Confessions and Questions

[Billy]

On June 9, I went short with a position in TZA. I thought I did so according to the robot, but I may have misinterpreted the signal to short TZA as a buy TZA. In any case, I'm a rookie, so please forgive this mistake.

During this day Pascal expressed confidence that the market would move higher. Despite seeing red in TZA, I remained confident the market would move lower in the near term. I had stayed in TZA after Dr. K's signal went to cash in early June and added 20% to an already substantial gain achieved by following Morales and Dr. Kacher. Mostly in cash, I took another position in TZA on June 9 because the macro-economic situation seemed a sure drag on the market. I can't list these reasons here, but I felt that I had caught the rhythms of TZA in relation to the market and was ready to ride it for more profit.

I was also, however, excited and fascinated by the development of the robots. And I made a very good return shorting GDX literally overnight on June 7-8. I decided that I would shoulder hard into a position should the robot go to a signal of strength. I expected the next signal to be SELL. Thus, on Friday morning I was in a condition of contradictory feelings and confusion. The robot said strongly BUY but I was certain the Russell 2000 would go lower.

Friday became horrific for me because I sold the TZA for 1/10th of the profit it would have realized had I held it that day. Moreover, I sought to establish long positions without conviction. At the end of the day I felt like my weight on planet earth had disappeared, and I had become a bouncing specter. I felt this way because my rhythm in the market was lost.

I have spent this week trying to establish and hold with confidence a long position in TNA and IWM. Market makers have made some pocket change from me.

So, here comes my question (if it is that): when I examine the back test data, I see that May 2010 provides a number of examples of when the robot had picked wrongly-- moments in time when the market went lower. Since I was not a participant at that time, I can only imagine how a market can break through the last remaining supports and sink into new depths. How does one's macro understanding/interpretation of a moment affect one's ability to follow a machine?

Throughout this difficult process for me, I have read with great relish the comments of experienced hands, such as Pascal, Billy, Paul Duncan, Mike Scott, Gil Morales, Dr. Kacher, and Ian and Ron. For all this help I am tremendously grateful. But ultimately the choices are mine; the trades affect only my family; I am, at the moment I push the button, utterly alone. I also recognize that my trading decisions are affected very much by my so-called feelings—that is, by my sense of rhythm at work in the market. How do I integrate the feelings and the macro-economic insights with the commands of a robot remains perplexing to me? I can confess I'm trying to remove the feelings, but I worry to do so would leave me disconnected and aloof from the information and trends that define our time. I also worry that at the time I become comfortable with a robot determining my fortune, the market will learn to foil this sophisticated instrument and break it, as it has broken other trend systems.

So this is my confession, and these are my questions. I don’t know whether not any one can or should respond to it. But, regardless of the embarrassment, I’d like to share it. I hope to learn what others experience...

Are you ready to stop believing in yourself and start proving yourself?

http://www.petershallard.com/self-do...er+Shallard%29

Billy

[nickola.pazderic]

Note: a cross of death appears possible in XLF!

[Timothy Clontz]

I didn't note this the other day because the Robot is currently long, but XLF (financials) is now the primary shorting target when the Robot goes short.

This replaces XLE (energy) and could change again before the Robot actually goes short again. Rather than just but people every time my model changes a sector selection, I'm only noting the current selection when the Robot gives a new signal.

[jt12]

this is my set of beliefs as far as the relationship between macro events and asset prices (stock prices):
1. Predicting macro events is impossible. Majority of economists and experts in this field are unable to do so. Majority of great forecasters are close to 50% so not very far from random. In the middle of 2008 we were told that subprime did not matter, at the beginning of 2009 that the future is dire. Since really smart people can't predict the macro i don't think i can do it.
2. Direction of asset prices can not be predicted. Also the relationship between stock prices and real economy is not stable - sometimes the market leads the real economy by many months sometimes it does not. Even the best traders/investors can not predict these relationships (even Mr.Morales quoted in this thread had substantial losses in 2009 as he was not well positioned at the beginning of the bull move). Its just really, really hard to do it consistently.
3. One can try to evaluate the market in probabilities (similar to weather i guess - we don't know if it will rain but when we see heavy clouds it does make sense to take an umbrella). Mechanical system might be a great help in assessing probabilities. "Robot" seems to me an excellent system (in fact one may even argue its Sharpe ratio will have to decline in the future it's so incredibly good). It is important to remember that losses are inevitable and can not be eliminated from the system (if there is a system without the losses or with very few of them it usually means it was curve fitted). What matters most is how large the losses are in comparison with the gains. Percentage of wins to losses is secondary (it does, unfortunately affect the psychology). Since i can't control the economy or predict prices i try to focus on what i can do. Proper position sizing, minimizing loss size and not overtrading.

[TraderD]

What matters most is how large the losses are in comparison with the gains. Percentage of wins to losses is secondary (it does, unfortunately affect the psychology).

