6 replies to this topic

[NAV]

Perma bulls and perma bears don't run into this problem, given their unidirectional bias. Traders trading both the ways, will certainly understand what i am going to talk about. Taking a position in the market requires a bias. Without a bias, either long or short, one cannot pull the trigger. That bias might be a product of one's instinct or one's work or the market price action itself. Let me give an example of a bear trend. The reverse of what is described below happens in a bull trend. Now let's assume that the market is moving lower and we come to the trading day with a bearish bias. The market reverses on us and gives us a buy signal. If we were all robots, one could just close the short and go long. But the "enemy" within ourselves, won't let this happen so easily. There are multitude of forces in play here. Let's say, after the prior day's market close , my work says "Bearish". We as humans subconsiouly filter out, especially news, that reinforces our market view. I don't need to mention about folks at traders-talk posting fundamental news items (bullish or bearish) based on the position they have taken. We visit those websites/message boards/analysts blogs/market advisors that reinforce our view. Now everyone we love and respect are of the same opinion and the bias only gets stonger as we enter the trading day. The darn market reverses on us. Typical response at this stage is that "The market is wrong". "The market is wrong" manifests itself in many ways. Now if one doesn't have stops, the response would be "This is a fakeout. I will wait". Now if one had stops and got stoped out, his response would be "That was a fakeout, i will reshort again". One does not bother getting stopped out multiple times, in the direction of the bias the trader came into the trading day. But "Stop and reverse", heck no ! That's the pschologically most difficult thing to do. Let's assume for a second that trader did a stop and reverse and then the market turns back down again, in direction of his bias. We all know, that's the day, we need lots of adult beverages . Those wounds of double whipsaws are so powerful that a trader will never repeat that mistake again in the future, thinking that he has learn't a lesson. If one looks at this phenomenon objectively, those kind of double whipsaws are a low odds phenomenon and the odds of having a sucessful trade by stop and reverse is way higher than our subjective estimates. The other issue is that, it takes some time to develop a bias again in the opposite direction, once we get stopped out. So again the typical response here is "Will evaluate after the market close, if this move was genuine or not". Guess what ? - the market closes at the highs. Now the call of countertrend says, "Go short". Let's assume, instead of a reversal, the market gaps-up and keeps going up. Now the "call of the countertrend" keeps getting stronger and stronger, withholding us from partcipating in what's happening and waiting patiently for what we are hoping for. That's how big trends/opportunites in the markets are lost by many IMO. The biggest sucker play in the markets are what is very comfortable. When the market reverses on us, the most comfortable position is to get stopped out as opposed to the uncomfortable "stop and reverse". Then the "enemy" in us rationalizes that we did a great thing by cutting losses and being out of the market. Let's assume that the market reverses on us, and we get stopped out for profits. Then there exists a more stronger rationale for not "stopping and reversing", for that has a probability of whipsawing and taking away the profits. Now if the market rallies strongly over the next few days, again the enemy in us "the countertrender" rears it's ugly head. A Plethora of psychological forces prevent us from doing this stop and reverse which is so easy on paper but so difficuly in reality. So, it's no wonder a lot of traders turn into bystanders watching the spectacle, once the market reverses on them. I have been myself struggling with this for years now. One of the solution to this phenomenon is system trading. The problem with this approach is when the market is in a tight congestion/consolidation zone, the whipsaws could completely shatter one's confidence in the system. Developing rules to recognize that and be out of such markets and finding opportunites in other markets is a solution. With some studies i have done, the probability of more than one whipsaw in a day increases as one moves below 120-min timeframe. So i would do the "stop and reverse" only when i am trading on timeframes of 120-min or higher. I tweaked my system a little bit to allow me to daringly perform "stop and reverse" and i will try to robotically execute that for a while and see how it goes. I also tuned my system to work with "Cash" markets as opposes to "Futures". My indicators were tuned to 8:00 Est - 4:15 Est for Futures market. I had to tune them for cash markets for 9:30 - 4:00 Est. I will also start hourly swing trading on two ETFs XLE and GDX to begin with. I will post some trades real-time with real money and see how it goes. I won't be posting my stops, but will post exits in real-time. Wish me good luck

Edited by NAV, 24 June 2007 - 11:03 AM.

[OEXCHAOS]

Good stuff, NAV. I might add that I THINK that the use of sentiment might, at least at some points, allow for greater ease in executing the "stop and reverse". Though I think context there would be key. It might be too much noise for your time frame. Then again, Volume might also be a helpful confirmation, too, for the SAR. Mark

[traderpaul]

NAV, We all fall into that bias trap.....Do you need a bias to trade?.....Can't use the same indicators to trade because the market players are not the same......Can't judge today's action based on yesterday's action.....If you post your stop or not does not matter.....Does not take much to figure out.....a tick or two below support?

[NAV]

Can't use the same indicators to trade because the market players are not the same......

Not true. Momentum trading has been the same for centuries. Actors have changed, but the concepts are the same. For instance, program trading has created some noise in what otherwise used to be a smooth trend. That does not change how we use the indicators, but how we execute.

Can't judge today's action based on yesterday's action.....

True

If you post your stop or not does not matter.....Does not take much to figure out.....a tick or two below support?

Nah, that's too simple. I use my own pivots (not the floor trader pivots).

It might be too much noise for your time frame.

Mark

Mark,

I did some analysis over the weekend. Contrary to what one would think, the noise factor was surprisingly low when i moved to 120-min charts or Daily and higher timeframe charts. The past was too predictable That's why i want to test it in real world and see how it goes.

Edited by NAV, 24 June 2007 - 12:28 PM.

[jmicou]

Interesting read.

[slatedrake]

Good stuff NAV, thanks for sharing. Looking forward to seeing how you do with the new system.


My thoughts below -speculating that we may see one of the complex bottoms that you've described in the past. 2 hour chart with 13, 5 slow stoch.






Or perhaps a more realistic resolution viewed on the SPY.

[arbman]

Can't use the same indicators to trade because the market players are not the same

The large players are always the same, the small players go away over time, but the one who manages to take your money everytime is the one you keep seeing everyday, that guy is not going away unlike all the other suckers...