Fact-Based Trading

[hayseed]

hey bossxero.... the drawdown is a figure that has intrigued me from the beginning.... i've asked on many forums if anyone has an idea of just what the realistic % should be.... do you have an idea or some particular amount your comfortable with..... h

[nvpliers]

Billbss has valid points. While I'm new to this site, I'm not new to FX trading. One thought that I had, is that if someone subscribes to the theory that every market move is mathematically random, you can blindly enter positions with varying TP and SLs, and your accumulated mathematical outcome will be a big fat zero. Then - as Billbss indicates - factor in your spreads, and your P/L will simply be the spread x the number of trades you made. Daytrading? Bigger losses. Longterm trader? You have losses, but not as large, since your payments to the "House" are less frequent.

But - ignoring all those wonderful mathematical indicators like Bollinger, MACD, etc. - if the theory of "every move is random" is true, why is it that some actually make money in this market? All I can figure is that someone has to have that "edge" to overcome the inherent disadvantage we all have in overcoming the accumulated hit from the spread-costs. Is that edge the mathematical indicators? Fundamentals? Perhaps. We need something to overcome the ultimate, consistent winner in this game, and that is "The House". The house will always get its cut [That's why Vegas does so well]. Yes, at times you get someone at the Blackjack table that scores, and scores big. But given enough players and enough time, the House always wins.

So, it's up to us to cheat the theory of "everything is random", by getting that edge. By getting into the same "plan" as that Black Jack winner. Getting that edge.

[I'm still looking for it!!!]

[bossxero]

Originally Posted by hayseed

hey bossxero.... the drawdown is a figure that has intrigued me from the beginning.... i've asked on many forums if anyone has an idea of just what the realistic % should be.... do you have an idea or some particular amount your comfortable with..... h

Not more than 5% I would say.

[mtardif]

Originally Posted by nvpliers

We need something to overcome the ultimate, consistent winner in this game, and that is "The House". The house will always get its cut [That's why Vegas does so well]. Yes, at times you get someone at the Blackjack table that scores, and scores big. But given enough players and enough time, the House always wins.

So, it's up to us to cheat the theory of "everything is random", by getting that edge. By getting into the same "plan" as that Black Jack winner. Getting that edge.

[I'm still looking for it!!!]

Hey, I understand where you're coming from. I'm beginning to think that setting stop loss points on every orders is a "come get my money" signal for "The House". Your stop-loss is their take profit. They'll just look at the books (bookies) and see where the majority of the stop losses are and send the price in that direction ("stop hunting"). Isn't it curious how it is much easier for price to hit the stop-loss than the take-profit, even if the TP is twice as close as the SL?

I'm beginning to think that I'll need to set stop-losses based on % drawdown of equity. So, place a trade and then if your drawdown exceeds says 1%, close the position. That way, the "House" does not see your stop loss target and so you do not give them information for them to work against you. (I have no problem putting a TP target on my orders, since it won't bother me if the dealer takes the price in that direction... )

Or better yet, scale into the trade. Fire off the first position from a signal on a hourly chart. Take profit from that signal if possible. If not, fire off a position from the same signal on a daily chart. Take profit on those positions if possible. If not, fire off a third position from the same signal on a weekly chart. Hopefully you take profit from that (three positions opened at different prices - "trading like dealers do"). If you set a stop-loss to 1-5% of account equity and that drawdown is reached, only then do you get stopped out. It's a stop-loss mechanism which is not visible to the dealer. A "cloaked" stop-loss, if we were to think of it in terms of Star Trek.

That is the theory I am working on at the moment.

[bossxero]

Thats kinda good idea Mtardif... read about that in some books but of course, dont know which it was. Lets see how this comes up to.

[jatotek]

Originally Posted by billbss

As an example of "fact-based" or "mathematical probabilities", consider this example.

- I put on two long positions.
- The first long position has a take profit of +100 and a stop loss of -50.
- The second long position has a take profit of +100 and a stop loss of -100.


It won't work. Your math is off.

These are the actual probabilities:

(1) Position 1: +100, Position 2: +100 / 27.28%
(2) Position 1: -50, Position 2: +100 / 36.36%
(3) Position 1: -50, Position 2: -100 / 36.36%

This does not factor in the spread. If it did it would look even worse.

The reason the three scenarios do not have an equal chance of occuring is because Position 1 does not have an equal chance of hitting profit vs hitting the SL.

Position 1 is twice as likely to get stopped out as it is to hit profit.

It is twice as easy for a pair to move 50 pips than it is to move 100 pips.

Position 1 will be -50, 66.7% of the time
It will be +100, 33.3% of the time

Position 2 will be -100, 50% of the time
It will be +100, 50% of the time

If you put on this trade 100 times, this is your probable results:

+200 pips 27.26 times = +5452 pips
+50 pips 36.36 times = +1818 pips
-200 pips 36.36 times = -7272 pips

Total = +2 which is caused by rounding errors
Real total = 0 pips

This doesn't factor in the spread.

The spread actually changes the probabilities a small amount.

A good approximation is to take 200 trades (100 @ 2 positions each), multiply by the spread and subtract from the 0 total.

If the spread is 3 pips then you will lose 600 pips every 100 trades.

Looking over the math I see there is a glitch in the total pip outcome for probability 3 it should be
-150 pips 36.36 times = -5452
Not
-200 pips 36.36 times = -7272

This should in turn give you a remainder of +1818 pips
Which will give you ample room for the 600 pips in spread

As per filtering. Just use the “law of large numbers” Why not? It seems to work for the guys in Vegas.

