Trader's Challenge: Keeping the demons in leash

[AW10]

AceX, thanks for opening up your trade diary to public. Appreciate the bold step that you have taken.

I have been following this thread since start but able to post my views now when I got some time.

For the past few days, I was bearish on NIFTY. The reason for this was some very clear cut, divergences in NIFTY-hourly.

Yet, the bearishness didnt come out quite strong.
Why? Whats the reason?

IMO, during strong trend it is possible to get false divergence signals. If you look at the charts of October, you will find many bullish divergence signals.
If one has analysed the loosing trades from backtesting log, then I am sure this observation is not new.
Its human nature (law of attraction as well) that we see what we want to see.. So if we are searching for divergence in the chart, we will find them.

There are times when divergence based system will not work. Any system will give some false signals, specially when the market behaviour has changed from the basic premises on which the system is designed.

Isnt trading on divergence a low risk setup?

Not always. There are times when it is low risk and at other times, it will have drawdowns. That is part of any system. So as a trader, we accept the fact, manage our risk, get stopped out and move on to next trade.
Backtesting results should have given us fair idea about what could be worst drawdown /average drawdown/ how often etc. so we are prepared
for drawdown.

So any way to differentiate between false divergences?
How do you handle it?

Seems this is coming out from our desire to be right always.
Trading is about accepting that we will be wrong. Still, we should attempt to reduce the chances of getting caught in wrong trades.

Maybe, you can use another indicator like ADX which indicates the strength of the trend to filter the trades. When ADX is high and divergence is seen then you might like to wait for other confirmation of trend reversal before pulling the trigger.
Ofcourse, it needs to be backtested to prove that it works.

Tighten your stop losses if you are on the opposite side? Or exit altogether? Or will you go with the divergence every time you see it?

As discplined system trader, our job is to follow the signal. While desiging and backtesting it, we should have already decided on SLoss strategy, exit strategy (at profit or at loss). So there is no need to second guess it now.
Once we take the trade, we always have 50 - 50 chance of winning or loosing. Thru backtesting, we know that even if we loose this trade, in the long run we are going to be winner so there is no need to doubt and temper the system.
If you want to temper it, then change the rules, backtest it again and get convinced that tempering works.

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3. The point 2 means, the capability to discern between counter trend and trend trading and the ability to choose the latter. Yet be mindful of the change in trend.It has helped me.

Great observation. It is equally important for trader to know when his system will not work. Our analysis/observation of loosing trades from backtesting helps a lot in knowing when not to trade the system.

Happy Trading

 

[AceX]

Appreciate the bold step that you have taken.

Thanks

IMO, during strong trend it is possible to get false divergence signals. If you look at the charts of October, you will find many bullish divergence signals.
If one has analysed the loosing trades from backtesting log, then I am sure this observation is not new.
Its human nature (law of attraction as well) that we see what we want to see.. So if we are searching for divergence in the chart, we will find them.

This is one thing, which I was always afraid of. Man, really its strange,how market brings up your fear and puts it in front of you. I was always afraid, if as a technical analyst, we are 'seeing' things which are not there. Already, its a common research issue that our interpretation change according to our social mood. And the social mood is in strong tandem with the markets [it leads by three quarters approx] So there you go!

There are times when divergence based system will not work. Any system will give some false signals, specially when the market behaviour has changed from the basic premises on which the system is designed.

Yes, thats true and I accept it. SLs are hence therefore extremely necessary. But didnt know that failure of divergence is also common.

Not always. There are times when it is low risk and at other times, it will have drawdowns. That is part of any system. So as a trader, we accept the fact, manage our risk, get stopped out and move on to next trade.
Backtesting results should have given us fair idea about what could be worst drawdown /average drawdown/ how often etc. so we are prepared
for drawdown.

Yeah, understandable. Thanks. Perhaps I am carrying a lot of emotional baggage.

Seems this is coming out from our desire to be right always.
Trading is about accepting that we will be wrong. Still, we should attempt to reduce the chances of getting caught in wrong trades.

Desire to be right? Umm.. .cant say, I believe from a desire to be more accurate in my analysis.

Maybe, you can use another indicator like ADX which indicates the strength of the trend to filter the trades. When ADX is high and divergence is seen then you might like to wait for other confirmation of trend reversal before pulling the trigger.

Yes, true. Yes, true... True, True.. Thanks for this. I almost forgot.

As discplined system trader, our job is to follow the signal. While desiging and backtesting it, we should have already decided on SLoss strategy, exit strategy (at profit or at loss). So there is no need to second guess it now.
Once we take the trade, we always have 50 - 50 chance of winning or loosing. Thru backtesting, we know that even if we loose this trade, in the long run we are going to be winner so there is no need to doubt and temper the system.
If you want to temper it, then change the rules, backtest it again and get convinced that tempering works.

Aye Aye Major!
On a serious note, yes true. I guess, the backtesting part is more of training oneself than checking if it works. Training for better executive decision control nerves. Hence any change in the rules, you have got to train yourself.


AceX

 

[AceX]

Dec 21,2008/Dec 22,2008

I had been thinking and going through my equity curve and trade logs over the weekend.

These are some pointers which I found worth thinking over:

1. Never trade until unless the market presents itself unto you.
To quote Jamal Mecklai, he said in the present scenario maybe the serious traders are at the beach, (with this volatility), they are not trying to beat the market and they know it, hence they are taking a break.

