ANYONE WHO WILL TRY TO MAKE MONEY SOLELY BY TRADING AND SUCH SYSTEMS OF TRANSACTIONS SHOULD BE AWARE THAT THERE IS A VERY POWERFUL AND ALMOST UNBEATABLE COLLECTIVE WILL SO AS NOT TO SUCCEED! NO-ONE WANTS PEOPLE TO QUITE THEIR JOBS AND MAKE MONEY THIS WAY AS IT IS SOMEHOW PARASITIC. IT IS IN SOME SENSE UNETHICAL AS A PRACTICE ENFORCEABLE TO THE MAJORITY. AND OF COURSE NEITHER THOSE WHO HAVE LARGE CAPITAL WANT THAT A MAJORITY WILL MAKE MONEY THIS WAY, AS THEY WOULD PREFER THAT THEY WORK IN THEIR COMPANIES FOR THEM. ONLY IN SPECIAL CONTINGENCIES AND SITUATIONS SOMETHING LIKE THIS WOULD BE ETHICAL. AND IN PARTICULAR A HIGHER MORALITY THAT WOULD SUPPORT SUCH A PRACTICE, WOULD BE PROVABLE WITH COLLECTIVELY BENEVOLENT DEEDS FROM A POSSIBLE SURPLUS OF SUCH MONEY!
Why most manual traders fail in creating a long term monthly income starting from small amounts of money. A most difficult path to financial freedom.
There are plenty many reasons, of course that would make manual trader to fail in trying systematic profits in capital markets, stock exchanges, forex etc. The fact is nevertheless that the majority of traders fail in the long run when trying systematic profits that from little only money would create fast capitalization and a reliable monthly income, and this is exactly what the social system wants!
it is not probable that automated trading would do so (see also post 6) . There is no serious social will to develop software for automated trading for fast capitalization and income! On the contrary the existing trading platforms, the last two decades still have serious drawbacks. The possible development of a sufficient reliable software that would create in a fast way capitalization starting from very few money, and thus creating a monthly income for people ,even if it is possible, is at a deeper consideration, undesired from the economic system, itself which wants people to work for the business of those who have the capital, and thus control them based on their need to survive. If such a software was to be developed, then this would give access to financial freedom to the majority, which we know is not in the intentions of the capital oligarchy than controls the economic system. And therefore a trader is left alone to develop such a system, which sincerely speaking is not really feasible, by one person only. Neither a collective open source volunteered development of such a software is really supported by the financial system.
Therefore we go back to simplicity and simple only mainly manual practices that a single trader can do, that although simple are not probable for the majority of the people!
0) The reasons of failure in trading according to their power of effect may be classified to
0.1) SOCIAL REASONS The possible development of a sufficient reliable trading system, manual or automated that would create in a fast way capitalization starting from very few money, and thus creating a monthly income for people ,even if it is possible, is at a deeper consideration, undesired from the economic system itself! As the economic system wants people to work for the business of those who have the capital, and thus control them based on their need to survive. If such a software or manual trading system was to be developed and be easy to apply by the majority of the people, then this would give access to financial freedom to the majority (something like a guaranteed minimum income or subsidy for survival) , which we know is not in the intentions of the capital oligarchy than controls the economic system. The awareness that the economic system is not much favorable for such possibilities is apparent e.g. in the writings of Bill Williams who has succeed to do it as "The alligator" and some times as "The gremlin." It is the old idea that the treasure (here of financial freedom) is guarded my a fierce and almost unbeatable dragon. A friend of mine, who is a professor and at the same time a successful trader, used to tell me that wanting to trade at the beginning is like wanting to cross a field full of mines without any tool to detect them. Some how one could say that this is the usual situation with all businessmen that want to create a capital. Nevertheless , judging from the scarcity of individuals who have succeeded in creating a reliable long term income, starting with a small amount of money though capitalization in the capital markets, compared to those that did it with ordinary real business, we conclude this this here is by far more difficult. On the other hand the fact that such a trading is after all capitalization as in many other types of business, is also an encouraging thought , because although business with successful and fast capitalization are not easy, they are not also impossible.
0.2) The intellectual reasons. Not statistical valid thinking about random quantities in the markets, and not aligning with the scientific collective consensus, that may allow them to utilize the collective work of many thinkers. Many traders do not know how to think about random or half random quantities, unless they are educated in statistics and furthermore are willing to apply the statistical scientific mode of thinking. At this point we may also remark on the other hand ,that the science of applied statistics has not created a collective will to create fast capitalization in the capital markets, that would create income starting with a small amount of funds. In fact most scientists might suggest to avoid it. Therefore at this any trader is in his own. The successful trading is based on appropriate successful beliefs, and new habits of beliefs, and such a system of beliefs is rarely found as rare are the ones that have succeeded. But the scientific consensus of valid statistics, may hep on that.
