Newbies Trading in the Dark

[James1st]

Anyone trading in the wrong direction is going to make a loss, Innertube.

Jeff, I didnt mention any %age in my post and although I have posted the formula before, let me clarify again: (%strike rate * tick gain) minus ((100-strike rate)*tick loss (or stop)). So a strike rate of 66% with a tick gain of 3 and a stop of 4 will yield a net profit of (66*3 minus 34*4) = +0.62 ticks per trade.

Of course there are trading strategies that require a number of bites at the cherry but the net outcome viz average strike rate * average tick gain will conform to the above rule.

Every trade is predicated on exploiting an edge that includes a directional bias and every trader has to develop his own methodology for determining that bias. He may take a guess, he may use WOM, he may follow the current direction, he may flip a coin, he may use a %Williams trace or he may simply ask his mother in law; what he must not do is prevaricate.

No science (that I know of) will provide an edge that is 100% accurate and where human judgement is involved, there will be good times and bad times, good judgements and bad judgements, failure of confidence moments and trading God moments.

[Innertube]

Anyone trading in the wrong direction is going to make a loss, Innertube.

Incorrect, I make no decision on direction and still profit.

[Euler]

There are so many different ways to trade I think it's tough to summarise it in one thread, sentence or video.

[stevequal]

Incorrect, I make no decision on direction and still profit.

If your scalping the market you don't necessarily need to worry too much about the market direction, just the belief that the market will stablise enough to take money out on the back & lay sides.

If your looking for a swing trade you do need to make a decision on which way the market may move in its direction.

[Iron]

So a strike rate of 66% with a tick gain of 3 and a stop of 4 will yield a net profit of (66*3 minus 34*4) = +0.62 ticks per trade.

I can't understand where the edge comes from when scalping.

To have an edge, you need a high strike rate. In something as random as a market, I don't see how you can be confident of that. I appreciate that, if you trade tightly ranging markets (however you define them), your chances of success are higher. But given that the market can leave the range at any moment, how can anyone be sure that, over 10,000 scalps, they will come out ahead?

I'm not knocking scalping. I know there are guys who can profit from it consistently, so I'm sure there must be an edge. I'm just trying to understand where the edge comes from (as hopefully knowing that will enable me to scalp profitably!).

Thanks

Jeff

[to75ne]

knowing to scalp only when the market is stable, or as entered a period of stability.

if you doubt or unsure you wait, till you are sure (as much as possable)it is/or as stabalised.

all the time you are ready to scratch instantly, even if you have to take a loss. you dont wait to see if it comes back, just scratch. you devolop a habit of scratching instantly that the price seems/appears/believe/does go against you.

also helps if you can reasonably know before hand if the market is likely to be stable or enter a period of stability before you trade it. ie is it likely to be a scalping market.

[Iron]

knowing to scalp only when the market is stable, or as entered a period of stability.

Thanks Tony.

How can you be sure that, over a very large number of scalps, the market will remain stable long enough and often enough for scalping to be profitable?

Also, how would you define stablity? That might seem like a purely philosophical question (and a pedantic one at that!), but it's an important one IMHO, as one person's stability is another person's volatility.

all the time you are ready to scratch instantly, even if you have to take a loss. you dont wait to see if it comes back, just scratch.

How do you decide whether to offer money or take money when scratching?

Jeff

[to75ne]

i can’t be sure that over any period the market will be or stay stable. hence im always ready to scratch the moment i think its going against me, even if it does not. i often scratch too early. in the long run i more right than wrong (experience helps alot).

i would define stability as the market price zig zagging along in a relatively small range for 20 to 30 secs or so and longer. or gently coming in or going out in fairly obvious steps, for instance drifts out 3 ticks, comes in 1, drifts out 3 further ticks come back 1 tick, drifts 4 ticks, comes back 3 ticks and so on. gently zig zagging. in a general up or down direction. sometime these can develop into 2/3 tick scalps or scratches, and sometimes they can develop into swings. money coming into the market in a "nice flow", no spurts or sudden lumps that are too large compared with the previous flow.

i always offer up money first, i don’t take a price first, if my money gets taken, starts to get taken or i think there is a high probability it will get taken, i then take the counter price (if I have not already got my counter trade in already as a offer). the only time i don’t do this is if i get spiked or i mess up, then i scratch or if it’s looking really bad i hit the “c” button.

hope the above makes sense jeff.

[Iron]

i would define stability as the market price zig zagging along in a relatively small range for 20 to 30 secs or so and longer.

What do you mean by a relatively small range? 2-3 ticks? 2-4 ticks?

i always offer up money first

Does that apply to closing your trade as well as opening it? Or if you feel the price might be about to run away from you, would you take the price offered, even if it means closing out for a loss?

Just to put my enquiry into context, I can understand why swing trading is profitable (trends self-perpetuate due to crowd psychology), but it's not so clear to me what makes scalping profitable over a large number of trades. Perhaps it too works because of crowd dynamics - rather than follow other people into a drift or a steam, people maybe assume that, if the market is ranging, then it's at its correct price, causing a self-fulfilling prophesy.

