My Core Beliefs

My Core Beliefs, about Trading

Back in the day, I went through a fair number of assignments in corporate America, where I’d need to get two groups of folks communicating together, seeing eye to eye, and working together well.  Often, it made sense to talk about “Core Beliefs” of each group first – that was a hip management technique a while back.  

Whether it’s trendy or not, I think it’d be helpful here now.  Below, I’ve bullet-listed a number of beliefs, so that, without reading ad nauseum, anyone can get a feel for “where I’m coming from” as a trader.   

Of course, these are just the beliefs I’ve come to have.  Others taking different paths, will have come to embrace trading differently than I.  And my opinions are just that, that is, mine, and just opinions.  

I hope this helps.

 

Re:  What’s Really Going On In The Market

  • I don’t really believe, that at any given time, there are “bears” and “bulls” in any market.  I don’t see any evidence that the market is Bears battling Bulls, and I don’t see any value in mentally modeling market action as two camps (Bears v.s Bulls) battling one another.  For example, the phrase, “Bulls defending their position” seems meaningless and silly to me.
  • I believe the market is made up of many, many different populations of traders, all with different trading timeframes, position sizes, stops, targets, and the like.  I’ve never found any value in trying to understand what market participants are thinking.  
  • The only exception:  although I’ve never proven that it can be the genesis for a trading system, I do wonder if predicting the behavior of longer-term (“big money”) players from shorter-term (“retail guys”) could be value.  For example:  when a short term system signals to fade a move at Price X, but a long-term breakout system signals going in the opposite direction – in that case, it seems like playing on the side of “big money” might let you “take money” from the “retail guys.”   Still, I’m not going to invest any time developing a system along that hypothesis.  And, in general, I don’t see any value in personifying various populations of traders.
  • The vast majority of the time, nothing notable is going on in the market.
  • There’s value in pondering the statement, “The most likely level for the market to be in the future, is where it is right now.”  
  • In tiny, low priced, nearly illiquid individual stocks, yes, I’m sure there is market manipulation.  But, I really don’t see market manipulation in broad markets. And I’m committed to never looking for market manipulation.  It “feels” like big players will run your stops.  And it “feels” like big money will pull bids or asks in the few minutes pre-market.  Being the one who feels  manipulated, the “feelings” will eventually become anger, then perhaps even blossom into conspiracy theories.  The energy you spend worrying in that way has a negative outcome and isn’t healthy.  And, even if you get past the feeling of angrily wanting revenge against big money, and calmly develop a system that allows you, being a nimble trader, to “beat big money at their own game,” you’ll probably realize that the same energy, put into developing a more conventional trading system, would have better payback.
  • Well dressed talking heads will calmly and confidently report, at the end of the day, on the various financial news channels, that the market “rose X points amid confidence from automakers about bla bla bla.”  Most all the time, I believe, this is just digestible fluff meant to give folks a story to tell about the day’s market action.  I don’t see it, in the vast, vast majority of cases, being of value trading.  So, I personally don’t want to make use of this sort of commentary.  
  • Having said that, I’ve poured through the data where a trend seemed to be stimulated by news of one (or a few) good earnings announcements in a particular sector, producing an obvious, large, and hours-long trend.  I have found a sector leading others on those days, but I never found a way to profitably trade the phenomena.  
  • I like mentally thinking of every print on time & sales, as a “nudge” to the market, and that, overall, what goes on in the market, overall, is just the mathematical summation of millions of nudges throughout the trading day.  This meshes fundamentally with the essence of what’s going when you use trade data to back-test.  Each print is a “nudge.”  There’s no intermediate abstractions, just millions and millions of transactions to analyze.   
  • The word ‘momentum’ is tricky for me.  I use it all the time, and I’m at my core, a momentum trader.  But, in physics, an object has to have mass and velocity to have momentum.  I think this analogy is not valid for trading.  I think of Price as having no mass.  Let’s imagine that price moved at a good clip, and the day’s range at 2:00 is 1.8x normal.  But if at 2:01, there was no order flow, price would stop dead in its tracks.  It’s an auction system; without order flow, price does not move.  This is a nuanced point, but for me, it’s important, in that I firmly believe a better system will be developed if you just concentrate on predicting future order flow, rather than focusing on the Newtonian motion of Price.