0.3) Psychological reasons. This is a very strong factor of failing, as most people are emotionally oriented. The successful trading as we said, is based on appropriate successful beliefs and habits of new beliefs, and such a system of beliefs is rarely found as rare are the ones that have succeeded systematically in trading. As the beliefs of a trader are directly affected by the impersonal beliefs, or beliefs of people of their environment, traders face a hard time creating the right beliefs and therefore the right emotions about trading. Furthermore the false beliefs of the majority of traders that are losing, either in their environment or even in the internet, is highly probable that will affect them, and make them lose too. Such false collective beliefs of the majority of the losing traders are often impersonal and written in many books of technical analysis, and have become so strong that the trader that joints and learns from the collective of other traders cannot but become a victim of them. In addition to that the close human environment of the trader may be hostile and obstructing to the desire of the trader to succeed and so as to allow the trader to have the successful beliefs, even if the trader never talks about them. It may take years for some people to change the emotional and belief habits as correlated with their open positions and the market moves. E.g. too many traders refuse to control the loss of a trade, at the worst case scenario for each trade, to be under 6% or under 2% , even when the percentage of their winning trades is as low as 51%-56%. They copy buy-and-hold investor that when they lose, they do not sell but they wait for the market to change direction. They find it very restrictive to bound loses to only 2% or 3%, and are based too much on the belief of their success in forecasting. They claim that by putting a tight stop loss, they will be losing almost always. There are many other examples where their habits of feelings and beliefs lead them systematically to loses. Everybody knows how difficult is to change deeply rooted habits and beliefs. Just ask systematic smokers to give up smoking, or fat people to lose weight and become slim and one will also understand why it is difficult to practice successful trading. The more personal the trader takes his trading at the beginning (and this is the case because they are dealing usually with their own money) the more difficult it is to make it successful! Some times their emotional habits are so inverse, that when they discover the trading that is winning in the long run,they discover also that it is not fun at all for every single trade, and emotionally it is not even pleasant to proceed (apart from the final long term profit) ! The awareness that our sense of psychology and the world is often against us, is apparent e.g. in the writings of Bill Williams, who has succeed to do be a winning trader, under the terms e.g. like "The gremlins, the little devils".
0.4) Physical activities reasons. Trading which is intraday, requires many hours during the day, and this is on often feasible to working people. Even daily trading which requires not more than half an hour per day, is already a strict demand of consistency, which for many people is not feasible. Furthermore requirements of sufficient good computer and internet support and even , some funds to start , while at the same time one has a sufficient permanent income from a daily job is not the privilege of everybody.
In my opinion it is not that to learn the basics of technical analysis or statistics is difficult. There are other unexpected reasons too. I enumerate in my opinion some basic 4 of the reasons in order of significance apart from those mentioned hitherto.
Why most manual traders fail in creating a long term monthly income starting from small amounts of money. A most difficult path to financial freedom.
There are plenty many reasons, of course that would make manual trader to fail in trying systematic profits in capital markets, stock exchanges, forex etc. The fact is nevertheless that the majority of traders fail in the long run when trying systematic profits that from little only money would create fast capitalization and a reliable monthly income, and this is exactly what the social system wants!
it is not probable that automated trading would do so (see also post 6) . There is no serious social will to develop software for automated trading for fast capitalization and income! On the contrary the existing trading platforms, the last two decades still have serious drawbacks. The possible development of a sufficient reliable software that would create in a fast way capitalization starting from very few money, and thus creating a monthly income for people ,even if it is possible, is at a deeper consideration, undesired from the economic system, itself which wants people to work for the business of those who have the capital, and thus control them based on their need to survive. If such a software was to be developed, then this would give access to financial freedom to the majority, which we know is not in the intentions of the capital oligarchy than controls the economic system. And therefore a trader is left alone to develop such a system, which sincerely speaking is not really feasible, by one person only. Neither a collective open source volunteered development of such a software is really supported by the financial system.
Therefore we go back to simplicity and simple only mainly manual practices that a single trader can do, that although simple are not probable for the majority of the people!
