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I thought I would pass this on. I don't know who wrote it, but whoever they were knew what they were talking about. Find out where you are in this scenario and try to move yourself up the ladder.
QUOTEIn the broad category of “trading the markets,” there are basically three types of trading: discretionary, technical, and strategy-based.
I have known and taught many traders, and have observed that there are four distinct stages of trader education: discretionary trader, technical trader, strategy trader, and complete strategy trader. All successful traders have gone through them. It is almost impossible to be a successful strategy trader without going through all of these stages.
Every trader usually starts out as a discretionary trader. The amount of money lost generally determines how long it takes the individual to start using technical indicators to make trading decisions. Eventually, as even employing technical indicators fails to move the trader into profitability, the trader moves into the third stage and starts to write strategies based on quantifiable data. It is at this stage that the trader ordinarily starts to make money. Finally, the strategies and money management approaches are refined and the individual becomes successful as a strategy trader.
The Discretionary Trader
A discretionary trader uses a combination of intuition, advice and non-quantifiable data to determine when to enter and exit the market.
Discretionary traders are not restricted by a concrete set of rules. If you are a discretionary trader, you can make buy and sell decisions using whatever criteria you deem to be important at the moment. For example, you can use both a combination of hot tips and relevant news stories from The Wall Street Journal, and enter or exit the market based upon this information. If you begin to lose money, you can immediately exit the market and change your trading method. You don't have to use the same techniques day in and day out. It's a very flexible way to trade that you can customize based on what you think the market is going to do at any given moment.
For the discretionary trader, trades are made using gut instinct and intuition. Unless a computer is generating a buy or sell signal and you actually follow the signal, your emotions will affect your trading. I explained in the introduction what problems instinct and intuition could be in trading. Remember fear and greed? In discretionary trading, technical tools such as indicators are sometimes used; however, when they are put to use, they are utilized sporadically as opposed to systematically.
Fascinated by the markets, the discretionary trader is ready to put on a trade at a moment’s notice. The most uncomfortable part of trading for the discretionary trader is when there is no action. So he will jump on any piece of information, anything that will permit him to take a stab at the market. Above all, he craves the action.
& HOT TIPS
The discretionary trader uses several sources for his trading decisions. One is intuition, for example, “I see a lot of people in stores, so I think the economy is good, and earning will increase, so the stock market should go up, and I should buy Sears.” He usually spends a lot of time talking to his broker. “What do you think Joe, isn’t Woolworth’s going to turn around?” Another is reading and watching the news, “Retail sales are looking strong and Woolworth’s is closing stores to lower their overhead.”
Hot tips are a common way that a discretionary trader gets ideas. A call from his broker or good friend, or a tip from a discussion at a cocktail party are all places the discretionary trader gets his trading ideas. “Hey George, HTECH Corp. has a hot new product in the works, here’s a stock you can pick up cheap.” If it gets dry in the summer, our discretionary trader may decide to buy Corn, Beans or Wheat. However, when he looks out the window and notices that it’s raining, he sells the position immediately. A news story on the nightly news may cause a discretionary trader to short the airline that has just had a crash.
CRAVES EXCITEMENT
What a discretionary trader loves is the excitement. He loves being “in the markets,” playing with the big guys. He craves the risk, the excitement of trading, and the gambling rush that he gets from calling his broker and putting in the order to buy. He loves being able to sell Gyro Corp. based on the news story of the health hazards of their top selling Gyrometer. He has a real obsession for buying Cotton based on the hot tip from his broker that the upcoming crop report was going to be bullish, and he covets the tip from his friend who called to say that he just bought Techno Corp. because the latest quarterly earnings were going to be a surprise on the upside.
Discretionary traders retain the flexibility of changing their buy and sell criteria from moment to moment, and change they way they trade from minute to minute and day by day. “Well, that last trade was a disaster, so tomorrow I will buy McDonald’s only if it opens up from yesterday’s close.” They don’t have any discipline, nor do they think they need any. They use their intuition and their gut instinct, and feel justified in doing so. They think, “Making money is easy, you just have to be smarter and quicker than the next guy.”
I personally don’t know anyone who has made money by discretionary trading. They may have been lucky and won on a few trades, but overall, over time, discretionary traders always lose money.
It is after enough money has been lost that the discretionary trader in some way stumbles across technical indicators. It may be from the chart book he just looked at where there was a Stochastic Indicator underneath the chart. Or he may have gone to the latest Make a Million Dollars Trading the Stock Market seminar and found out that using the Relative Strength Indicator is the sure way to stock market profits. He thinks, “So this is how they do it!” These indicators look like magic. They add some rationality to an otherwise irrational trading style. He thinks, “This must be how the big money players make the big money—they use technical indicators!”