Re: Indicators, Patterns, Pivot Points, Day Ranges, WAP, and Support / Resistance

  • I think indicators are great, and I think there are some that have real value. But I see new traders often wanting some system, perhaps with a single “magic” indicator, that is so straightforward that it’s easy to pick up, internalize, believe in, and trade.  If you read everything that Mr. Internet has to say about indicators, you’ll get a weird mix of worthless noise, some marginally valuable insights, and a few insanely complex well designed indicators.  For me, as I new trader, I wouldn’t be able to discern what is what.  And even now, I really don’t spend any significant time checking out new indicators.  So, for me, I “like” indicators in general, but I don’t really use any at all.
  • I believe in trading patterns.  Big time.  Super big time.  They make sense to me.  For example, I can imagine, after a long tight flat trading range, there will be stops just outside the range, and the order flow created by hitting those stops will have a cascading effect.  And I firmly, confidently believe certain price patterns presage increased order flow at certain price points.
  • I’ve never found calculated pivot points to be of value.  I can believe that in the old days, when human floor traders had to calculate and remember certain levels in their heads, pivot points helped, and I can imagine that they were useful in trading back then.  But I’ve never found any way to incorporate them into a system.   There are several ways to calculate pivot points; I suspect some are more modern than others.  None help me.   
  • I do use the prior day’s VWAP and an insanely complex so-far-today, time-weighted VWAP.  One component of my bread and butter TF system is an OS/OB subsystem which uses these two VWAPs.   (Having said that, I honestly don’t know why they work.  I do know that at one time, I have known traders who are bonused on their day’s executions being more than X away from whatever the VWAP ended up being that day.  And, it seems to me, that fund managers would still want to compare their various traders against one another based on something like VWAP.  And, fundamentally, all systems need a reference Nexus by which to gauge whether the current price presages some future movement.  I have a pet theory that system developers in all the big firms have come to use very similar nexuses, and that the formulas aren’t all that complex, perhaps just the prior day’s VWAP. )
  • Understanding support and resistance, I’m absolutely sure, is really valuable.  I’ve checked out many ways of calculating support and resistance, but, to be honest, I’ve never been able to find a calculated S/R level that is precise enough to be valuable.  You can “see” things happen on a price chart when price gets close to a support or resistance line, but trader’s need a precise level to trigger an entry, and I’ve never been able to find a S/R calculation that is helpful in that respect.  
  • However, if you consider the actual, real-life High or Low of some prior period (say the prior day, as support / resistance,) than factoring that S/R into a trading system is, I believe, can be wise.  I personally believe that the prior day’s High and Low are *attractive* forces in the very short time period when price has gotten close, which is the exact opposite of what most traders believe.  I believe S/R lines are significant “repulsive” forces only if they’ve been violated by a certain amount, and a pullback occurs (many traders agree.)   

Re: Stops

  • If you’re developing a system with stops which are large relative to the targets, the system’s overall profitability won’t be significantly affected when you alter the stops to be slightly larger or smaller.  This can be valuable if you’re considering developing a system that would slightly alter the calculated stop excursion, when the price at which the stop would have be placed, is near a S/R level.
  • Trading a system with very small targets relative to the stops (high win rate) will “feel” good, to the degree that you might fool yourself into thinking it’s all working better than it is.  
  • Trading a system with large targets relative to the stops (that is, with low win rates) might “feel” much worse than it really is.
  • Simple trailing stops, especially tight trailing stops, has never yielded good results in any of my back-testing, so I’m generally in the camp of folks who don’t believe in trailing stops.  Although I haven’t incorporated it into any system, I’m intrigued by trailing very large stops, and adjusting the stop excursion as function of time remaining in the trading day.
  • Really intelligent adaptive stops, based on very recent ranges, in general, fascinate me.  And I believe, based more on faith than rigorous back-testing, hold a lot of promise.  I’d love to learn what others are doing in this area, particularly in systems tested on random entries.