0) The reasons of failure in trading according to their power of effect may be classified to
0.1) SOCIAL REASONS The possible development of a sufficient reliable trading system, manual or automated that would create in a fast way capitalization starting from very few money, and thus creating a monthly income for people ,even if it is possible, is at a deeper consideration, undesired from the economic system itself! As the economic system wants people to work for the business of those who have the capital, and thus control them based on their need to survive. If such a software or manual trading system was to be developed and be easy to apply by the majority of the people, then this would give access to financial freedom to the majority (something like a guaranteed minimum income or subsidy for survival) , which we know is not in the intentions of the capital oligarchy than controls the economic system. The awareness that the economic system is not much favorable for such possibilities is apparent e.g. in the writings of Bill Williams who has succeed to do it as "The alligator" and some times as "The gremlin." It is the old idea that the treasure (here of financial freedom) is guarded my a fierce and almost unbeatable dragon. A friend of mine, who is a professor and at the same time a successful trader, used to tell me that wanting to trade at the beginning is like wanting to cross a field full of mines without any tool to detect them. Some how one could say that this is the usual situation with all businessmen that want to create a capital. Nevertheless , judging from the scarcity of individuals who have succeeded in creating a reliable long term income, starting with a small amount of money though capitalization in the capital markets, compared to those that did it with ordinary real business, we conclude this this here is by far more difficult. On the other hand the fact that such a trading is after all capitalization as in many other types of business, is also an encouraging thought , because although business with successful and fast capitalization are not easy, they are not also impossible.
0.2) The intellectual reasons. Not statistical valid thinking about random quantities in the markets, and not aligning with the scientific collective consensus, that may allow them to utilize the collective work of many thinkers. Many traders do not know how to think about random or half random quantities, unless they are educated in statistics and furthermore are willing to apply the statistical scientific mode of thinking. At this point we may also remark on the other hand ,that the science of applied statistics has not created a collective will to create fast capitalization in the capital markets, that would create income starting with a small amount of funds. In fact most scientists might suggest to avoid it. Therefore at this any trader is in his own. The successful trading is based on appropriate successful beliefs, and new habits of beliefs, and such a system of beliefs is rarely found as rare are the ones that have succeeded. But the scientific consensus of valid statistics, may hep on that.
0.3) Psychological reasons. This is a very strong factor of failing, as most people are emotionally oriented. The successful trading as we said, is based on appropriate successful beliefs and habits of new beliefs, and such a system of beliefs is rarely found as rare are the ones that have succeeded systematically in trading. As the beliefs of a trader are directly affected by the impersonal beliefs, or beliefs of people of their environment, traders face a hard time creating the right beliefs and therefore the right emotions about trading. Furthermore the false beliefs of the majority of traders that are losing, either in their environment or even in the internet, is highly probable that will affect them, and make them lose too. Such false collective beliefs of the majority of the losing traders are often impersonal and written in many books of technical analysis, and have become so strong that the trader that joints and learns from the collective of other traders cannot but become a victim of them. In addition to that the close human environment of the trader may be hostile and obstructing to the desire of the trader to succeed and so as to allow the trader to have the successful beliefs, even if the trader never talks about them. It may take years for some people to change the emotional and belief habits as correlated with their open positions and the market moves. E.g. too many traders refuse to control the loss of a trade, at the worst case scenario for each trade, to be under 6% or under 2% , even when the percentage of their winning trades is as low as 51%-56%. They copy buy-and-hold investor that when they lose, they do not sell but they wait for the market to change direction. They find it very restrictive to bound loses to only 2% or 3%, and are based too much on the belief of their success in forecasting. They claim that by putting a tight stop loss, they will be losing almost always. There are many other examples where their habits of feelings and beliefs lead them systematically to loses. Everybody knows how difficult is to change deeply rooted habits and beliefs. Just ask systematic smokers to give up smoking, or fat people to lose weight and become slim and one will also understand why it is difficult to practice successful trading. The more personal the trader takes his trading at the beginning (and this is the case because they are dealing usually with their own money) the more difficult it is to make it successful! Some times their emotional habits are so inverse, that when they discover the trading that is winning in the long run,they discover also that it is not fun at all for every single trade, and emotionally it is not even pleasant to proceed (apart from the final long term profit) ! The awareness that our sense of psychology and the world is often against us, is apparent e.g. in the writings of Bill Williams, who has succeed to do be a winning trader, under the terms e.g. like "The gremlins, the little devils".
0.4) Physical activities reasons. Trading which is intraday, requires many hours during the day, and this is on often feasible to working people. Even daily trading which requires not more than half an hour per day, is already a strict demand of consistency, which for many people is not feasible. Furthermore requirements of sufficient good computer and internet support and even , some funds to start , while at the same time one has a sufficient permanent income from a daily job is not the privilege of everybody.