DISCOVERS TECHNICAL INDICATORS
Once the discretionary trader discovers technical indicators, he or she incorporates some rudimentary ones into trading, usually as additional justification for making the trade. “Not only did Ralph (my broker) tell me to buy Gizmo Corp. but Gizmo has great relative strength. Gizmo’s moving averages are bullish, and the Stochastics are oversold and giving a buy signal as well.”
These newfound technical indicators give the discretionary trader a new lease on trading. Now our trader has a whole new world in front of him—the world of technical trading. For a while, this newfound world combines with intuition and the discretionary trader views himself as a strategy trader. He says, “I trade a strategy using moving averages and Stochastics with a dash of daily news and tips from my broker. I am now a real objective strategy trader.” While the trader may view himself as a strategy trader, this could not be farther from the truth. The discretionary trader’s style is still undisciplined, based on newly educated guesses, and he is probably still losing money.
For a moment, these technical tools were thought to be the answer, and while they add a little more rationale to his trades, the losses continue to pile up. Despite his continuing angst, our discretionary trader is now on the way to becoming a technical trader.
The Technical Trader
A technical trader uses technical indicators, hotlines, newsletters and perhaps some personally defined objective rules to enter and exit the market.
As a technical trader, you are beginning to realize that rules are important and that it is appropriate to use some objective criteria such as confirmation before making a trade. You have developed rules, but sometimes you follow them and sometimes you don’t. It depends how confident you feel today and how much money you are making or losing. If an indicator gives you a buy signal, you may override it because your broker told you the earnings report was going to be negative. Or maybe the bonds are up, which means interest rates are rising, and you better see how high rates go before you commit more money to this already overpriced market. You may think, “I have a profit, hmm, I just may take it now. Even though the Stochastic is not overbought, the markets are tough. It’s not easy to make money. Like my father said, ‘you can’t go broke taking profits.’ At least now I have a winning trade. I’ll sleep well tonight.”
Our trader now begins to realize that using the intuitive and hot tip approach will not lead to profitability. He now begins to focus on the technical indicators themselves. There are so many! Moving Averages, Exponential and Weighted. The MACD, Momentum, P/E Ratio, Rate of Change, DMI, Advance/Decline Line, EPS, True Range, ADX, CCI, Candlesticks, MFI, Parabolic, Trendlines, RSI, Volatility Expansion and Volume and Open Interest, just to name a few. So much to learn and so little time!
This whole new world of technical books, seminars, newsletters, and hot lines now begins to preoccupy our trader. He learns all he can about indicators. He wants to find the one indicator that will ensure profitability. He surrenders to what I call Indicator Fascination.
INDICATOR FASCINATION
The first assumption that our trader makes is that someone out there must know how to do this. There must be an expert, someone who knows how to make money, that has created the magic indicator to do it. This is the Holy Grail syndrome and our trader now embarks on a search for the Holy Grail Indicator. He knows intuitively that there must be an indicator that will give him the information he needs to make profitable trades…that there must be teachers out there that know how to make money trading. He thinks, “All I need to do is find him and his indicators.”
This is the indicator fascination phase. How are indicators calculated, what do they represent, and are they the “secret” to making money? All of these questions need to be answered so he becomes a seminar junkie, travelling the country on the quest for that great technique, the one that everyone uses to make the big money. He visits Chicago one month…L.A. the next…followed by a visit to the Chicago Mercantile Exchange. He watches the CNBC expert technicians and surfs the net looking for that magic indicator.
Now he’ll only buy when the ADX is moving up and the MACD is positive, and he’ll sell only when the RSI gets overbought and turns down. His trading becomes more indicator-based and he listens less to his broker. For example, he may tell his broker, “No, I won’t buy Apple Computer until the Earnings Momentum Indicator is over 80!” Unfortunately, even with all of this information, and all the assurances of his seminar leaders, he still is not making money. He even begins to wonder if he will be able to continue trading with all of these losses. He thinks, “If I could only control the losses, I will probably be able to trade a little longer before my money runs out.”
It is at this stage that he learns the value of stop losses, known as stops. He learns the importance of managing the risk on each trade. He gets a hint that there is more to trading than just the indicator, and his ears perk up when people mention the concept of controlling risk and conserving capital. He thinks, “I just want to stay in the game, to keep enough money to make the next trade. I don’t want to quit a loser!”
But even with the newly found indicators, and controlling his risk with stops, he continues to lose money, although he also consummates some winning trades that keep his capital from depleting too quickly. And here he has another major revelation—markets can be trending or choppy. It is at this point that he realizes, “If I could only predict the choppy markets, where I lose most of my money, I could simply stay out of the market and get back in when it starts to make the big move.” So he starts another quest, that of leaning how to predict choppy markets.
