Monday, July 23, 2007

Monday Series: Part 4 - Improving the Odds

Some traders learn from their mistakes ........ others never recover. Trading is an adaptive, dynamic process that is filled with risk and uncertainty. Those who fail to adequately recognize this simple truth are in for rough ride. Contrary to popular myth, there is no holy grail trading system. Consistent trading is about a state of mind and Dr. Brett Steenbarger over at Traderfeed tries to impress that truism unto his readers every day. I know many successful traders and frankly, no two trade alike ..... everyone is wired a little differently as a result of either nature or nuture. Whether you favor gap fades, momentum stocks, late day breakouts, new highs/new lows, moving average crossovers, algorithmic trading, neural networks, probabilistic statistics, etc., the trick is to make the system your own, to understand every nuance of the system and to meticulously define, test and follow the rules of the trading plan within which the system, or systems will be used. Here's another spin on the same topic and it's worth a close read:

Other intervening factors can contribute to trading outcomes, and traders need to avoid using them as crutches in the face of both good and bad results. Case in point: Charles Kirk has an excellent post on the role of luck in trading. Basically, you make your own luck through proper due diligence, positive attitude and systematic trade execution. There's no free lunch in the market. For the full text, see:

There are many free sites that provide trading algorithm testing, both forward and backward. Several of the sites have their own programmable rating systems to enable traders to rank stocks based on a variety of technical and fundamental criteria. Six of my favorites are:

A wide variety of paid sites provide daily statistical and technical perspectives on the market, including timing indicators and signals. Two of the best are:

I have mentored many traders and in my experience the ones that excel are the ones that think systematically, who have attained the self-disciple and focus to follow a trading plan (remember Curtis Faith from last week?), and who understand that trading is a business .... a serious business for those who seek to make it their livelihood. Successful trading is an incremental process based on precise and methodical risk management. Trading is not a hobby, a casual past time or a gaming proxy. Contrary to the Gordon Gecko persona, good traders also tend to display a profound humbleness, perhaps because they understand the fragile nature of their success. Having been a business owner and operator in my pre trading life, I understand these concepts quite clearly and when I was struggling with my early trading a couple readings of Alexander Elder's "Trading for a Living" brought things back into focus. I hope that some of the resources mentioned here can facilitate your path to consistently successful trading because there' only one thing more painful than learning from experience ....... and that is not learning from experience.


Evan said...

Hi Bob, I've been enjoying your blog for a number of months. As a fledging trader, is there 1 particular setup (i.e. gap, morning reversal, afternoon breakout, etc.) which you feel is the most straightforward to learn to use effectively? Many thanks, Evan

bzbtrader said...

The appropriate answer to your question depends on the features of the platform that you are using and the amount of capital you are willing to put at risk. Can you watch the NYAD in real time on 2 minute bars? Can you watch the TICK and TRIN in real time on 2 minute bars? Does your platform have parabolic SAR, Fibonacci and linear regression studies?
If your focus is daytrading... then fading gaps and GE mean reversion scalps are high probability trades (once you learn to recognize the setups). Later this month I'll discuss capturing afternoon breakouts/breakdowns and provide some unique tools to accomplish those ends. If your time frame is a bit longer, then trading off dojis and inside days is one way to increase your odds (another topic I'll cover later this month). Many traders like the systems approach, since risk is relativeley defined. . although if you read the Risk Management article in the NYTimes I mentioned yesterday the validity of a quant approach is revealed as terminally flawed. The pivots are, of course, my #1 tool for daytrading because they consistently work to provide high probability intraday turning points. The trick is to find those stocks, ETFs, indices that respond very predictably to your favorite indicators, which is why I favor the Qs, IWM and the other members of my ETF basket. . .they are good performers. Since you've apparently only followed me for a few months, I suggest going back to my May posts and reading through to the present on the theme that I tried to develop over six months of using a basket of systems to predict market direction. Perhaps those posts may give you some further ideas for your research.
Hope that helps a little bit.