In my opinion it is not that to learn the basics of technical analysis or statistics is difficult. There are other unexpected reasons too. I enumerate in my opinion some basic 4 of the reasons in order of significance apart from those mentioned hitherto.
1) One fundamental reasons is the brokers
and the industry of trading itself. The brokers are interested for the profit
of the transactions costs, or Bid-Ask profit, at the trading of traders which
is independent to losing or gaining of the trader. Thus they push them to trade
often, more often that it is necessary, which leads the traders to failure.
They also corrupt them with trading competitions, where the winner is whoever
will gain a usually extravagant rate of return within a fixed amount of time.
This usually is a random effect, and the rate of return is ot at all the
one that one can have in a systematic way. Thus the traders consider themselves
a failure if the succeed in general a lower rate of return, which might be the
normal and the one that they should conduct. So they push themselves to gain
that very high rate of return, which in practice impossible to sustain in
a systematic way, thus they crash their account sooner or later. The brokers
and other interested parts of the trading industry advertise very high
unsustainable rates of return to attract customers and so a vicious cycle of
trading failure is created.
What is the normal sustainable rate of return of succseful trading. According to B. Williams, who has applied seasonal trading, with pyramiding (see post 61) it can raech at the maximum a 15% annually (and after a leverage between 20-100 if derivatives or CFD's are traded, it will be about 300% annually, as Bill Williams reports). And a good intraday automated system will have sustainable monthly rate of return say for 5 years, of about 0,02%-0.1% (and after a leverage of 100 if derivatives or CFD's, or forex are traded, it will be about 10% monthly, at a maximum draw down of 20%-30%). Now these values should not be considered high, if e.g. we compare them with the rate of return that a bank is making for example from a credit card, which is with an annual rate 10%-19%, but after the capital structure leverage of the banks which is 10 will be 100%-190% annually (and similarly for other banking products).
What is the normal sustainable rate of return of succseful trading. According to B. Williams, who has applied seasonal trading, with pyramiding (see post 61) it can raech at the maximum a 15% annually (and after a leverage between 20-100 if derivatives or CFD's are traded, it will be about 300% annually, as Bill Williams reports). And a good intraday automated system will have sustainable monthly rate of return say for 5 years, of about 0,02%-0.1% (and after a leverage of 100 if derivatives or CFD's, or forex are traded, it will be about 10% monthly, at a maximum draw down of 20%-30%). Now these values should not be considered high, if e.g. we compare them with the rate of return that a bank is making for example from a credit card, which is with an annual rate 10%-19%, but after the capital structure leverage of the banks which is 10 will be 100%-190% annually (and similarly for other banking products).
We should understand also that there is an indirect but everywhere existing hidden will in the impersonal economic system which wants the financially small to lose, and the financially big to gain. It might be asked why one should not trade manually for example in 4-hours candles, and have the remarkable results of doubling the funds each month, as it is proved in the published results by the trading of the author himself at the end of the post 44. The reason is that this remarkable doubling in one month in manual trading,
performed on 4-hours charts, is not something that can be done continuously. In
order to have all these intraday fluctuations more or less predictable, you
must look in the monitor every 4-hours, and have in your mind the evolution of
the prices during the checking and this pushes almost all other daily activities
aside. In addition this focus and concentration in the markets almost all the
day, fills you with a rather toxic and negative energy which is not good for
the body and the health. The situation is radically different for manual trading on daily charts with 15-20 minutes per day looking in the charts and seasonal trends. On the other hand if it is to code an automated
trading program, this has by far worse pattern recognition than the manual
pattern recognition and the current state of the art of technology does not
allow but a small fraction only of the manual trading doubling (1MD , where
MD=Monthly Doubling)
2) A second very significant reason in
the same direction, and with the same way of failure, is that it is not
only the brokers and the industry that push the traders to extravagant
unsustainable rates of return, but also the need of survival of the traders
does too. Many traders are in an condition of unemployment, or with very low
income of partial employment, and having some deposits in the bank , force
themselves to trading for a living which is not possible with the amounts of
funds they have in the bank, The result is a very risky trading, so as to
attain very high rates of return, and thus a survival income, which crushes
their account. In some cases the traders borrow from banks, and the payments
that the banks require are by far higher that the systematic income it is
possible to succeed in the markets with such funds, which leads again to
crashing the account.