PREDICTING THE MARKETS
Discontinuing the use of the old technical indicators, our technical trader now begins to flirt with the Elliot Wave theory, W.D. Gann techniques, and Fibonnacci Targets and Retracements. These techniques generally claim to help you predict when the market will be choppy and where and when it should be bought and sold. He does all of this studying so he can learn to stay out of choppy markets. It makes a lot of sense. Someone out there must know when the markets are going to go sideways and then step aside waiting for the next big trend. When the trend comes, they get on it and ride it for big profits. They then exit and wait for the next trend. He hears promises that he should be able to forecast all of this by using these predictive techniques.
Unfortunately, after several seminars, our trader tries to predict a corrective stock market and ends up mistaking it for the next big wave up. He explains to his friends, “I missed the big move because I thought we were in Wave B but the market was really in Wave 2 ready to start Wave 3. If I had just used my old trusty indicators instead of trying to predict the move and waiting, I would have made big bucks.”
HISTORICAL PROBABILITIES
It finally occurs to him that he should back test some techniques and see how some of his indicators would have worked historically; he reasons that if he can do this, he would have more confidence and discipline in his trades. He begins to understand that no one (including himself) can predict the market. He starts to realize that he needs to have some confidence that the techniques he is going to use have worked in the past. He now knows that he can’t predict the market. He thinks, “All I really need to know is what the probabilities are when I put on a trade according to my rules, and I should make money.”
Our technical trader has now passed the second big initiation and begins to sense the need for trading a strategy. He realizes that there is immense value in historical strategy performance data. He purchases TradeStation and dives into learning how to design and trade strategies.
The Strategy Trader
A strategy trader trades a strategy—a method of trading that uses objective entry and exit criteria that have been validated by historical testing on quantifiable data.
Strategy traders are restricted by a set of rules. These rules make up what is known as the strategy. As a strategy trader, you will not deviate from your strategy’s rules at all, unless you have decided to use a different strategy altogether. When your strategy tells you to buy, you buy. When your strategy tells you to sell, you sell. And you buy or sell exactly how much your strategy tells you to. You read The Wall Street Journal and talk over the markets with your broker, but you don’t make trading decisions to override your strategy because of something you read or heard from your broker.
The reason you are restricted by your rules is that your rules are sound. As a strategy trader, you've spent a lot of time and research in creating those rules. Your rules have been hand-designed by you and tested and re-tested on years of historical data. This testing has given you positive results and the conviction that lets you know it’s time to take your strategy into the future. Your emotions might still fly as high and low as the market, but at least they are not causing you to make bad trading decisions.
Our strategy trader has now left behind the gurus, the hotlines, and the broker recommendations, and has stopped trying to predict which wave the market is in and how far it will go. He has purchased and learned how to use TradeStation. He is becoming knowledgeable about computers, data and technology. He has realized the value of quantifiable data and back testing, and starts to put on trades with the confidence that comes with knowing the historical track record of the same strategy for the last 10 years. He is slowly learning the business of trading.
QUANTIFIABLE DATA
One of the first things a strategy trader needs to understand is quantifiable data. This is the data that he will correlate to the market and use to develop his trading strategy. Without quantifiable data, he would be unable to trade a strategy.
Quantifiable data is measurable data. Stock and commodity prices are quantifiable, as is volume. All technical indicators that are derived from price and/or volume are quantifiable and useable in designing a strategy. Are phases of the moon quantifiable? Yes, as are the location of the planets. They occur in a regular pattern, and each occurrence is measurable and predictable. What about earnings per share or the price earnings ratio of stocks? Yes. These are also quantifiable and can be used in strategy trading.
Once you understand what quantifiable data is, it is easier to spot non-quantifiable data. Non-quantifiable data usually consists of random events that cannot be reduced to a number and that cannot be predicted. For instance, speeches by politicians are not quantifiable, although we know that they can have a profound effect on stock prices. Opinions of our broker are not quantifiable. Are earnings surprises quantifiable? No, but quarterly earnings reports are, and they usually have a significant effect on stock prices. Are weather patterns, droughts, or freezes quantifiable? No, although we know they too have a considerable effect on commodity prices, it is not possible to quantify droughts and correlate them to Soybean or Corn prices.
A strategy trader thus moves into a mode of acquiring and testing quantifiable data as it relates to historical price activity. This is a marked difference from a technical trader, who tries to correlate data to price but usually through observation and intuition, and from the discretionary trader, who doesn’t use quantifiable data at all or feels he needs to in order to make money.
It is this acquisition and use of quantifiable data, along with the software to test it, that enables the strategy trader to investigate trading techniques historically and begin to put some rational and enlightened business practices to use in his trading. It is this process that enables him to start finally making money.
I hope this helps someone out there. I'm permanently done posting on this board.