Means of increasing efficiency. Try using the second law of thermodynamics “conservation” potentially a slightly tighter stop may have little impact on the total probability of wins and losses. In doing so you conserve capitol and should be able to increase your results. Even if only tightening the stop by 2 pips.

Although I do agree with bill its harder for the market to move 100 pips than it is 50 pips. If 27.28% and 36.36% are correct variables for the outcome. Then it actually does have a chance.

[mtardif]

Yeah, I know the title seems like an oxymoron, but let me explain.

The attached EA is not doing what I programmed it to do. I could sit here and pretend to be a genius for discovering an algorithm to come up with a nearly perfect equity curve, but I won't, it's not in my nature.

Only I know what I intended this EA to do, and only I can go into my own head and revisit my code and get it to do what I intended it to do. (I'm still trying to find out if the system I have in my mind will actually yield the results I expect it to.)

However, I am puzzled as to why this code produces a nearly perfect equity curve, with 94% winning trades and less than 10% drawdown, consistently for the past three years. It seems to only trade once or twice per month maximum. It's like as if it is able to find the best probability trades and take advanatge of them. Weird. All my focused efforts have never yielded something like this, this is purely accidental.

Can someone look at this code and explain why it's yielding the results it's yielding? How the heck did I trip myself up into this mess? I've been looking at it for so long I don't even know what 2+2 is anymore. (Maybe all the booze is not helping matters, but 'tis the season...)

Happy Holidays!

[hayseed]

using the weekly stoch as a filter will almost invaribly accomplish 2 things.....
lower the number of trades and lower the number of loosing trades....h

[bossxero]

MTardif... if you are not using any kind of SL in the EA, this can explain the perfect equity curve.

[mp6140]

While not a subject fully answerable in such a small space, let us first understand that forex, equities, options and the whole raft of other financial instruments that get traded are done so by PROFESSIONALS, and these pros think very much alike (naturally , THATS the way theyre taught to think)

Not only do they think alike, they also make phone calls to each other, information I forward just in case youve never been in a trading room to see the deals being made.

Now, once you are "tuned in" to how they are thinking, you begin to understand what appears "random" is usually not --- in fact, I will state that it IS NOT RANDOM in any way shape or form ! One only needs to be trading a 15 min chart, reach a good resistance point, watch ALL trading STOP DEAD, and understand the phone calls moving back and forth across the world, essentially asking "so, what you gonna do ?"

From my experience, the majority of the pros are using the H1 as a "trend" timeframe and to establish tops and bottoms for the day --- then they trade the smaller timeframes, "working" the repeated ups and downs that produce the increased profit over just "buying and holding" and theoretically at least, preventing any drawdowns while constantly increasing profit. If one were to simply hold a long, let us say, for a 24 hour period, there would be periods where you were making money and periods where you were losing, simply because currency moves up and down during the day as the banks make and take profit, playing long and short, or buying the dips or whatever particular method they wish to use that moment !

If the currency is trending UP, is now the time to take profit and then short the dip ? These things happen at repeatable times of the day, essentially like clockwork, so if somethings going up, and its a few minutes to noon, est --- either get your profit or go short to counter your long which will sit for a while before its taken out tonight in the Japanese session, or when the euro opens --- but ill bet dollars to a cops doughnuts, it gets taken out BECAUSE THATS WHAT THE BANKS WANT ~ and that was the trend direction they were working with all day, just moving up and down to make more money in the day trade market !

to understand what I say, one must have full support and resistance on their charts, an understanding of the one hour (and daily) trend, its seperate moving average resistance points, and just WHAT the banks are trying to achieve.

I use something called the Linear Regression Channel, which is simply a top, bottom and middle trend line for a particular timezone for a particular currency pair --- this shows topmost, bottom most and middle support and resistance points, and is RARELY violated in any way, as that would ALTER the trend that the banks have already figured in.

by laying an LRC on any timeframe chart (but the longer ones show trends better, of course !) one is able to "see" what the banks are up to with amazing clarity, especially if one is looking at a weekly chart !

Ive attached a jpeg, just to give you an idea of what i speak, but to get to the point where you "think" like a trader normally just requires experience and a "greedy" disposition, and is not the world of the right-brained and careing person !

One can learn to trade in a relatively short period of time (well, a year is minimum and usually much too short) but to become a true SOB might very well not be possible for some --- at least I hope so ! (see the movie "wall street" for additional research into the subject !)

thinking like a pro trader requires mastery of "if this happens, then this is the result", and as only applied to money and greed -- good luck if you wish to lose your soul for the money but get the maserati, 2 million dollar house, trophy wife or husband and the rest of the percs !

yet another edit --- if youre worried about getting past the "spread hit" you take on your initial trade, why not investigate the ECN's, which usually work on one pip spread for most everything --- I personally use EFX, but have no problems with any of the others ! (and being an ECN, they dont trade against you in any way, shape or manner !) LOL

another subject -- what about news and its effects on the price ? The trader's analysists spend every day searching for what the fed will release the following week, and got a pretty danged good idea of what will be released, so watch your currency a week before news release --- if the news is anticipated to be good, the currency will most likely drop (there is one reason not to happen, but for a later time) as the banks short the currency for the first profit, and then have a large amount of upside movement to handle the news., of course, reverse for bad news !



trade well and enjoy

mp

[quote=nvpliers;13029]

But - ignoring all those wonderful mathematical indicators like Bollinger, MACD, etc. - if the theory of "every move is random" is true, why is it that some actually make money in this market? All I can figure is that someone has to have that "edge" to overcome the inherent disadvantage we all have in overcoming the accumulated hit from the spread-costs. Is that edge the mathematical indicators? Fundamentals? Perhaps. We need something to overcome the ultimate, consistent winner in this game, and that is "The House".