3) A third reason is that the traders
thing that intraday manual trading is radically more profitable than day-to-day
trading where only once per day (e.g. for 15 minutes) a control and a decision
is taken. They think so because they estimate that profits will increase in
direct analogy to the shorter time scale they will use. But it is not so
at least for two reasons. a) The shorter the scale the more the “noise” (=non
profitable and non-tradable fluctuations of the markets due to
unpredictability) b) In intraday manual trading, one has to spend many
hours in front of the screen as if he was working at office while in day-to-day
trading only 15-20 minutes per day, while he may have a normal work and normal
day with other non-trading activities. The truth is that for manual trading the
golden scale is the seasonal cycles (2-6 months) as sub-cycles of a 5.55
Kitchin cycle or 22.2 years global climate cycle (Kuznet cycle). Of
course by programming automate trading it is possible to trade intra-day without
spending human time. But the rate of return of such automated intraday trading
is not higher than the seasonal manual trading if in the latter, the human
pattern recognition is involved which is superior to automated trading pattern
recognition. Some sellers of automated trading show the results of their
programs for a limited time intervals (some months only) which appear
very high so as to sell or rent them. But sooner or latter such automated
trading had also significant failures so that in the long run (5 years or more)
have less rate of return that the manual seasonal trading.
The way that unpredictability increases as the time scale becomes shorter, seems to be a result of the law of inequality. The very shape of the Pareto distribution could be used to present how unpredictability increases when the time sale decreases. In the next diagram of the Pareto didstribution, the x-axis is the time scale, and the y-axis is the unpredictability. A hint of why this is so is the next: A wave in shorter time scale takes less volumes of transactions to be shaped. And the volumes of transactions, follow the pareto or power distribution. The less the volumes the smaler the population (of transactions but also of traders) the less the predictability and stability.
The way that unpredictability increases as the time scale becomes shorter, seems to be a result of the law of inequality. The very shape of the Pareto distribution could be used to present how unpredictability increases when the time sale decreases. In the next diagram of the Pareto didstribution, the x-axis is the time scale, and the y-axis is the unpredictability. A hint of why this is so is the next: A wave in shorter time scale takes less volumes of transactions to be shaped. And the volumes of transactions, follow the pareto or power distribution. The less the volumes the smaler the population (of transactions but also of traders) the less the predictability and stability.
4) Many traders apply only technical
analysis, while they avoid fundamental analysis of the companies or of
the markets in general, and avoid news, as they consider them shifting
sand. They are right in many cases. But if one has to obtain the maximum of the
best results then all available relevant information should be used. For
example in choosing a season trend, it is better to confirm it with
fundamental analysis (of the enterprise, the sector or macro-economic
fundamentals) and news, rather than mere technical analysis indications.
There are 3 contexts of laws required in trading . The appropriate LAWS OF THINKING for trading, the appropriate LAWS OF FEELINGS for trading , and the appropriate LAWS OF ACTIONS for trading.
The Successful trading is based according to these three laws on
1) POWER OF COLLECTIVE SCIENTIFIC THINKING: A GREAT AND SIMPLE SCIENTIFIC PERCEPTION OF THE FUNCTION OF THE ECONOMY THROUGH SOME GLOBAL STATISTICAL LAW. E.g. The law of Universal attraction in economy: that big money attracts more big money in the capital markets, and this by the balance of demand and supply makes securities indexes of the companies , that are indeed the big money, to have mainly stable ascending trend, whenever one can observe such one. Valid statistical deductions can be obtained with simple statistical hypotheses tests about the existence or not of a trend, with sample size half the period of a dominating cycle). (STABLE GREAT SCIENTIFIC THOUGHT-FORM OR BELIEF FACTOR IN TRADING. )
2) POWER OF COLLECTIVE PSYCHOLOGY: A LINK WITH THE POSITIVE COLLECTIVE PSYCHOLOGY.(E.g. that the growth of security indexes also represent the optimism of the growth and success of real business of the involved companies. And we bet or trade only on the ascension of the index, whenever an ascending trend is observable). (STABLE GREAT POSITIVE COLLECTIVE EMOTIONAL OR PSYCHOLOGICAL FACTOR IN TRADING. )
3) POWER OF INDIVIDUALS SIMPLE , CONSISTENT AND EASY TO CONDUCT PRACTICE. (e.g. a trading system with about 80% success rate that utilizes essentially only one indicator in 3 time frames, simple risk management rules of stop loss, take profit, trailing and escalation, and time spent not more than 20 minutes per day. In this way there are not many opportunities of human errors in the conduction of the trading practice. Failed trades are attributed to the randomness and are not to blame the trader). (STABLE SIMPLE AND EASY PRACTICAL FACTOR IN TRADING)
We may make the metaphor that successful trading is the ability to have successful resonance with the activities of top minority of those who determine the markets.