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Registered User
Joined: 3/21/2006
Posts: 4,308
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I actually found this information usefull, What I do not under stand is why, if you do not subscribe to technical analysis you would be found lerking on this site, or using Don Wordens Software. Thats what we are all here for because we find that Technical analysis helps in finding stocks that might be ready to buy. And yes one should have a good plan for Money managment and Risk (stop loss).And other plans that I will not go into boring details about.
I will only state what I have already said.
(If what I am doing is working for me, and has for a long time) Why would I want to change that???
Now yes I am always learning and testing new things and that is what makes trading fun.
Any way good luck to you and good trading.
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Registered User
Joined: 8/12/2006
Posts: 83
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Hey HaveNoCents - Thanks for posting this...
Having been the Discretionary trader a while back it really opens ones eyes to the reality.
How would one go about backtesting.
I have heard of TRADE-STATION and METASTOCK. But, pricey for a beginner.
Any suggestions...
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Registered User
Joined: 8/12/2006
Posts: 83
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Google today
climbed to a high of 499.66
and closed at 498.79.
I wonder why it did not touch the 500 mark. I guess it is one of the mysteries ...
I do have a position in this stock and being a beginner, just wondering, How to decide when to get out.
Any Comments
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Registered User
Joined: 12/19/2004
Posts: 457
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There is a world of difference between being a "discretionary trader" and an undisciplined gambler.
If you read Jack Schwager's Market Wizards, some of the most successful traders he had interviewed used a combination of systems and discretion (ie. judgement).
His whole description of "discretionary traders" smacks of ignorance. Those people he describes are not using "judgement" but are just guessing.
To use judgement, you need experience, and you need knowledge. Knowledge comes from reading books on various market theories (including fundamental analysis, technical analysis, economics, history, etc.).
You also need, over time, to practice applying that knowledge, and track the results.
How can someone develop any "system" unless they use some sort of "discretion" or judgement, to filter out the billions and billions of bits of information, in order to pick out what is useful? You have to have some idea of what you are looking for, before you use the computer to crunch the data. Those ideas only come from theory, or judgement.
As for historical testing: it has a role, but it certainly doesn't give predictive probabilities in the way everyone thinks it does.
As Ludwig von Mises astutely wrote: "In the field of economics, there are no consistent relations, and consequently, no measurement is possible." As technican analysis is really applied economic analysis, this also applies to technical trading.
How is this so? Because the nature of our measures are in terms of money. Yet, the value of money itself is also fluctuating. We have these indexes that purport to "measure" inflation, but they are crude, and hide important information that influences the actions of the people we wish to study.
I will be the first to grant that the process of testing a strategy can certainly help you gain insight into how it might work, but then you have to ask: "Has the market already figured out this strategy? How will I know when it is failing in real time?"
Markets change. Strategies that APPEAR to have worked on the market back in the 1940's, 50's, 60's or 70's are not likely to be directly applicible to market action today. There are futures, options, options on futures, ETF funds, and a whole host of professionals who look for such opportunities.
What is the answer, then? The only solution is to learn how to judge things for yourself. Technical analysis is one (very imporant) tool. Fundamental analysis and economic analysis is another. An often overlooked tool is history. Knowing what the Dow or the SP did on any day is not as informative as is also understanding what expectations were at that time as well.
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Registered User
Joined: 10/27/2004
Posts: 36
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rmr, excellent addition to the HaveNoCents post. Thanks to you both.
I haven't achieved my metric for success yet, but would add that there is a significant amount to learn about the tradestation itself(I mean that generically). That part of my development has sometimes cost most dearly. Examples: the types of stops to use; the sophisticated types of orders that are possible and their limitations; that the same order thru the same broker might be handled by the different exchanges differently; that old orders placed on a stock you no longer hold may no longer appear on your primary portfolio page but still execute; etc. There has been an awful lot of minutiae to learn... And it's really hard to anticipate what questions to ask until the sitation taps you on the shoulder or smacks you upside the head. Best bet - keep the positions small while you learn.
I recommend attending the broker's seminars/webinars and asking lots of questions, and listening to the other questions until you understand both what's being asked and the answer.
rmr's final answer is right 'on the money,'all points. My most important lessons now are about the play of expectations that led to market inflection points, past and present, and the ever-growing array of strategies that can be implemented in these trends and turns. The tcnet hottoworks club is my university; the dean is superb and the collegiality, ideal.
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Registered User
Joined: 1/28/2005
Posts: 6,049
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I think the most difficult thing a trader has to deal with is the truth.
Do we reach conclusions for convenience to explain away what
we do?
When something is going wrong do we focus on the problem?
Do we identify the correct problem?
It reminds me of the joke about the guy that loses his keys in the dark.
