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i've just been thinking about "noise" and in particular signal-to-noise
ratio with respect to discretionary trading, and in particular the signal
processing unit between your ears.
what prompted this was another attempt by myself to grapple with
Neural, Novel & Hybrid Algorithms for Time Series Prediction
i began thinking that the same motivation which drives a neural net model
builder to pre-process inputs and to eliminate as much extraneous data as
possible from the neural net could be applied to a discrectionary trader...
so, letting your brain take the role of the neural network:
- you'd want to make sure you didn't overload it with too many indicators or
too many of the same type of indicators.
- you'd want to make sure that it did NOT receive any inputs other than the
specific few you have trained it to work on as this would simply dilute the
signal even more.
- you'd want to make sure that its processing of each input was commensurate
with each inputs' importance in predicting the output.
- you'd want to understand how it behaves under extreme market conditions so
that you could take it offline or subsume it within a prudent money
management framework if it starts to breakdown.
- futher to that you'd monitor its performance and note those occasions
where it failed to trigger an appropriate response to the market. over time
patterns of behavour might emerge that could be usefully embedded in the
"system".
- you wouldn't want it to treat entering or exiting the market differently
(in that it would have no underlying protective or aggressive biases).
- you'd want its signals to be easy to follow and execute...as in the
signals would have some visibility prior to triggering and they would be
concrete - buy now/sell now, not "maybe now is a good time to buy".
- you'd want it to be on all the time and not switch off unless you
deliberately switch it off.
the outcome of thinking about this is that even if you can't achieve a total
zen-style mindset then you can at least do some things to LOWER THE NOISE
LEVEL in your head:
- are you sure you really need to look at ohlc bars, why not look at
something simpler (ie less data points to confuse you) like line-on-close
charts, p&f charts, market profile etc
- do any of the "indicators" you look at predominate disproportionately on
your screen or in your concentration? why is this? is your attention
attracted by the fast moving volatile indicator more than the apparently
less volatile indicator. Have you scaled your visual cues appropriately?
- if you feel particulary tense around the times when you enter or exit the
market then perhaps it is worth considering adopting a stance of always
being in the market...so that there is a less of an adrenalin rush when
putting-on or taking-off risk to distract you and more focus on just
executing flawlessly.
- how many markets/instrunments do you feel comfortable watching and
gleaning information from at any one time? if you feel stretched and/or
confused by all the different things you watch then get rid of as many as
possible until you're brain is happy.
- how do you concentrate? are you a short intermittent bursts type person,
or do you just sit there happily watching and absorbing the market for hours
without being distracted? what timeframe might be better suited to your
concentration style? would/does the company of other traders help, hinder or
otherwise modify your concentration pattern?
- do you get bored trading sometimes and miss opportunites because you have
unconciously switched off? maybe you need a higher timeframe where you can
manage the market's concentration requirements of you better.
- if you know that sometimes you trade when you don't feel up to it, or put
on trades you know you shouldn't or sometimes chase the market to make back
losses from earlier in the day/yesterday...what practical steps could you
take to prevent this happening? maybe you need to talk to another trader or
another person you can trust and tell them when it happens you need their
help to take you offline before you do damage to yourself and your account.
- what other ways can you avoid contaminating the signal processing element
of your trading?
just some random thoughts,
Robert
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Robert Hodge
Moonlight Systems
r-hodge@xxxxxxxxxxxxxxx
(on MSN messenger as hodgerobert@xxxxxxxxxxx)
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