In trading there are 3 components in the feelings that must be dealt with. 1) The feeling of MONEY itself, 2) The feeling of the UTILITY of the money 3) The feeling of the RISK of the money each time. What is called usually money management in trading is essentially RISK MANAGEMENT.
REMARKS ABOUT VALID STATISTICS AND PREDICTABILITY
We must make here some remarks about the robust application of statistical predictions in the capital markets.
1) The theory that the efficient markets and in particular that they follow a pure random walk is easy to refute with better statistical experiments and hypotheses tests. The random walk would fit to a market where the sizes of the economic organizations are uniformly random. But the reality is that they follow a Pareto or power distribution, therefore this is inherited in the distribution of the volumes of transactions and also in the emerging trends or drifts.
2) The statistical models of time series are more robust , when they apply to the entity MARKET as a whole and are better as non-parametric , and not when they apply to single stocks and are linear or parametric. The reasons is that a time series as a stochastic process , requires data of a sample of paths, and for a single stock is available only a single path. While for all the market the path of each stock or security is considered one path from the sample of all paths of all the stocks. Linear time series models or derived like ARMA, ARIMA, SARIMA etc are destined to fail for particular patterns like those described in the post 32, because the true equations are non-linear and in addition with random, time varying coefficients that derive the random emergence of the 4 basic observable patterns (see post 32 ). In addition the standard application of the time series by the researchers, focuses on stationary time series after they extract a stable exponential trend, while in the reality the main concern should be the random path of the average value of the prices that shapes the patterns and is neither constant exponential trend neither zero ! The "statistical momentum conservation" might then be nothing else than an hypothesis that the random and time varying 1st order in time steps , partial correlation of the prices , is always positive. This can be easily tested statistically. E.g. in the cross exchange rate EURUSD but also in the indexes, the partial correlation of the current to the previous time step bar is measured indeed positive, in almost all time frames, except at the daily time frame, where the cyclic behavior prevails. In the daily time frame the partial correlation is negative , which means if one day is up the next day it is more probable that it is down. In addition, the cyclic behavior is even stronger in pairs of two days with negative partial correlation (two days up two days down etc)
3) The less ambitious the statistical application the more valid the result. E.g. applying a statistical hypothesis test, or analysis of variance to test if there is an up or a down trend (drift) or none, is a more valid statistical deduction , than applying a linear model of a time series and requiring prediction of the next step price.
4) Multivariate statistics, like factor analysis, discriminant analysis , logistic regression, cluster analysis , goal programming etc are possible to utilize for a more detailed theory of predictability and of portfolio analysis, and sector analysis of the market and not only H. Markowitz theory.
5) In applying of the above applications of statistics, the researcher must have at first a very good "feeling" of the data, and should verify rather with statistics the result rather than discover it.
6) The "Pareto rule of complexity-results" also holds here. In other words with less than 20% of the complexity of the calculations is derived more than 80% of the deduction. The rest of the 20% requires more than 80% more complexity in the calculations.
The statistical quantities from the front-office in trading need to me measured are
1) the price position in the channel around the average, 2) the velocity (1st derivative) and
3) the acceleration-deceleration (2nd derivative), which is done as statistical quantities by a hypothesis test or confidence interval.
4) The support-resistance levels can be measured also by action-volume histograms. The measurements are done with convenient indicators, and can also define in a statistically valid way, not only , the channels , the trend, reversal, and
5) (Eliot) waves but also
6) the spikes.
7) It is required also an in advance in the past measurement and discovery of the basic stable cycles in the markets (see post 5)
8) An in advanced in the past measurement and discovery that trends duration and length, and volumes follow the Pareto distribution (see post 11,25 etc).
In addition for the back-office of trading we need to measure the
9) probability of success of trade based on the past history of trades, to apply the Kelly criterion, and also
10) the average rate of increase of the trading funds and
11) its variance again from the past history of trading.
The back-office statistical quantities in 9), 10), 11) are related , by simulation as e.g. in the simulator in post 43.
I have also created a simulator to experiment with different rules of withdrawals.
THE OVER ALL STATISTICAL BEHAVIOR OF PRICE PATTERNS
We notice that although the price patterns are essentially 4 categories in details there are 6 distinct statistical patterns of the random or statistical position, velocity and acceleration of the prices (see post 32).