2. Have a larger perspective of things i.e.

• Consult a bigger timeframe[already in my list]
• Consult a larger price action within the same time frame

3. Dont trade in the middle hours. Volumes are low, neither amateurs are there at that time nor pros are there, hence neither the madness of crowds nor the strategy of assassins are there to sustain a rally. Or in other words there will be no rally. Until unless I am a scalper, I wont take positions in the middle hours.

4. Keep your frequency low and grip on reality tighter.

AceX

 

[Niks]

Excellent posts... they exhibit a strong desire to improve

4. Keep your frequency low and grip on reality tighter.

Yes keeping the trade frequency low has helped me a lot too. I also reduce my trading size dramatically when tempted to trade on a new rule/pattern etc.

PS: m just a beginner level trader, trying to improve.

 

[AceX]

Niks,

Easier said than done for me.

I broke my technical rule. And thats bothering me!

 

[AW10]

Niks,

Easier said than done for me.

I broke my technical rule. And thats bothering me!

AceX, Better luck next time.
Maybe, creating a small chklist with specific bullet points will help you. I have my strategy rules written on a small sheet of paper as checklist and always keep that next to my keyboard during trading hours. I refer to this list before hitting the submit button.

Happy Trading

 

[AceX]

AceX, Better luck next time.
Maybe, creating a small chklist with specific bullet points will help you. I have my strategy rules written on a small sheet of paper as checklist and always keep that next to my keyboard during trading hours. I refer to this list before hitting the submit button.

Happy Trading

Thanks AW10. Yes I did think about it. But seriously didnt pursue it. Since yesterday I had been consciously repeating, murmuring, imagining and soaking in my cardinal rule.

AceX

 

[AceX]

23rd December,2008

Today had been a better day. Thanks to these lessons and Mark Douglas[the Author of The Disciplined Trader]. Its a bit satisfying because, I stuck to my technical & psychological rules.

PSYCHOLOGICAL RULES and TRAINING:

1. Whatever are your trading rules irrespective of its nature[technical or psychological], to soak in and execute it dispationately, you should internalise it.
Internalisation occurs only when you are passionately soaked in it. Its a mental conditioning and nothing less. Hence,whenever you are not trading, repeat your rules to yourselves, murmur them, imagine them. This will help you to condition yourself to follow those rules. I spent last evening repeating myself the rules. It has helped, but I guess I have to keep repeating it and concretize it.
For more details on mental conditioning, Google: Pavlov's Dog

2. Very important details: Flow with the market. Don't have an adversary mindset and try to 'get even' with the market. Flow, flow like the water. When Saint, told 'flow', he conveyed the most important mental image. Its perhaps the most important thing, which helped me today.

3. Realise, how much the market has to give you. Indicators, candlesticks or all those rules will help you to make this decision. Dont ignore those in to greed [listen hard, AceX, this is for you]

TECHNICAL RULES

1. After breaching a trendline, prices try to test them from below. This retest often happens on low volume [which is the reason that confirms it is not a bear trap]. Or it might be, a high volume price bar but the bullish breath is weak.
Like what happened today. It already breached the upward trendline[Figure 1] in 10 minutely, early today morning and then went on to test it[zoomed in Figure 2]. The volume was high but difference was yet to be closed.

2. In relation to Psychological Rule 3, you might want to have indicator exits. So when a particular indicator condition is met, resize your position and redecide your stop, [a probable stop might be the high of that bar, test it before implementing]. And those who deal with very few lots, anyway have a lot to learn(example:AceX), so they better exit and watch[ and internalise] the price action.

These are some of the psychological rules which helped me to get hold of me[temporarily].I have to work on making it a permanent part of my trading psyche. The technical pointers is not new wine. Its old wine and borrowed shamelessly from sources long forgotten. Only trading days like these bring forth those memories.

Figure 1. 10 minutely, MINIFTY, spread over the recent sessions

Figure 2: Zoomed version
Till then,
AceX

 

[AW10]

1. Whatever are your trading rules irrespective of its nature[technical or psychological], to soak in and execute it dispationately, you should internalise it.
Internalisation occurs only when you are passionately soaked in it. Its a mental conditioning and nothing less. Hence,whenever you are not trading, repeat your rules to yourselves, murmur them, imagine them. This will help you to condition yourself to follow those rules. I spent last evening repeating myself the rules. It has helped, but I guess I have to keep repeating it and concretize it.

AceX, Another pointer.
I have created mp3 recording of my trading plan and trading rules, in my own voice. I listen to them atleast once in a day specially when I am jogging/walking. It has helped me a lot. I don't have to use my TableTime to read my rules but I still pass the required message to my mind during the time when I can't do anything else. (we rarely use voice recorder of our mobile).

Give it a try. Hope this helps.

Great to see your highly focused committment to trading. Hope people are following this thread and learning the steps that are required to be taken to grow the higher level of trading performance.

Happy Trading.

 

[NOMINDTR]

AceX, Another pointer.
I have created mp3 recording of my trading plan and trading rules, in my own voice. I listen to them atleast once in a day ...

I have many a time thought of this sort of self-hypnosis. That really make wonders. I have done this, not for trading, I am planing to implement this for my trading plans and to have control over emotive moves.