that look like good
trades
changing according to market conditions, my rules for size,
exits and
stops change also.
If the market is in an uptrend like it was in Nov and Dec of 2005, I
use longer MA's, loser stops and less rigorous exits. In January I
tightened the stops and exits and shortened the MAs. In April I
didn't
trade. My holding periods change accordingly as you would expect.
I'm mostly a long only trader. I do short the indexes when I see a
downtrend, but I'm even more conservative in my shorting. With
commissions so low and execution times so high, there's little
economic reason not to be conservative when it so cheap to buy
back in
if you're stopped out too early. It takes some degree of
discipline to
go back to a trade after being stopped out, but my number one
rule is
don't lose money.
I have to live strictly off of the returns on my capital account so
preservation of my capital account is a rule with zero
subjectivity.
A lot of people want to automate the chart reading criteria that
I use
to narrow my lists of trades among the choices I have. I don't think
that works very well because the subjective evaluation is
necessary to
respond to different market conditions and to consider all of the
variables and their constraints.
If you read Roy's newsletter you will see how Pareto's principle and
my education in the mathematics of operations research has shapped
what I do. I have an explanation in there about why I don't believe
maximization or minimization despite the high usage of these
principles in econometrics and production management. (Even an
excellent, expert, programmer such as yourself would find some
interesting and new things in there. I do and have increased my code
library a lot because of it. You would even get a few new systems
develop ideas out of it.)
I don't optimize much using the systems tester. As I said in my
other
post I optimize mostly to evaluate robustness. I use the systems
tester as a relative comparison and to figure out how much the
trading
statistics change from one market condition to another.
When I do optimize I optimize the sytem to perform the best in
uptrends, and then I add rules to restrict it's ability to trade in
other market conditions.
I do not feel that optimizing or testing across a wide range of
market
conditions as a means of optimization is a good idea. I do test
across
several years to look at overall systems performance, but I also
test
year by year to correlate the performance with the market
conditions.
I also test on various subsets of the universe of stocks. I use in
sample and out of sample data, especially when I want to
evaluate the
performance of the system in a particular market type, or to
determine
the effectiveness of my filters at preventing trading when the
trading
statistics for that market condition are below my acceptable
thresholds.
I see trading as more about strategy than about indicators so I
don't
waste a lot of time with indicators. Trading to me is the management
of probabilities. Unfortunately the mathematics of probability
is one
of the hardest math techniques for people to understand. Too many
people assume they understand probability because they can get a
feel
for a one in ten chance or 40% losers and 60% winners. To me, that's
not probability, it's performance statistics.
As you know, probability is understanding independent events and
dependent events and how to determine the possibility of different
combinations occuring.
Well, this is a long post so I won't go into any more detail. The
detail and code is in Roy's newsletter, but I hope that this
much of a
discussion has at least been worth the time it takes to read it.
This stuff works for me. Obviously there are thousands of ways to
trade. I've looked at as many of them as I could, and what I do
is the
best fit for me, and it produces great results on my scale of
results
measurements. My three primary requirements are: don't lose money,
consistency is more important than big numbers, and make enough
to pay
the bills and increase my capital account to offset inflation
and any
slips in rule number one.
Thanks again for your contributions. While a lot of them are way
over
my head, I'm sure many people appreciate the time and effort it
takes
to post them.
_____
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