A class of stochastic processes can be defined as the behavior of the markets based on these 6 basic patterns P1, P2, P3, P4, P5, P5, P7. The Pi i=1,2,3,4,5,6,7 are essentially random statistical patterns with random and variable parameters of size duration, and relative analogies that define them. E.g. we may have a Pareto distribution of the duration and price height of the patterns because of the inequalities in the markets. The 7th pattern P7 of stationary behavior we may call intermittency pattern. We may then assume a class of Markov processes with random and variable transition probabilities, where each random type of pattern occurs and then a next one occurs. Bu the transition probabilities are not arbitrary! E.g. spikes occur usually at the begging (initial spikes) and the end (terminal spikes) of trends, up and down trends with stationary channels in between them, shape cycles, that in the average of stable period, and some times of fixed beginning and end.
The probability that a type of pattern occurs changes also according to the time scale. In 2, 5 or more years annual bars time frames, the non-waving trend pattern is dominating, while say in 5-minutes bars time-frame flat patterns are dominating.
We notice that, by utilizing only pattern P3, of non-waving trend, and intermittency P7 we may derive all, other patterns with appropriate patterns of transition probabilities of the P3! I have coded a simulator of such a class of stochastic processes, superimposed on many time frames called Multi-time scales Rainbow Walks stochastic processes.
This is the overall behavior of patterns of the markets, and there are some invariant properties like
1) Cyclic behavior as alternation with up and down trend patterns with flat channels at the bottoms and tops
2) Statistical momentum conservation (see post 10) where the 1st time-step partial correlation of a price is almost always positive,
3) A Pareto distribution of the duration and height of the patterns, due to the inequalities of the enterprises in the economic system (see post 10, 25, 57,63 )
There are many who complain that the indicators have lag, and prefer not to use indicators at all, but only the prices. This is rather stupid! The indicators when are measuring a statistical quantity MUST have lag, because we are not interested for the price at the now only, but in a short-term past horizon too, which defines the statistical momentum which is statically conserved. It is not a race of speed, it is a challenge of successful perception. The science of statistics is the best for the moment one can have , from the collective scientific thinking, and collective consensus, and we must be honest and humble to admit is restricted abilities, but also trust , respect it and be confident for the success when applying it. When we are applying the statistical mode of thinking for the markets, we never run serious dangers of being "burned"and "busted" in our deductions, as statistics claims everything only up to some probability, or probability inequality and intervals.
There are some also that claim to have "intuitive guessing" about how the markets will move beyond the observable state of the markets. This of course cannot be included easily in the standard statistical inference. But it seems to me that sometimes, this is in certain human and social environmental conditions is too much to ask from yourself, and it may fire-back to systematic opposite to the actual markets moves guessing! I believe that fortunately pure statistical inference from the observable states of the market only, may be adequate for very profitable trading.
The statistical quantities from the front-office in trading need to me measured are
1) the price position in the channel around the average, 2) the velocity (1st derivative) and
3) the acceleration-deceleration (2nd derivative), which is done as statistical quantities by a hypothesis test or confidence interval.
4) The support-resistance levels can be measured also by action-volume histograms. The measurements are done with convenient indicators, and can also define in a statistically valid way, not only , the channels , the trend, reversal, and
5) (Eliot) waves but also
6) the spikes.
7) It is required also an in advance in the past measurement and discovery of the basic stable cycles in the markets (see post 5)
8) An in advanced in the past measurement and discovery that trends duration and length, and volumes follow the Pareto distribution (see post 11,25 etc).
In addition for the back-office of trading we need to measure the
9) probability of success of trade based on the past history of trades, to apply the Kelly criterion, and also
10) the average rate of increase of the trading funds and
11) its variance again from the past history of trading.
The back-office statistical quantities in 9), 10), 11) are related , by simulation as e.g. in the simulator in post 43.
I have also created a simulator to experiment with different rules of withdrawals.
THE OVER ALL STATISTICAL BEHAVIOR OF PRICE PATTERNS
We notice that although the price patterns are essentially 4 categories in details there are 6 distinct statistical patterns of the random or statistical position, velocity and acceleration of the prices (see post 32).
A class of stochastic processes can be defined as the behavior of the markets based on these 6 basic patterns P1, P2, P3, P4, P5, P5, P7. The Pi i=1,2,3,4,5,6,7 are essentially random statistical patterns with random and variable parameters of size duration, and relative analogies that define them. E.g. we may have a Pareto distribution of the duration and price height of the patterns because of the inequalities in the markets. The 7th pattern P7 of stationary behavior we may call intermittency pattern. We may then assume a class of Markov processes with random and variable transition probabilities, where each random type of pattern occurs and then a next one occurs. Bu the transition probabilities are not arbitrary! E.g. spikes occur usually at the begging (initial spikes) and the end (terminal spikes) of trends, up and down trends with stationary channels in between them, shape cycles, that in the average of stable period, and some times of fixed beginning and end.