Goes over to the streetlight to find them .(because the light is better there)
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These are some random thoughts related to the above comments.
I believe the Mises comments are related to economics. (Inflation/deflation, boom /bust)
I'm not so sure it directly applies to a $10 stock going to $14.
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If a knock of backtesting is the future can change. Can someone
tell me what they are using for certainty?
Also what is never mentioned is it can tell you what does not work.
It can tell you how sensitive your system is to parameter change. (robust)
Everything in trading is about probability.
(nothing is a "guarantee")
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The markets may change but not the cycles within them. There will
always be boom/bust overvaluation/undervaluation. I have to laugh
when someone states a recession is around the corner. Really!
I did not know they were banned. There have been recessions there
will be more. There have been bull/bear markets. there will be more.
The traders goal is to determine what's happening and exploit it.
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Maybe markets have changed over the years but many things are still used.
TA, Elliot wave Theory, Donchian Channels, breakouts, gaps, volume
conformation. trend/counter-trend, cycles.
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Change is not always bad. Anyone who's been trading 20 years or more
knows the dramatic drop in commissions, Trading software (like TC2007)
real-time-data, economic analysis. It was unthinkable you could scan
the market for stocks that meet your requirements.
Also things like ETF's allow the small investor diversification.
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The traders goal is to constantly identify what's happening and
constantly exploit it. We cant control what the price of a barrel of oil
will be. All we can do is exploit it. We cant control inflation. All we
can do is make money from it.
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Remember when markets and cycles change the traders goal is to
adapt with them. We are only in a prison of our ideas if we
create it. If I state this is the way I trade and this is the way I will
continue to trade for the next 30 years. Then the results will be
my fault. When what we do stops working we must adapt it to
the new environment.
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The trader must constantly ask himself. Am I asking the proper
questions? Am I supplying the proper answers?
Thanks
diceman
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Registered User
Joined: 10/27/2004
Posts: 36
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be aware... you'll never step in the same river twice.
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Registered User
Joined: 5/17/2012
Posts: 106
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QUOTE (HaveNoCents) I thought I would pass this on. I don't know who wrote it, but whoever they were knew what they were talking about. Find out where you are in this scenario and try to move yourself up the ladder. I don't know who wrote this either but i would guess Wm. O'Neil Co Inc. or their affilate . This is an example of the misleading hype that is prevalent in the trading industry.. Not that its touting TradeStation. though that could be a tip off but that it pronounces Backtesting as a solid foundation to establish. a (hold on let me see how strategy is spelled)strategy. A strategy is a sucker punch if based on Backtesting
QUOTEIn the broad category of “trading the markets,” there are basically three types of trading: discretionary, technical, and strategy-based.
I have known and taught many traders, and have observed that there are four distinct stages of trader education: discretionary trader, technical trader, strategy trader, and complete strategy trader. All successful traders have gone through them. It is almost impossible to be a successful strategy trader without going through all of these stages.
Every trader usually starts out as a discretionary trader. The amount of money lost generally determines how long it takes the individual to start using technical indicators to make trading decisions. Eventually, as even employing technical indicators fails to move the trader into profitability, the trader moves into the third stage and starts to write strategies based on quantifiable data. It is at this stage that the trader ordinarily starts to make money. Finally, the strategies and money management approaches are refined and the individual becomes successful as a strategy trader.
The Discretionary Trader
A discretionary trader uses a combination of intuition, advice and non-quantifiable data to determine when to enter and exit the market.
Discretionary traders are not restricted by a concrete set of rules. If you are a discretionary trader, you can make buy and sell decisions using whatever criteria you deem to be important at the moment. For example, you can use both a combination of hot tips and relevant news stories from The Wall Street Journal, and enter or exit the market based upon this information. If you begin to lose money, you can immediately exit the market and change your trading method. You don't have to use the same techniques day in and day out. It's a very flexible way to trade that you can customize based on what you think the market is going to do at any given moment.
For the discretionary trader, trades are made using gut instinct and intuition. Unless a computer is generating a buy or sell signal and you actually follow the signal, your emotions will affect your trading. I explained in the introduction what problems instinct and intuition could be in trading. Remember fear and greed? In discretionary trading, technical tools such as indicators are sometimes used; however, when they are put to use, they are utilized sporadically as opposed to systematically.
Fascinated by the markets, the discretionary trader is ready to put on a trade at a moment’s notice. The most uncomfortable part of trading for the discretionary trader is when there is no action. So he will jump on any piece of information, anything that will permit him to take a stab at the market. Above all, he craves the action.
