The market can do anything at any moment because every person who trades is a market variable. That means you will never learn enough to anticipate every possible way that the market can make you wrong or cause you to lose money. Learn to accept the risk. When you accept the risk, you won’t perceive anything that the market can do as threatening. People , expressing their beliefs and expectations about the future, make prices move- not models. The fact that a model makes a logical and reasonable projection based on all the relevant variables is not of much value if the traders who are responsible for most of the trading volume aren’t aware of the model or don’t believe in it. In other words, people who trade don’t always act in a rational manner. If you have to win, if you have to be right, if you can’t lose or can’t be wrong, you will cause yourself to define and perceive categories of market information as painful. In other words, you will view as painful any information the market generates that is in opposition to what will make you happy. Intelligence and good market analysis can certainly contribute to success, but they aren’t the defining factors that separate the consistent winners from everyone else. |
Archives of “models” tag
rssLESSONS FROM TRADING IN THE ZONE BY MARK DOUGLAS
1.) When it comes to trading, it turns out that the skills we learn to earn high marks in school, advance our careers and create relationships with other people, turn out to be inappropriate for trading. Traders must learn to think in terms of probabilities and surrender all of the skills acquired to achieve in virtually every other aspect of life.
2.) Within 9 months of moving to Chicago, I had lost nearly everything I owned. My losses were the result of both my trading activities and my exorbitant lifestyle, which demanded that I make a lot of money as a trader.
3.) You don’t need to know what’s going to happen next to make money. Anything can happen. Every moment is unique, meaning every edge and outcome is truly a unique experience. The trade either works or it doesn’t.
4.) More or better market analysis is not the solution to his trading difficulties or lack of consistent results. It is attitude and “state of mind” that determine his results. A winner’s mindset means learning how to think in probabilities.
5.) The edge means there’s a higher probability of one outcome than another. The greater your confidence, the easier it will be to execute your trades.
6.) Do you ever feel compelled to make a trade because you are afraid that you might miss out?
7.) People , expressing their beliefs and expectations about the future, make prices move- not models. The fact that a model makes a logical and reasonable projection based on all the relevant variables is not of much value if the traders who are responsible for most of the trading volume aren’t aware of the model or don’t believe in it. In other words, people who trade don’t always act in a rational manner.
8.) Price movement could be so volatile that it would be very difficult, if not impossible, to stay in a trade in order to realize the fundamental analysts’ objective. (more…)
Quantitative Strategies for Achieving Alpha by Richard Tortoriello -Book Review
In this book Richard Tortoriello sets out find empirical drivers for stock market returns. This is a new book published last month. The author tests 1200 strategies on stock above 500 million valuation to determine the major fundamental and market based drivers for future stock market returns.After such analysis he presents strategies that consistently outperform the market.
The author tests 7 basic categories of stocks factors:
- Profitability
- Valuation
- Cash flow
- Growth
- Capital allocation
- Price momentum
- Red Flags ( risk factors)
Detailed quantitative tests for each of the factors are presented in the book. As the author works for S&P, he has access to the best database on stocks and he presents his findings for multiple factors within each of the above seven categories. The testing shows that the top single factor strategy for achieving excess return is price momentum calculated using 28/16 relative strength. The best strategy using two combined factor for excess return is price momentum plus nearness 52 week high.
This book unlike other quant books is easy to understand and well presented. The biggest advantage of this book is it will give you building blocks to build your trading strategy around things that empirically work in the market. Knowing what works and why it works can help you build better trading models.
Revolutionary Trading Psychology
Everyone thinks the market is a game of numbers. We use complex models, umpteen oscillators or retracement calculations and even a fundamental analysis of supply and demand – all based in numbers and about numbers.
But in reality, the numbers of the market are but an illusion.
Markets are only the vacillating prices that other human beings, using the same mathematically based tools, are willing to pay. For example, what can be expensive one day can be very cheap the next if a trend has ensued.
It is only a matter of perspective. And perspective is a matter of the judgments you make.
Judgments on the other hand will be influenced by both impulsive feelings and by intuitive feelings – or pattern recognition. The trick is to have all the data on the table so you can tell the difference.
In order to do this, us market participants need to do a couple of things – give up the notion of a iron-clad trading plan based purely on historical probabilities and replace it with a trading plan based on historical probabilities (yes you read that right) AND a systematic way to leverage your judgment under uncertainty. This way you can make a decision about factors that may now be in play for the future probabilities. I mean who thought the VIX could stay over 30 for 6 months? … I am just askin.
Now in order to do this successfully, you have got to learn to optimize your judgments – which means spending more time focused on deciphering and understanding them than you spend on deciphering and understanding the charts.
This is revolutionary trading psychology – and it works.
Trading Profits in relate to Time and Accuracy
The size of profits of a trading system, is related to time and accuracy. They are inter-related and it is not possible to get the best out of all 3 factors in any trading system.
Before I elaborate further, I shall define what these 3 factors mean.
Size of profits – I am referring to the average amount of profits the system will earn per trade.
Time – The average length of time you held on to a trade.
Accuracy – The percentage that the system is correct and earns you a profit.
Big Profits = Long Time = Low Accuracy
For systems that aim for big profits, they must allow a greater range of fluctuations for the trade. By having a large trading range will in turn prevent you from getting stopped out so soon. Hence, you will be in a trade for a longer period of time. Besides having a larger profits, it will also serve you losses that are bigger, because your stop loss limit has to be further from your entry point. It is more difficult to grasp for the relationship with accuracy.
Small Profits = Short Time = High Accuracy (more…)
Trading Profits in relations to Time and Accuracy
The size of profits of a trading system, is related to time and accuracy. They are inter-related and it is not possible to get the best out of all 3 factors in any trading system.
Before I elaborate further, I shall define what these 3 factors mean.
Size of profits – I am referring to the average amount of profits the system will earn per trade.
Time – The average length of time you held on to a trade.
Accuracy – The percentage that the system is correct and earns you a profit.
Big Profits = Long Time = Low Accuracy
For systems that aim for big profits, they must allow a greater range of fluctuations for the trade. By having a large trading range will in turn prevent you from getting stopped out so soon. Hence, you will be in a trade for a longer period of time. Besides having a larger profits, it will also serve you losses that are bigger, because your stop loss limit has to be further from your entry point. It is more difficult to grasp for the relationship with accuracy.
Small Profits = Short Time = High Accuracy
On the contrary, a highly accurate trading system allows you to be right most of the time but each time when you are right, you take very small profits. This is possible by making very tight stops in your trades such that you lock in profits as soon as you make them. Hence, you will be in and out of the trades very fast and frequently. This is typical to intraday trading or mean reversion models or even band trading. (more…)