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John I'm the person who wrote the "silly stuff" you referred to in your
email. I enjoyed your (long) post, which culminated in "price, time and
volume" as the essence to a successful trading system. I'm not writing to
defend what I said, as we're all entitled to say whatever etc. But curiously
I ask, are not the components you mention the inputs to a decision that when
it's understood may be structured, whereas before it was clear, it was
considered discretionary?
It's my observation, over many years as well, that successful traders who
can't (as yet) articulate why they're successful, are said to be
discretionary traders. However, when they're able to articulate the steps
they take or follow to arrive at a decision to trade, and are able to codify
it, they become known as system traders. Seems the fundamental difference is
the evolution of a clear and detailed description of a system. In other
words, all systems must have been discretionary at birth if you will.
Another train of thought in determining system or discretionary trading
might be the components used in a system. Price, time and volume might be
considered technical components, whereas earnings growth and other
accounting measures are fundamental components. A system using the former
components could be said to be a technical system and a system using the
latter components could be said to be a discretionary system.
Categorizing a system doesn't seem overly important (to me at least). What
is important is its success in terms of delivering an expected ROI within
acceptable risk parameters. For me, taking several steps back a number of
years ago from the myriad of what I'll call charlatan devised systems, I
complied my aversions to trading and then proceeded to develop a safety-net
(system) that obviated those concerns. Subsequently, I found I was able to
trade without concern for the contingency of an unacceptable loss, which I'd
suggest is the root of fear to trade.
Making decisions to trade, however they might be arrived at, is of course
another story. I wouldn't question the merit of measuring price, time and
volume as inputs to a decision, whether its observed in "code" or in one's
mind. I measure fundamental data which in my systems drives a proprietary
"popularity quotient" for each stock in a filtered universe of stocks. Mine
works a I'm sure yours does. And who cares what they're called or how
they're categorized.
-----Original Message-----
From: John Hamon [mailto:jhamon@xxxxxxxx]
Sent: Sunday, April 29, 2001 7:43 AM
To: Omega_List
Subject: trading systems
i read this list to keep current with tradestation, the trading platform i
love to hate. but when it veers off into "philosophy" about trading systems
i always find myself amazed at what passes for thought and enlightenment. i
write this to the list for no other purpose than to help somebody else who
might perhaps be able to hear it and benefit. i have been through all of
this myself, i have heard and done it all too, so understand i am trying to
help. and i don't want $5,000 or even $300 to do so...
some silly person wrote the other day that even discretionary traders use
systems and the difference between discretionary trading and systems trading
is just a matter of the complexity of the decision tree. how could you not
say this without realizing what you are saying? it's like comparing a
traffic light and traffic cop. the traffic light (a trading system) can
have some internal logic and use sensors to determine whether there is
excess traffic on one side of the signal, but it cannot take the place of a
traffic cop (discretion). when the big game is at the stadium (an
exceptional situation), they turn off the traffic lights around the stadium
and bring in the cops. it's obvious why, so i'll simply complete the
analogy. systems fail under exceptional conditions (and lots of others).
and when they do, they fail spectacularly. i read all this nonesense about
how successful traders use systems. if you cling to the belief that richard
dennis is a successful trader, then you don't understand the old adage that
"even turkeys fly in a hurricane." richard dennis made his nut in the last
commodities inflation cycle. how's he done since then?
more recently, how about all the "dippies" who bought the dips of CSCO all
the way down to 15? for ten years buying the dips made you look like a
genius. now, with a greater than 80% haircut, if you've been buying the
dips you've been getting margin calls. i talked to a man last night whose
professional financial advisor put his retirement into professionally-run
mutual funds that have returned him -55% in the last 12 months. these are
professionals?
then i read this "philosophy" about self-confidence and belief and all the
rest of the tony robbins horseshit. this is an off-shoot of the self-esteem
movement, whose results include american high schoolers who feel good about
their math abilities and have among the lowest test scores in the developed
world. no amount of self-esteem will replace knowledge and understanding of
the markets.
this is true: markets do exhibit quantifiable pricetime signatures that
reflect where they are in their growth curves. as i wrote once before
recently, the game is about knowing what time it is. is it the beginning,
continuation or end of the trend? or is "no trend" time (random walk)?
what is the pricetime magnitude of the trend? to learn this, however, you
will have to discard larry williams, tom demark, jake bernstein and all the
rest of them. and start thinking. for starters think about whether i am
right or not: are there any circumstances under which these guys would be
selling books, videos and hotlines if they knew what time it was in the
market? why would you: a) go through the enormous hassles they do when you
could be completely self-directed every day of your life? these guys sell
the dream, but they don't live it; b) sell the information you use to make
money for a few hundreds of dollars? answer: they don't have anything!
a good example is this larry williams "trading pattern" that was discussed
the other day. what larry williams calls a trading pattern might, at best,
be considered an entry trigger, if you already knew that you wanted to be
long the market. the fact that he stops it out on the first profitable open
demonstrates why he is, after all these years, an unsuccessful trader: he
won't let the trade work.
here it is in a nutshell: if you believe that optimized neuro-fuzzy networks
of ADX, RSI and stochastics are going to lead you to the promised land, then
you'll continue to give your money to me. throw out all the derivative
indicators and spend a couple of years looking at price, time and volume (OI
in futures). look at great stuff and look what it did to start, continue
and end trends. you'll be on the right track.
jh
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