& HOT TIPS
The discretionary trader uses several sources for his trading decisions. One is intuition, for example, “I see a lot of people in stores, so I think the economy is good, and earning will increase, so the stock market should go up, and I should buy Sears.” He usually spends a lot of time talking to his broker. “What do you think Joe, isn’t Woolworth’s going to turn around?” Another is reading and watching the news, “Retail sales are looking strong and Woolworth’s is closing stores to lower their overhead.”
Hot tips are a common way that a discretionary trader gets ideas. A call from his broker or good friend, or a tip from a discussion at a cocktail party are all places the discretionary trader gets his trading ideas. “Hey George, HTECH Corp. has a hot new product in the works, here’s a stock you can pick up cheap.” If it gets dry in the summer, our discretionary trader may decide to buy Corn, Beans or Wheat. However, when he looks out the window and notices that it’s raining, he sells the position immediately. A news story on the nightly news may cause a discretionary trader to short the airline that has just had a crash.
CRAVES EXCITEMENT
What a discretionary trader loves is the excitement. He loves being “in the markets,” playing with the big guys. He craves the risk, the excitement of trading, and the gambling rush that he gets from calling his broker and putting in the order to buy. He loves being able to sell Gyro Corp. based on the news story of the health hazards of their top selling Gyrometer. He has a real obsession for buying Cotton based on the hot tip from his broker that the upcoming crop report was going to be bullish, and he covets the tip from his friend who called to say that he just bought Techno Corp. because the latest quarterly earnings were going to be a surprise on the upside.
Discretionary traders retain the flexibility of changing their buy and sell criteria from moment to moment, and change they way they trade from minute to minute and day by day. “Well, that last trade was a disaster, so tomorrow I will buy McDonald’s only if it opens up from yesterday’s close.” They don’t have any discipline, nor do they think they need any. They use their intuition and their gut instinct, and feel justified in doing so. They think, “Making money is easy, you just have to be smarter and quicker than the next guy.”
I personally don’t know anyone who has made money by discretionary trading. They may have been lucky and won on a few trades, but overall, over time, discretionary traders always lose money.
It is after enough money has been lost that the discretionary trader in some way stumbles across technical indicators. It may be from the chart book he just looked at where there was a Stochastic Indicator underneath the chart. Or he may have gone to the latest Make a Million Dollars Trading the Stock Market seminar and found out that using the Relative Strength Indicator is the sure way to stock market profits. He thinks, “So this is how they do it!” These indicators look like magic. They add some rationality to an otherwise irrational trading style. He thinks, “This must be how the big money players make the big money—they use technical indicators!”
DISCOVERS TECHNICAL INDICATORS
Once the discretionary trader discovers technical indicators, he or she incorporates some rudimentary ones into trading, usually as additional justification for making the trade. “Not only did Ralph (my broker) tell me to buy Gizmo Corp. but Gizmo has great relative strength. Gizmo’s moving averages are bullish, and the Stochastics are oversold and giving a buy signal as well.”
These newfound technical indicators give the discretionary trader a new lease on trading. Now our trader has a whole new world in front of him—the world of technical trading. For a while, this newfound world combines with intuition and the discretionary trader views himself as a strategy trader. He says, “I trade a strategy using moving averages and Stochastics with a dash of daily news and tips from my broker. I am now a real objective strategy trader.” While the trader may view himself as a strategy trader, this could not be farther from the truth. The discretionary trader’s style is still undisciplined, based on newly educated guesses, and he is probably still losing money.
For a moment, these technical tools were thought to be the answer, and while they add a little more rationale to his trades, the losses continue to pile up. Despite his continuing angst, our discretionary trader is now on the way to becoming a technical trader.
The Technical Trader
A technical trader uses technical indicators, hotlines, newsletters and perhaps some personally defined objective rules to enter and exit the market.
As a technical trader, you are beginning to realize that rules are important and that it is appropriate to use some objective criteria such as confirmation before making a trade. You have developed rules, but sometimes you follow them and sometimes you don’t. It depends how confident you feel today and how much money you are making or losing. If an indicator gives you a buy signal, you may override it because your broker told you the earnings report was going to be negative. Or maybe the bonds are up, which means interest rates are rising, and you better see how high rates go before you commit more money to this already overpriced market. You may think, “I have a profit, hmm, I just may take it now. Even though the Stochastic is not overbought, the markets are tough. It’s not easy to make money. Like my father said, ‘you can’t go broke taking profits.’ At least now I have a winning trade. I’ll sleep well tonight.”
Our trader now begins to realize that using the intuitive and hot tip approach will not lead to profitability. He now begins to focus on the technical indicators themselves. There are so many! Moving Averages, Exponential and Weighted. The MACD, Momentum, P/E Ratio, Rate of Change, DMI, Advance/Decline Line, EPS, True Range, ADX, CCI, Candlesticks, MFI, Parabolic, Trendlines, RSI, Volatility Expansion and Volume and Open Interest, just to name a few. So much to learn and so little time!