Re: Commentators, Financial News Channels, And The Like

  • If they told you uninteresting boring information, you’d stop watching & their advertisers would stop paying them.  There’s a lot of motivation to jazz things up.
  • There’s value in asking yourself why people take interviews.  
  • The information on which one can trade, and which gives an edge, is not exciting.  It’s boring numbers, probabilities, and doesn’t promise outsize exciting gains.  

Re: The Effect Of News

  • In general, what I can see, the market gyrates a bit after news, and then continues doing whatever it was doing before the news release.  I believe it’s rare for news to make the overall broad market switch direction, or “take off” & start trending strongly.  
  • What is news?  The definition of the word, literally, illustrates the frustration you’ll have trading news.  Is it “big news” “”with legs?”  It’s a very subjective call.   
  • I’ve witnessed people making jaw-dropping amounts of money trading the news, but in each and every case, they had their subject matter thoroughly researched well ahead of time, and had exact, actionable rules for entry and exits.  Witness the overnight market when Trump’s results were coming in – folks who just jumped in spur-of-the-moment might have made some money, or not.  The ones that cleaned up knew exactly what order the state’s results would come in, which news outlets experts to listen to, which state results would trigger an entry, what event (or time) would trigger the exit, etc. etc.

Re: System Development

  • If you’re developing a single system to add to your pre-existing arsenal of systems, it makes more cents to focus on a high PF, more than developing a system that trades often.   However, if you’re developing your very first system, then perhaps trade frequency is important – but you’d have to examine why you’re wanting the higher trade frequency.

Re:  Trading Psychology

  • I think more traders wash out because of things that can be fixed in their psychology, than wash out because of things that can be fixed in their trading systems.
  • The human brain, on some level, wants the reinforcement of being right much more than being wrong, which negatively affects success in trading.
  • Studying gambling psychology, and the types / frequencies of psychological rewards that keep a person addicted to gambling, is valuable in that it, among other things, makes us resist the temptation to trade in a way that “feels good.”  

Re: Back-testing

  • In reality, when you’re developing a system, you’ll contaminate your out-of-sample data, whether you earnestly intend to do so or not.   Once it’s contaminated, you’ll have a hard time trusting that the system you develop will be a quality system.
  • I feel best with one in-sample dataset, and 2 out-of-sample.  I’ve played with a lot of ways of separating my data into in-sample and out-of-sample, and found one that (I know it sounds unbelievable) produces almost identical results for non-overfit systems for in-sample and out-of-sample.  I hold the details close, sorry. Trade secrets, you know.
  • Separating in-sample data from out-of-sample data based on calendar date is a recipe for disaster, particularly if your entire data range isn’t long.

Re:  Being Happy As A Trader

  • When you’re appraising your own success as a trader, daily results don’t matter.  Weekly results don’t matter.  Monthly results barely matter.  The only thing that matters, is your equity curve when you look back over at least the last 12 months.
  • By and large, trading is boring.  
  • By and large, there is very little connection between how hard you work, and how much money you make, in the short term.  And in reality, a lot of your returns can be due to luck.  It’s hard to stay motivated under those conditions.
  • Trading is a job that’s hard to talk about, to friends and family.  It took me a long time to come to terms with this, and, for me personally, it really affected how happy I was in the career.  If you’re at all like me, you’ll want to craft “story lines” to tell various groups of friends, family, etc.
  • Your drawdowns WILL affect your happiness, and they WILL affect those around you.  

