Hi everybody,
I#8217;ve just had what I think is a significant Aha! Moment that I#8217;d prefer to share with you. It arrived as a result of my reading the articles here and here.
These men are (seemingly ) trading profitably by turning conventional wisdom on its head. FXTitan is advoing that we cut profits short and allow losses run indefinitely and StevieT is using an RR profile of 1:20, i.e. he's setting profit goals of 50 pips and stoplosses of 1,000 pips. I asked myself How do these men break the established rules, and still be profitable? , and tried to probe deep enough in their rationale.
My decisions follow below. Be warned: you need to think beyond all of the textbook maxims entry, exit, RR and MM, and apply lateral thinking as I did to completely grasp all of this. If so, I can assure (well, almost) that what follows will revolutionize the way in which you consider trading procedures. I am hoping I can express myself simply and obviously enough to make this post a read. OK, here goes:
1. The types of order that we use (buys; sells; market or limit orders; profit goals; stoplosses; hedging by taking long and short positions in precisely the exact same currency pair) are effectively immaterial. All order types simply add to, or decrease, our web overall position (long or short).
2. To profit, we must be net long while price is rising, and/or net short while price is falling, frequently enough to conquer costs (disperse swap). This applies constantly, without doubt, to a variety of methods, conventional or otherwise. Provided that we're achieving this, our account fairness (which is the amount of realized P/L from previously closed positions, plus unrealized P/L from currently open positions) increases; otherwise it will fall.
3. As long as our account fairness continues to rise overall, we might justifiably assume that we have a border. To make this happen, we need to somehow time our orders (i.e. adjust our web position) accurately enough around market reversals, on balance, to be net long while price is rising, and internet short while it#8217;so falling. This is the base line regardless of whether we#8217;re (in conventional terms) entering, exiting, scaling , scaling , realizing a profit, realizing a loss.
4. The result of any one trade is insignificant (if we're hedging, or scaling in/out, together with rankings offsetting each other, the idea of a person trade is effectively moot, anyway). It is the overall effect on account fairness, i.e. internet P/L, that is the most important thing.
5. RR (in the conventional sense) is effectively irrelevant. Firstly, SLs and TPs are effectively offsetting orders which bring our internet long/short position back to neutral. Everything else being equal, the further away we put our TP from entry compared to our SL, the less likely the TP will be reached prior to the SL. All this ultimately amounts to is a compromise between win size (RR), and triumph rate (batting average), i.e. everything else being equal, win size and win rate always operate in exact inverse ratio to each other.
[Note: Since markets have been driven by intangibles (mathematically) such as greed and fear, the probability that a trade will triumph can#8217;t be computed beforehand. Mathematical edge (or expectancy, or profit variable, call it what you may ) can only be quantified in hindsight, as the product of triumph rate and acquire size.]
I#8217;ll attempt to explain my point about RR with a good illustration. Let#8217;s say we believe price, currently rising, will undo at overhead resistance. So, following conventional maxims, we place a tight stoploss (cut losses quickly) just over the resistance point, and then let profits run, as price drops, using a trailing stoploss. But, expectancy is that the product of triumph size and win rate, and our premise of a reversal is correct determines the latter. This relates to the efficiency of the analysis and forecasting. It's the degree to which the forecasting moves past the inverse equilibrium of RR and acquire rate that provides the edge.
Since departure is effectively merely an offsetting order, entries and exits are ultimately mirror images of each other (like Merlin mentioned here). Hence, to improve overall expectancy, exits must be likewise somehow be timed accurately around probable market reversals, i.e. as described in point 3. (The only difference being that, if we utilize conventional RR/MM techniques, stoploss together with position size is used to alloe a pre-determined maximum risk with each trade).
So what about let profits run, cut losses quickly? Again (if we revert to thinking in conventional terms) let profits run, cut losses quickly is going to operate profitably into the extent that prices tendency. In a trending market, it's a profitable egy; in a ranging market, the exact reverse applies (more on most of this here). The key is to apply the right paradigm, as explained in points 2 and 3. (To simply apply the conventional maxim in most situations #8211; assuming that it provides an advantage #8211; is to presuppose that forex tendencies much more frequently than it ranges).
If I may digress further.... If I understand correctly, the permit profits run, cut losses maxim initially applied to stocks, and has been transplanted into forex. More on this here. My observations are that while stock trading is only speculative, allowing prolonged tendencies while positive opinion escalates (e.g. the dot-com boom), forex tends (on balance) to revert into a mean, (1) in the long term, due to federal economic boom/bust cycles, and government/bank intervention, even when economic indiors reach undesirable extremes, and (2) from the shorter term, there is mean reversion unless/until news announcements generate the opinion required to maneuver price up/down to a different degree. (But, I realize that tendencies do occur in forex, on each trimeframe, and that the fact is a lot more complex compared to this generalization).
Finally, I want to recommend two articles which (IMHO) are both excellent, and relevant for this discussion:
(by Plutonite)
#8230;#8230; it's a MIRACLE that we're making ANY correct statements about a market which was at one point believed to be inherently chaotic and foolish to take part in. Remember that it required several academic papers in the Journal of Finance to show that the market is not a random walk model.
Actually , the market (and any exchange) is inherently chaotic, due to the high number of unrelated participants whose activities both commercial and speculative can't be previously determined, and whose collective influence, weighed by quantity, is much more difficult to predict. It's if you consider it, a crazy game we're playing. Just because you have charts that seem to inform an image in hindsight doesn't mean that anything makes sense at all. This can be an unknown function with a variable, and we're attempting to ride it. F*cking crazy.
At precisely the exact same time, there seem to be recurring patterns on the market action that replicate themselves, and which do form either a statistical and an intuitive basis to generate time string propositions (aka trades), but that is a subject for another discussion. ....
(by ItalianSharp)
I think most traders - regardless of those being forex traders, futures traders, commodity traders, or stock traders - fail since they do not have a true advantage.
The majority of the reasons I read out of forums, books, articles only concentrate on discipline, cash management, adequate capital, expertise, etc.. .
However, if you only have discipline, cash management and enough capital to trade and you still are missing a true advantage, it'll only be a slower death.
I also think it is a lot easier to be disciplined when you have a true advantage than when you do not have some advantage.
Should you look to be on the wrong side of the market the majority of the instances, the urge to tweak your system round is always around the corner. When you have no reward from what you are doing how do you become a soldier? If you aren't a masochist, I can't really see how a person can stay disciplined using a egy that is losing.
What about experience? Well, experience can help so muchbetter. Your expertise will only tarnish your assurance permanently and will be barbarous if you have no advantage.
In conclusion, a trader fails since his egy doesn't provide him with a border good enough to make money.
Many losing traders think that cash management can fix this handicap and try their luck with averaging down till they blow up their account and go broke.
In case you don't have an advantage, do not trade. Forget about ratios, discipline, cash management, expertise. . .it's all useless if you do not have a true advantage.
What supplies that advantage? Return to points two 3 above.
Hope all of this makes sense.
David
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