This whole new world of technical books, seminars, newsletters, and hot lines now begins to preoccupy our trader. He learns all he can about indicators. He wants to find the one indicator that will ensure profitability. He surrenders to what I call Indicator Fascination.
INDICATOR FASCINATION
The first assumption that our trader makes is that someone out there must know how to do this. There must be an expert, someone who knows how to make money, that has created the magic indicator to do it. This is the Holy Grail syndrome and our trader now embarks on a search for the Holy Grail Indicator. He knows intuitively that there must be an indicator that will give him the information he needs to make profitable trades…that there must be teachers out there that know how to make money trading. He thinks, “All I need to do is find him and his indicators.”
This is the indicator fascination phase. How are indicators calculated, what do they represent, and are they the “secret” to making money? All of these questions need to be answered so he becomes a seminar junkie, travelling the country on the quest for that great technique, the one that everyone uses to make the big money. He visits Chicago one month…L.A. the next…followed by a visit to the Chicago Mercantile Exchange. He watches the CNBC expert technicians and surfs the net looking for that magic indicator.
Now he’ll only buy when the ADX is moving up and the MACD is positive, and he’ll sell only when the RSI gets overbought and turns down. His trading becomes more indicator-based and he listens less to his broker. For example, he may tell his broker, “No, I won’t buy Apple Computer until the Earnings Momentum Indicator is over 80!” Unfortunately, even with all of this information, and all the assurances of his seminar leaders, he still is not making money. He even begins to wonder if he will be able to continue trading with all of these losses. He thinks, “If I could only control the losses, I will probably be able to trade a little longer before my money runs out.”
It is at this stage that he learns the value of stop losses, known as stops. He learns the importance of managing the risk on each trade. He gets a hint that there is more to trading than just the indicator, and his ears perk up when people mention the concept of controlling risk and conserving capital. He thinks, “I just want to stay in the game, to keep enough money to make the next trade. I don’t want to quit a loser!”
But even with the newly found indicators, and controlling his risk with stops, he continues to lose money, although he also consummates some winning trades that keep his capital from depleting too quickly. And here he has another major revelation—markets can be trending or choppy. It is at this point that he realizes, “If I could only predict the choppy markets, where I lose most of my money, I could simply stay out of the market and get back in when it starts to make the big move.” So he starts another quest, that of leaning how to predict choppy markets.
PREDICTING THE MARKETS
Discontinuing the use of the old technical indicators, our technical trader now begins to flirt with the Elliot Wave theory, W.D. Gann techniques, and Fibonnacci Targets and Retracements. These techniques generally claim to help you predict when the market will be choppy and where and when it should be bought and sold. He does all of this studying so he can learn to stay out of choppy markets. It makes a lot of sense. Someone out there must know when the markets are going to go sideways and then step aside waiting for the next big trend. When the trend comes, they get on it and ride it for big profits. They then exit and wait for the next trend. He hears promises that he should be able to forecast all of this by using these predictive techniques.
Unfortunately, after several seminars, our trader tries to predict a corrective stock market and ends up mistaking it for the next big wave up. He explains to his friends, “I missed the big move because I thought we were in Wave B but the market was really in Wave 2 ready to start Wave 3. If I had just used my old trusty indicators instead of trying to predict the move and waiting, I would have made big bucks.”
HISTORICAL PROBABILITIES
It finally occurs to him that he should back test some techniques and see how some of his indicators would have worked historically; he reasons that if he can do this, he would have more confidence and discipline in his trades. He begins to understand that no one (including himself) can predict the market. He starts to realize that he needs to have some confidence that the techniques he is going to use have worked in the past. He now knows that he can’t predict the market. He thinks, “All I really need to know is what the probabilities are when I put on a trade according to my rules, and I should make money.”
Our technical trader has now passed the second big initiation and begins to sense the need for trading a strategy. He realizes that there is immense value in historical strategy performance data. He purchases TradeStation and dives into learning how to design and trade strategies.
The Strategy Trader
A strategy trader trades a strategy—a method of trading that uses objective entry and exit criteria that have been validated by historical testing on quantifiable data.
Strategy traders are restricted by a set of rules. These rules make up what is known as the strategy. As a strategy trader, you will not deviate from your strategy’s rules at all, unless you have decided to use a different strategy altogether. When your strategy tells you to buy, you buy. When your strategy tells you to sell, you sell. And you buy or sell exactly how much your strategy tells you to. You read The Wall Street Journal and talk over the markets with your broker, but you don’t make trading decisions to override your strategy because of something you read or heard from your broker.
