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Rters,
Here are 2 fallacies which I would like to highlight
regarding change in trend(CIT) techniques based on
my experience :-
i) "Trade with the trend". Take only the CIT signals that is
with the trend
Inferior CIT techniques hides under the cover of the
statement above. The problem with it is because
most CIT can be +/- 1 day out and if you were to
apply the trend as the filter you are actually trading
based on reversals in the direction of the trend.
The CIT technique if studied closely would not have
changed the decision to enter a trade. Hence, taking
trades based on taking out the high or low of the
previous bar is misleading trading setup.
It should be note that most CIT reversals technique
signals a trade when the market takes out the high or
low of the previous 1 period bar extreme or variant of
it in the opposite direction.
ii) A random date generator provides CIT forecast with
result matching or bettering the CIT technique
publicly discussed, .eg randomly generating 40 dates
per year.
Assuming that the trader is totally discipline, .eg
able to execute his trade flawlessly then this is my
explanation of the paradox.
1 ) The total number of trades is generally reduced
by incorporating CIT techniques whether or not the
CIT has any predictive value.
2 ) Most of the money is lost when the market is
in a congestive phase, .eg making 1 or 2 bar
reversals in succesion and/or small blips(runs).
By using a truely random date generator the number
of times the trader is faced with condition 2) is
greatly reduced as a percentage to the number of
total trades as compared to before when the trader
would take trades based on every 1 or 2 bar
reversals and hence more profitable.
This is based on my observation that markets do not
go into several congestive phase in successions and
with the randomly generated dates spaced to be at
least as large as the normal period of the congestive
phase would tend to increase the bottom line within
the context of the trader's time frame.
For a CIT technique to truely work the following have to be
observed :-
i) You must be able to indicate whether a CIT is going
to be a top or bottom consistently in advance OR
ii) You have a different way of discerning the direction of
the CIT OR
iii) You must be able to determine the magnitude of the CIT
move consistently, eg. you can say with high degree of
confidence whether a CIT is going to MAJOR or at least
going to x points OR
iv) You can observe certain consistent market characteristics
around the CIT period which in a non CIT period would
be consistently invalid OR
v) You can consistently say the CIT date is going to
come in exact on the date forecasted. No allowance
for +/- 1 day.
Apply any of the five test to all CIT techniques whether
they are based on mathematics, geometry, natural law,
numerology or astrology and you will know whether the CIT
technique have any predictive value.
It is not my intention to provide proof of actual
techniques meeting the above test(s) but merely to provide
food for thought for anyone seriously wanting to
incorporate CIT technique to their advantage.
I'll close this off by saying "An inferior CIT technique
will consistently get you into the wrong side of the
trade".
Clement
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