The three measures: Win Rate, W/L Ratio and Profit Factor can be related to each other using a formula (see: http://www.priceactionlab.com/Blog/2...d-payoff-ratio). WinRate is not necessarily secondary to W/L Ratio from the strict point-of-view of total profit generation, tho I agree with you that it's harder to follow a system with a low Win Rate.

Trader D

[mklein9]

this is my set of beliefs as far as the relationship between macro events and asset prices (stock prices):
2. Direction of asset prices can not be predicted.

I would say that the right way to look at how to work with the market is to consider trading or investing as an activity where you are estimating the distribution of future prices. How that is done can be any of a million different ways. As long as you (figurative "you") can estimate future price distributions better than most of your competitors (in time frame, in security types, etc.), then you can do well. No one method has an inherent advantage over any other -- simply because if it did, more people would do it, and it would lose effectiveness.

Future stock price distributions can be well estimated by Pascal and Billy's robots as we are seeing in real time. On the complete other side, they can also be very well estimated by deep fundamental analysis over long time periods without regard to technical analysis. Numerous of the world's richest people did exactly that.

The main thing is to find a method that matches one's own personality and that has an inherent edge using one's own skill set. The problem is that I believe it may take 10 or more years to find that combination. Warren Buffett would be completely lost with what we're doing here. And we would be completely lost with what he is doing. But we can all be successful if we find the correct combination for each of us.

-Mike

[Andrei]

Bob is a single best valuable source for all kind of information. This is great.

[nickola.pazderic]

I am grateful for the replies. They are all insightful and helpful.

I've looked over my trading record and there have been stretches like this past week previously. A series of green positive trades is interrupted by a string of red losers. The nightmare begins when one (in this case, me) tries to win back the losses in hurry and the losses compound. Every athlete or chess player or salesperson or, yes, trader, knows the feeling I believe. In baseball, hitters have slumps. Most of the time there is no single answer to free the performer from the quicksand. I would bet, however, that renewed patience and a trust in one's inner self (which Billy quickly pointed out) are probably most important to recovery.

Think or Swim is a very powerful trading platform. High Growth Stock software is similarly powerful. Often I feel overwhelmed with one or the other or both. I enjoy very much the metaphor of an airliner cockpit. I fantasize about constructing a high powered computer system with multiple monitors-- especially when I see photographs of traders who operate effectively and successfully in such an environment. But I also know that the graduate student who introduced me to trading conducts research and make trades with only a small lap top. She can't understand why one might need two screens and laughs at how hyper I appear on skype during the trading day. Somehow I need to turn down the noise.

If I have one strong suit from years of teaching, it is this: I'm able to spot people who do quality work and who have substantial potential to contribute. I'm here now because I see tremndous potential for me and for others in the group assembled here. This should be fun and profitable for all.

Most gratefully,

[Billy]

The nightmare begins when one (in this case, me) tries to win back the losses in hurry and the losses compound.

Nickola,

Long time members of the old VIT group know that this is exactly what happened to me last year (2010). I had a compounded YTD gain of over 80% in my discretionary accounts until near the end of May. Then, a series of losing discreionary trades compounded 6-7% trades losses without interruption to bring my accounts in the red just prior to the explosive September bull run. I had lost all confidence in my trading, so when I went long at that time I only started trading 1/3 of my previous position sizes and I could never make it back in spite of the best opportunity to do so.
Besides the psychological healing process, I scrutinized every one of my losing trades to find out what could have avoided the disaster. It was not risk management. My discipline was strict about cutting losses fast according to my trading plan. It was the compounding effect of the "small" losses that was the culprit.
My risk management was and still is based on my multi-pivot methodology. It gave me "optimal" buy and short entries for each day with an "optimal" stop loss. But the decision to take the buy or short entry on any day was entirely discretionary; like you I was following my feeling for market rhymes. And i've been 100% wrong for three long painful summer months. Then I looked back at all the 20 DMF signals over the period and I immediately saw that simply trading my methodology in the direction of the 20DMF instead of my best market direction guesses would have avoided most of my disaster. And, at a minimum, I would not have experienced the vicious negative compounding effect. And I would have started the bull run in September on full margin from accounts up 65% YTD.

On his side, Pascal was doing very well compared to me but analyzing his trades he noticed he could improve a lot the risk management of his trades using my methodology. His Einsteinian reflex was to backtest and backtest and backtest, filtering out every noise that didn't provide any risk-adjusted edges.

And the robot was born, optimizing the mixing of proven outperforming market signals with a proven outperforming risk management system.

Billy

[Kenneth K]

"...I also recognize that my trading decisions are affected very much by my so-called feelings—that is, by my sense of rhythm at work in the market. How do I integrate the feelings and the macro-economic insights with the commands of a robot remains perplexing to me?..."

The question is how accurate your sense of market rhythm is. Collect the data and analyse the win/loss ratio, and calculate the expected returns vs risk. Then you would know if your 'sense of market rhythm' is worth following.