The reason you are restricted by your rules is that your rules are sound. As a strategy trader, you've spent a lot of time and research in creating those rules. Your rules have been hand-designed by you and tested and re-tested on years of historical data. This testing has given you positive results and the conviction that lets you know it’s time to take your strategy into the future. Your emotions might still fly as high and low as the market, but at least they are not causing you to make bad trading decisions.
Our strategy trader has now left behind the gurus, the hotlines, and the broker recommendations, and has stopped trying to predict which wave the market is in and how far it will go. He has purchased and learned how to use TradeStation. He is becoming knowledgeable about computers, data and technology. He has realized the value of quantifiable data and back testing, and starts to put on trades with the confidence that comes with knowing the historical track record of the same strategy for the last 10 years. He is slowly learning the business of trading.
QUANTIFIABLE DATA
One of the first things a strategy trader needs to understand is quantifiable data. This is the data that he will correlate to the market and use to develop his trading strategy. Without quantifiable data, he would be unable to trade a strategy.
Quantifiable data is measurable data. Stock and commodity prices are quantifiable, as is volume. All technical indicators that are derived from price and/or volume are quantifiable and useable in designing a strategy. Are phases of the moon quantifiable? Yes, as are the location of the planets. They occur in a regular pattern, and each occurrence is measurable and predictable. What about earnings per share or the price earnings ratio of stocks? Yes. These are also quantifiable and can be used in strategy trading.
Once you understand what quantifiable data is, it is easier to spot non-quantifiable data. Non-quantifiable data usually consists of random events that cannot be reduced to a number and that cannot be predicted. For instance, speeches by politicians are not quantifiable, although we know that they can have a profound effect on stock prices. Opinions of our broker are not quantifiable. Are earnings surprises quantifiable? No, but quarterly earnings reports are, and they usually have a significant effect on stock prices. Are weather patterns, droughts, or freezes quantifiable? No, although we know they too have a considerable effect on commodity prices, it is not possible to quantify droughts and correlate them to Soybean or Corn prices.
A strategy trader thus moves into a mode of acquiring and testing quantifiable data as it relates to historical price activity. This is a marked difference from a technical trader, who tries to correlate data to price but usually through observation and intuition, and from the discretionary trader, who doesn’t use quantifiable data at all or feels he needs to in order to make money.
It is this acquisition and use of quantifiable data, along with the software to test it, that enables the strategy trader to investigate trading techniques historically and begin to put some rational and enlightened business practices to use in his trading. It is this process that enables him to start finally making money.
I hope this helps someone out there. I'm permanently done posting on this board.
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Registered User
Joined: 12/31/2005
Posts: 2,499
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One can easily find the entire ebook online for
The Path To Successful Trading
By Charlie Wright
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Registered User
Joined: 5/17/2012
Posts: 106
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I will be bloging over there at Barry taylors Emini-Watch youtube site, Me and Barry are friends , well sort of. Now we are at the exact middle of a W pattern on the S&P500 emini. you can compare it to the Index it should work the same. so in ten week we will be at the top of the second leg of a double top around 1400 and then its all down from there . Now we got to go down below 1300 first , say 1270then come back up to 1400
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Registered User
Joined: 5/17/2012
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Oh I forgot My UTube user name is FredJonesJunior
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Registered User
Joined: 6/15/2008
Posts: 1,356
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I was informed once, that it was prohibited to solicit ones own web/blog site here at Worden's forum.
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Registered User
Joined: 12/31/2005
Posts: 2,499
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In this case it migth be a public service to warn us away.... :-)
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Joined: 5/17/2012
Posts: 106
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I've just checked 13 different indicators and most of them can tell the furture in retrospect. I makes a nice demostration. but they won't lead to your trading sucess. The best you can achieve in trading is to make a name for your self as a Guru. I don't know if that is possible with out adquate marketing . Possible start out with a website. I say it will be hard to gain a foothold but there is always a Mega church preacher in the wings when the last one got defrocked so there might be a place for you . Try to get in to John Wiley and Sons Publishers . they can boost your career if they publish your book. Become a guest lecturer at colleges that will give you some standing others might not have. Claim you pick a market turn some time in the past . Who's to say you didn't . Look how long it takes for people to figure out you didn't have a second major in IT. What's IT? Something to do with computer. or those guys who claime they recieved a Medal of Honor and they never left the states. It can be done.is all I'm saying . And you may be able to pull it off .
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Joined: 5/17/2012
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QUOTE (pthegreat)
I was informed once, that it was prohibited to solicit ones own web/blog site here at Worden's forum.
kWell just remove it. Its done all the time.
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Joined: 7/24/2012
Posts: 3
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Its a nice post but still i believe discipline act as a major parameter , since discretionary trading is beholden to the analysis and execution performed by the individual rather than the system, there is the risk of biases, lack of discipline, and other psychological short-comings creeping in,
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