Confessions and Questions

[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