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Trader's Tip
Learn about trading by the facts about flipping a coin.
- Ryan Jones |
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Today's Featured Article
Truth has been the topic of much discussion over the years. Truth is often the object of heated debates on everything from religion to politics. Seemingly in today's postmodern society, truth has become more obscure than ever. However, a quick study in history will show that there has always been a fierce battle over what is true and what is not true. There is nothing new under the sun.
There are undeniables. Two plus two is four, always has been and always will be. The grass is green...the grass is brown...both statements can be true depending on circumstances. God exists. God does not exist. One of those statements is true and the other is not; both cannot be true. The market was up yesterday. Relative to the previous day, that statement is true. Relative to one year ago, that statement is not true. When is a door not a door? When it is ajar. (My kids love that one.)
In other words, there are many paradigms when it comes to what is true and what is not true. The problem is that the facts are sometimes muddled in irrelevant context and/or circumstances. As a result, it becomes difficult to separate the facts from interpretation of those facts. Stick with me on this one for just a few more minutes...this is going somewhere, and at the end of the article, I will reveal why this topic is going to be important to every single trader reading it.
The market was up yesterday relative to the previous day. This is a fact. However, on some financial talk show or financial TV station, some "expert" tried to inextricably link other circumstances with that fact. For example, housing starts were up and we saw the market move higher as a result. Two undeniable factual statements were made in that sentence. First, housing starts were up relative to the previous month; and the market was higher relative to the previous day. However, the two may not be linked at all. It may be coincidence...or, there may be some truth to the connection. The problem with this kind of statement is that there is no indisputable evidence to prove that the
reason the market was up was somehow tied to the increase in housing starts.
This is the fatal flaw when it comes to truth and trading. Factual statements are made and often tied together in a way that is not factual (but passed off as factual).
Truth is important to me, in all areas, trading included. I have made it my life's work to separate the facts and then properly interpret them based on the evidence provided. In today's article, I am going to explain how to separate fact from fiction and properly interpret facts. This process is extremely important because it can help you avoid critical trading mistakes and better uncover profitable opportunities.
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The first example surrounds the performance statistics of a trading system. In the past, I have researched innumerable trading ideas and developed just as many trading strategies. It is critically important to discern between what is a factual statement and what is not a factual statement when it comes to analyzing a trading system. The result of any analysis is to determine whether the strategy is worth risking my hard-earned money on.
Compare it to flipping a coin. If I flip a coin and it lands heads up, I can make a factual statement that the coin landed heads up. However, it would not be a factual statement to say that since the coin landed heads up last time, it will land heads up the next time. I also cannot make the statement that the coin will not land heads up on the next flip. The truth is, I do not know how the coin will land on the next flip, but I do know that it either will land heads up or tails up. That is a factual statement. Therefore, it would also be a factual statement to say that the coin has a 50% chance of landing heads up and a 50% chance of landing tails up.
Apply the same logic to a trade. My last trade won. My next trade may win or it may lose. Where things start to get muddy is when I attempt to apply the same probability to a win or a loss as I did the flip of a coin. This is where many, many traders make a huge mistake in analyzing a trading strategy to determine whether it is worth risking money on or not. Over the course of 50 trades, for example, 35 have been winners and 15 have been losers. This factual statement cannot be denied in a trade-by-trade track record. What cannot be stated as factual is that over the next 50 trades, 35 will be winners and 15 will be losers. In fact, from the information given, no factual statement can
be made as to how many of the trades will be winners and how many will be losers.
Did you catch that? No factual statement can be made on the future event as far as number of winners and losers. Trading is kind of like the weather. You can factually state that it rained yesterday but you cannot factually state that it will rain tomorrow. You can estimate the probability of rain based on other factual statements, but to some degree, even that is a guess. However, meteorologists attribute various degrees of probability to certain combinations of statistics that are based on fact. This is not dissimilar to what we must do as traders. We must look past all of the circumstances and begin our analysis always with the facts first and never assign as true that which is not.
The first question I have when I look at a set of statistics is why. This is not an easy question to ask, but it is no more difficult than asking why it rained the previous day. Why does it rain? Air containing water rises, condenses and falls back down. This is a factual statement. That is why it rains. Why does air containing water rise? To this question, there are many answers. Sometimes cold air comes in and pushes the warmer air containing water higher. Sometimes the sun heats the air at the surface up and it rises. Sometimes there are other reasons.