Re:  Leverage

  • The stated returns of any system intrinsically factor in the amount of leverage.  So, at least for futures trading, the performance numbers you see quoted all over Internet Land, are hard to compare.  
  • Leverage is a beautiful thing.  A glorious, wonderful thing.  If your system has a real edge & really works.  If your system doesn’t have an edge, or if you’re trading unsuccessfully flying by the seat of your pants, then leverage is an ugly, inglorious, horrible thing.  

Re:  How To Get Started In Trading

  • There is no substitute for experiencing the emotional highs and lows of actual trades.
  • You can get the experience of riding trades, even without trading large size.
  • For many people, it’s initially more important to vet whether you’ll be able to handle the emotional highs & lows, than it is to spend time developing a perfect trading system.

Re:  What you read about trading in Internet-Land

  • The vast majority of folks selling trading advice aren’t providing much, if any, value.
  • The best independent traders, who actually make significant money year in & year out, I believe, tend to have become reclusive.
  • Really good traders generally have much better options, than to sell advice, retail, to new traders, on the internet.

Re: Subjective Trading v.s. Strictly Following System Rules

  • I personally believe the absolute best course for me, is to eliminate all subjective decisions from my trading.  My goal is to make my trading completely mechanical.  
  • Other than adjusting stops around news & channel break-outs, I’ve never personally witnessed anyone increase their earnings significantly, using discretion to move targets and stops, once in a trade.  
  • It seems to me that if one has a mature idea about what to do, in adjusting stops and targets once in a trade, that that idea could be, and should be, backtested, and if valuable, codified into the actual trading system.  

Re:  What personality type ends up being successful traders

  • I’ve seen all sorts of folks succeed.  I don’t think there is any one “personality type” that is particularly well suited for trading.
  • Folks who are prone to fooling themselves, tend not to succeed at trading.

Re:  Diversification

  • The word ‘diversification’ is almost always used referencing swing or long-term trading, but similar benefits can be had, by diversifying your short term trading.   The big benefit is smoothing your equity curve, which has myriad advantages “smoothing” your emotional highs and lows while riding run-ups and draw-downs.   
  • I’ve done the math.  A lot of methods work, to diversify, even for the intra-day trader.   Generally, any time you add a second, then a third, then a fourth trading system to your arsenal, you’ll see improvement in the smoothness of your equity curve.
  • I actually believe, and I’ve proven it to myself with several systems, that you can “diversify” by trading a few variants of a single trading system.  This is heresy to a lot of traders, and it was unintuitive to me at first.  But I’ve run the numbers many times.  It’s hard to believe at first, but if you take one working system, with its back-tested targets, stops, and time stops, then alter those targets & stops to create a second and then a third variant of the original system, then trade all three systems, your equity curve will smoothen out.   Originally, I would have thought that doing something like this would heighten the run-ups and draw-downs, but in every case in which I’ve tested it, it doesn’t, and in fact significantly smooths things out.  So, the lesson I’ve learned, is that the benefits of diversification can be had without the need to develop a completely different new system with anti-correlated returns.   This is perhaps the most unintuitive way to diversify, but perhaps the easiest if you’re trading only one system.
  • More conventional ways to get the benefits of diversification are:  trade a valid working system, developed for a particular market, on additional markets (ex:  trade a TF system on ES or NQ), develop a complete new system based on different underlying phenomena and which has little correlation to your other systems’ returns, modifying a single system based on a single trigger to be based instead on letting multiple subsystems “vote” on the trigger.   
  • The most common method talked about, for swing and longer term traders, to obtain the benefits of diversification is likely trading completely different sectors & markets.  The logic I presume is that different sectors go through different economic cycles, and the different market conditions exist in different markets – so results should have little correlation.   This wisdom might be wonderful for swing traders, but I’m glad I didn’t listen to it, as an intra-day trader.  I would have spent eons trying to become expert in multiple markets.  

My apologies if some of the language in these bullet points seems jargon-y.  And, also, if some points are hard to understand.  My intent was to provide a rapid-fire list of terse points.  I can explain individual concepts in longer, easy to read posts, if & as folks ask.

Happy Trading!

 – Andy  

 

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