The probability that a type of pattern occurs changes also according to the time scale. In 2, 5 or more years annual bars time frames, the non-waving trend pattern is dominating, while say in 5-minutes bars time-frame flat patterns are dominating.
We notice that, by utilizing only pattern P3, of non-waving trend, and intermittency P7 we may derive all, other patterns with appropriate patterns of transition probabilities of the P3! I have coded a simulator of such a class of stochastic processes, superimposed on many time frames called Multi-time scales Rainbow Walks stochastic processes.
This is the overall behavior of patterns of the markets, and there are some invariant properties like
1) Cyclic behavior as alternation with up and down trend patterns with flat channels at the bottoms and tops
2) Statistical momentum conservation (see post 10) where the 1st time-step partial correlation of a price is almost always positive,
3) A Pareto distribution of the duration and height of the patterns, due to the inequalities of the enterprises in the economic system (see post 10, 25, 57,63 )
There are many who complain that the indicators have lag, and prefer not to use indicators at all, but only the prices. This is rather stupid! The indicators when are measuring a statistical quantity MUST have lag, because we are not interested for the price at the now only, but in a short-term past horizon too, which defines the statistical momentum which is statically conserved. It is not a race of speed, it is a challenge of successful perception. The science of statistics is the best for the moment one can have , from the collective scientific thinking, and collective consensus, and we must be honest and humble to admit is restricted abilities, but also trust , respect it and be confident for the success when applying it. When we are applying the statistical mode of thinking for the markets, we never run serious dangers of being "burned"and "busted" in our deductions, as statistics claims everything only up to some probability, or probability inequality and intervals.
There are some also that claim to have "intuitive guessing" about how the markets will move beyond the observable state of the markets. This of course cannot be included easily in the standard statistical inference. But it seems to me that sometimes, this is in certain human and social environmental conditions is too much to ask from yourself, and it may fire-back to systematic opposite to the actual markets moves guessing! I believe that fortunately pure statistical inference from the observable states of the market only, may be adequate for very profitable trading.
MORE REASONS OF FAILURE WILL BE FOUND IF THE REASONS OF SUCCESSFUL TRADING ARE UNDERSTOOD AS WRITTEN IN THE POST 44
THE TOP 6 FACTORS OF ATTENTION IN MANUAL TRADING
1) NEVER USE ALL YOUR FUNDS FOR TRADING. DIVIDE THEM TO TRADING AND NON-TRADING FUNDS BY THE RATIO f=R/a^2 RULE (see below for this ratio or in posts 3,13,33). THE DIVISION OF FUNDS AT EACH PERIOD IS ADJUSTED TO CONFORM WITH THIS PERCENTAGE RATIO. NEVER WITHDRAW PER PERIOD FROM THE NON-TRADING FUNDS MORE THAN HALF OF THE AVERAGE PROFITS OF THE TRADING FUNDS PER PERIOD. This division and adjustment of the funds has been applied for many years in buy and hold investments by professor Michael LeBoeuf.
2) THE ONLY CERTAINTY, WHILE TRADING IS ALSO OUR FIRST PRIORITY: WE MAY DETERMINE THAT OUR LOSSES AT EACH POSITION WILL NOT BE LARGER THAN A SPECIFIED PERCENTAGE DEFINED BY THE KELLY CRITERION (see posts 3, 13, 33)
3) FOCUS ON MACROSCOPIC INSTRUMENTS LIKE STOCK INDEXES WITH PERMANENT STRONG LONG TERM TREND OR AT LEAST STRONG AND CLEAR SEASONAL TREND, even if you want to trade at short time scales. (e.g. of the American Economy which is young and strong and indexes like Dow Jones, SnP500, Nasdaq etc)
4) FOR VERY LOW RISK AT OPENING POSITIONS ON THE PREVIOUS INDEXES WITH PERMANENT STRONG TREND, OPEN BETTING UPWARDS , AT TERMINAL SPIKES AGAINST THE TREND. This is the Bill Williams technique.
5) READ THE NEWS AND FINACIAL STATEMENTS BUT THE ASSESSMENT OF THE PATTERNS OF THE MARKET REQUIRES THAT IT IS DONE IN MANY SUCCESSIVE TIME FRAMES CHARTS. This is a basic recommendation by Alexander Elder, which, by now, it is a common knowledge to traders
6) BE FLEXIBLE IN FORECASTING THE MARKET AND DO NOT HESITATE TO FOLLOW PROMPTLY ANY UNEXPECTED CHANGES OF THE TREND OF THE MARKET.