Jeff

[to75ne]

2 to 3 ticks is just about ideal sometimes, but alot of the time there is tons of money on both sides of the book, and it can takes ages to get your money through to top of the que.there was a few odds on shots last week like that cant remember if it was ascot or the other cards , i mucked up a few times on them. basically i lost my nerve and scratched/or pulled out to early. could not get the timing right. c button hitting instead. took er few hits where i should have taken some relatively easish ticks.

i prefer 4 to 5 ticks or so, its a nice range, especially if there are fairly obvious so called tops and bottoms. one of the areas where i find the graphs very useful. especially last traded price.

if my counter offer is not already in, and my original offer is taken, i will take the available price and get out, either level, for a gain or a loss, what ever is on offer at the time. if my counter offer is in, and it seems that my original offer its not going to get taken then i scratch/or pull it (or go against me). i will not always cancel my counter offer though, if it’s been in a que for x amount of time and the price is zigging and zagging in a nice range my once counter offer is now a potential offer, all the time moving up to the front of the que. hope that makes sense

[to75ne]

Just to put my enquiry into context, I can understand why swing trading is profitable (trends self-perpetuate due to crowd psychology), but it's not so clear to me what makes scalping profitable over a large number of trades. Perhaps it too works because of crowd dynamics - rather than follow other people into a drift or a steam, people maybe assume that, if the market is ranging, then it's at its correct price, causing a self-fulfilling prophesy.

Jeff

is there any real difference? in both case’s you have to take more ticks than you lose.
in one case you take 1 or 2 ticks in the other you take 5/6 or more.

if you get the swing wrong you lose 2/3/4/5/6 ticks for example, if you get the scalp wrong you lose none, 1 or 2 ticks. in the long run in both cases you have to be right more times than your wrong.

i think this is one area where people who are new or are learning get seriously wrong with trading. a lot of people seem to be enamoured with the idea of swings because of the relatively large potential gains as opposed to scalping; they let greed take control rather then their logical mind. they forget that not all markets are suitable to swings, but more suitable to scalps and vice versa. or that at some point in time the market is more susceptible to scalping and at some other point to swings.

they forget to think, to control their minds and emotions, and not let their emotions control them.

in short learn to identify when and or markets are suitable to swing or scalp. if you it get wrong scratch. it is as important to scratch out of a swing trade if you get it wrong as much as it’s important you scratch out of a scalp if you get it wrong.

if you don’t know what to do or unsure, don’t enter, just watch and wait.

[Iron]

is there any real difference?

It depends on how you practice trend trading. If you stay with the market for as long as it continues to trend in the direction of your trade, then there's a big difference.

Because you're not aiming for an arbitary target, as with scalping, you're exploiting the market's irrational over-exuberance. One risk of aiming solely for x number of ticks is that there's a risk that the winning trades won't be sufficiently profitable or numerous to compensate you for your losses.

a lot of people seem to be enamoured with the idea of swings because of the relatively large potential gains as opposed to scalping; they let greed take control rather then their logical mind.

I would disagree that it's necessarily due to greed.

And there's nothing illogical about trend following. Some of the world's most successful traders are mechanical trend followers (including John W Henry, owner of Liverpool). Trend following works because it exploits the herd-like behaviour of crowds. If crowds were rational, you wouldn't get the majority of money in a horse race matched on the favourite!

they forget that not all markets are suitable to swings, but more suitable to scalps and vice versa.

A pure trend follower would argue that you never know when a big trend will develop, so it's best to apply trend following techniques to such markets. Sure, you'll take lots of small losses, but the theory goes that they will be more than compensated for by your winning trades.

But personally, I prefer to jump onto an existing trend; I don't like big drawdowns!

The Whipsaw Song puts it better than I can: http://www.youtube.com/watch?v=LiE1VgWdcQM (the guy behind this song, Ed Seykota, is a Market Wizard, and the guy who famously observed that everyone gets what they want from the market).

they forget to think, to control their minds and emotions, and not let their emotions control them.

There are disciplined and indisciplined traders in all styles of trading.

if you don’t know what to do or unsure, don’t enter, just watch and wait.

Amen to that!

[Iron]

Just a further thought -

Unless an approach to trading can be defined in precise mathematical terms, it cannot be established whether an edge exists.

Agree or disagree?

I'm not 100% sure, and as it's 1am, there are things I'd rather be thinking about! LOL!

Jeff

[to75ne]

i rarely follow a trend from start to finish, im not a trend trader. i rarely trade before 10 minutes from the off, and usually out at the offical off time on irish markets (i use excel on them), and when i judge there about to go on the brish markets (pics etc).

i dont like leaving money too long in a market. the only times i get on a long term trend is if i accidently but rarely by design, happen to get a offer excepted on what i assumed would be a swing from a reversal, and happyly realise that i am now on a long term drift or steam. so i cant comment on long term trends, i am not much cop at them.

"
Unless an approach to trading can be defined in precise mathematical terms, it cannot be established whether an edge exists.

Agree or disagree?

I'm not 100% sure, and as it's 1am, there are things I'd rather be thinking about! LOL!

Jeff"

would have thought that was true but i dont believe an individual trader needs to know the maths. just that it can be proven mathamatically. too heavy for this time of night/morning/whatever


"
to75ne wrote:a lot of people seem to be enamoured with the idea of swings because of the relatively large potential gains as opposed to scalping; they let greed take control rather then their logical mind.


I would disagree that it's necessarily due to greed.

And there's nothing illogical about trend following. Some of the world's most successful traders are mechanical trend followers (including John W Henry, owner of Liverpool). Trend following works because it exploits the herd-like behaviour of crowds. If crowds were rational, you wouldn't get the majority of money in a horse race matched on the favourite! "

jeff i did say "where people who are new or are learning get seriously wrong with trading." in the sense of more money more tempting, i agree there is nothing illogical to trend trading, i did not mean to imply there was, just in the context of new or learning people. as i stated above cant really comment on trend trading except i am no good at it.

[Iron]

And if this is true, does it not refute the idea that trading profitably requires months of practice and study, if not years?

Instead, is it not a case of just applying a simple and precise backtested method, which is proven to give you a long term edge?

This is why I'm interested in why scalping works - knowing its theoretical underpinnings can help people develop such techniques.

Jeff

Just a further thought -

Unless an approach to trading can be defined in precise mathematical terms, it cannot be established whether an edge exists.

Agree or disagree?