A winning trade is simply buying before a market moves higher, or selling before a market moves lower. Thus, rather than looking at the trades first, it is more important to look at market movement. Therefore, I can look at a day where a long trade won and I am actually looking at a day where the market moved higher (assuming that the trade lasted only 1-day). My question is not why did the trade win, but rather why did the market go higher? From there, I can begin to list circumstances that existed the previous day or days. For example, one fact the day prior to the market moving higher may have been that %K crossed above 80%. However, is it true that the market moved higher the day
after %K crossed above 80%?
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Another fact may be that the 10-bar moving average crossed above the 40-bar moving average. But every time that happens, was the following day marked by higher prices? Let's say that over the last 50 times this has occurred, 35 times the market has moved higher the following day. It would be a major, major mistake to say that the market moved higher the following day because the 10-bar moving average crossed over the 40-bar moving average. That simply cannot be a factual statement. If it were, then every time it occurred the market would move higher. Likewise, it may rain when air with water rises, but it does not rain every time air with water
rises. This means that there are other factors involved.
It could be said that the 10-bar moving average crossing over the 40-bar moving average was reflective of something going on in the market that you could not see. Therefore, the 10 bar moving average crossing over the 40 bar moving average may be evidence that there is enough momentum in the market to carry it higher the following day.
Going into the July 4th holiday, the market has moved higher the first three days of July 70% of the time. After the July 4th holiday, the market has moved down the following week about 70% of the time. Hint, hint. The question is, why? Does the July 4th holiday have something to do with it? When the first trading day of the month also falls on the first calendar day of the month, the market has moved higher 80% of the time.
The evidence suggests that these days have an influence on market direction...but that cannot be a factual statement. This is where major mistakes are made. There is a reason behind every trade you make. What is that reason? Many traders assign the reason to something they deem to be factual when it is not. There may be influence, there may be previous occurrences, but the factual statements have to stop there and probabilities estimated. Why is this a mistake (and subtle one at that)? It is the difference between marrying a trade or strategy and approaching from an objective standpoint. If a trader looks at the facts for what they really are, they simply make better money management
decisions than those who refuse to go the extra mile and pay attention to the details.
Another benefit in paying attention to the details and refusing to call something that is not true "true" is the ability to better discern numbers that have simply been manipulated. This is much harder for traders to do because it requires them to be able to dissect market movement and analyze the components of that market movement. Unless you are a programmer, this has been almost impossible to do with any efficiency.
This brings me to why this article is so important right now. On October 1st of this year, I am going to launch a product that has been in the making for many months now. For the first time, you will be able to quickly analyze market movement without any programming. This product is going to blow you away and that is all I can tell you about it right now. However, when it comes out, you are going to want to have digested the information in this article because it will become infinitely more important to you.
For those who may want a sneak peek at this product, simply go to
http://www.smarttrading.com/SCArticleFS.html and sign up to receive information about this new mind blowing product as soon as it comes out.
Part II of this article will be published by the end of July - so keep reading.
What has happened can have different interpretations. Apply this to trading and the markets and I am sure you know exactly what I am talking about.
http://www.smarttrading.com/SCArticleFS.html
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About the Author
| Ryan Jones
is considered one of the trading industries "most complete traders". Starting his trading career at the early age of 16, he had traded nearly every major market and strategy by the age of 21. At the age of 26, Ryan signed a book deal with John Wiley making him one of the youngest authors ever in the field of futures trading. His book, The Trading Game, Playing by the Numbers to Make Millions is still considered to be the authority on the subject of trading and money management by many leading traders. Ryan's advanced experience and knowledge across many trading fields such as Technical Analysis, Option Trading, Money Management and the S&P have lead to several
trading feats, including turning a $15,000 account into over $107,000 in less than 90-days short-term trading the S&P (real money). |
|
Special Message from Our Author
Take Control of Your Trading; Be Among the First!
This new trading tool will give traders the power to analyze and uncover trading opportunities (take control) that has never existed before. It is a product that has been in the making for four years, and it will blow your mind. To be in a select group that will receive information about this product before everyone else, simply click on the link below and provide your name and email address.
http://www.smarttrading.com/SCArticleFS.html |
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