trading myths.

Discussions about personal psychology for the individual trader.
Post Reply
Nathan
Roundtable Knight
Roundtable Knight
Posts: 127
Joined: Sun Jul 13, 2003 3:52 am

trading myths.

Post by Nathan » Thu Aug 19, 2004 7:09 pm

Through my trading, research, and contemplation of the markets, I have concluded that that many of the statements about trading and the markets that new traders encounter are myths, near myths, or at the very least, questionable motives.

(I am editing in here: also, I have found that as i learn, my personal, prior understandings of these things have in some cases proven to be myths)

Here is a starting list and the reasons I feel they are not accurate.

The first group are myths because they fail to integrate the pieces of the puzzle, but rather attach undue importance to one part.

1. money management is the key to trading. Money management is one part of the trading puzzle. It is not "the key" as on its own it will do nothing to help a trader make profits.
In fact for the average trader with little or no edge, a sound money mgt scheme will do more to insure losses than gains. however, brokers will like this, because it ensures that the novice trader pays plenty of commissions before they lose too much. It also reduces the risk to the clearing firm.



2. Position sizing is the key to trading. See above.

3. Psychology is the key to trading. It seems there is always a guru looking to unlock the secrets of trading with their particular specialty. It is true that psychology is important, as it is in any performance activity. However, there is no escaping that confidence without cause is foolishness. Yet, how many times have i read: "why don't i have confidence? if only i could pull the trigger, id be a winner." Not exactly.

4. the trend is your friend. I disagree with this. It may be your friend, If you are prepared to live with the equity curve of trend trading, and have a sound approach. Yet, how often, do u see these blanket statements, with no context? The fact is in many contexts, the trend is not your friend, if this saying has any meaning at all. Just one more bit of incomplete information that misleads new traders.

5. Entries are not important. I find this to be near delusional. It serves to encourage people to trade when they basically don't have a clue because... after all, entries are not important!!! In my own testing, and in viewing the more thorough tested results of others, I have not seen this to be true.

6. exits are more important than entries.
like all these things, it may be true in a specific context. But, given as a blanket statement or truism, i feel it is a highly dangerous bit of advice.

these next ones are just based on what i see others doing, rather than their defined beliefs:

Trading a small account is a good way to make income. It may be possible, but, is it worthwhile? U have an unsteady income stream, likely allot of stress, and the pressure to make a living will likely encourage the trader to trade too large.

staring at live charts during the day is productive or will help trading. monitoring the markets is important, If it serves a Well defined, specific purpose. But, i wonder. for the vast majority of retail traders, I feel it is about being titillated by the markets and feeling "apart of the action".

"I trade for the challenge" I have heard many traders say this. In fact, I once said it... That is what i believed during the one period in my trading when i was not profitable. I now strongly feel that trading "to be challenged" is a very questionable motive.

the feeling that: "there is safety in a popular, tested system".
Sometimes, it seems the herding instinct exits not just in markets, but also in the systems people use to profit from the markets, as if, there is safety in numbers when it comes to speculative profit. Yet, the markets are zero sum, any fixed system must have a capacity partly based on the # of people using it, causing the greatest number of would be traders to get sucked in at a peak.

I certainly am not an expert. These are just the opinions. anyone else have trading myths to offer up?
Last edited by Nathan on Thu Aug 19, 2004 10:32 pm, edited 1 time in total.

ksberg
Roundtable Knight
Roundtable Knight
Posts: 208
Joined: Fri Jan 23, 2004 1:39 am
Location: San Diego

Myths or ...

Post by ksberg » Thu Aug 19, 2004 9:40 pm

Nathan,

There are several ways to go about myth busting. Presenting research and facts tends to be among the best. Clarifying misconceptions is another. Sometimes it helps to trace the source of misinformation.

I believe that #1 and #2 are misquotes. What I recall seeing is that money management (position sizing) is the key to making significant profits in trading. In the discussions I've heard or read, the pre-condition is always that the trader must have a positive mathematical expectancy. My experience and testing tend to confirm, not negate this premise. So perhaps it's not a myth but a mis-read or a misquote. Can you supply references that say money management "is the key to trading"?

As for #4, the statement "the trend is your friend" is so general that it lends itself to many interpretations. In most contexts, the statement is used to teach beginning traders (and not so beginning traders) that it is difficult to fight the general direction of the market. Facts to support this might be the number and types of approaches that can pull money out of trending markets vs. non-trending markets, or the expectancy x opportunity of trend vs. non-trend approaches. Even if you are a counter-trend trader, it pays to know and understand trend as a concept, and know when and where to fade it. I personally think "trend" is a pretty profound and important concept. How do you define trend? What time-frame are we talking about? How relavant is the trend to my trading? So, to me "the trend is your friend" is an invitation to really get to know and understand the concept. I don't see how this is misleading to beginning traders at all!

Maybe you can expand on your original thoughts and ideas.

Kevin

Nathan
Roundtable Knight
Roundtable Knight
Posts: 127
Joined: Sun Jul 13, 2003 3:52 am

Post by Nathan » Thu Aug 19, 2004 10:29 pm

#1 and #2 are "myths" in my view because in various places, i see them discussed as a vague, floating notion divorced from the other elements of trading. They are also personal "myths" because, i see in my own history times when I felt I understood something, when in fact I had very little understanding.

It is not a misquote because I was not quoting anyone. so far as i know Money management becomes worthwile only in a particular context, ie, the context of a good trader with a good system.

as for #4, yes, i agree that It is so general it lends itself to many interpretations. That is exactly the problem. The truth or non truth of this statement, like the others, relies on a specific context. for example, if an expert trader says the trend is his friend, for him it is true, because he has developed that context that makes it true. for a beginner, this is frequently a cliche that i feel substitutes for real knowledge and in fact can be misleading.

This this thread was intended to be about personal revelations, not ironclad "myths" that will apply to every traders situation or path.

ksberg
Roundtable Knight
Roundtable Knight
Posts: 208
Joined: Fri Jan 23, 2004 1:39 am
Location: San Diego

Post by ksberg » Fri Aug 20, 2004 12:32 am

Nathan wrote:#1 and #2 are "myths" in my view because in various places, i see them discussed as a vague, floating notion divorced from the other elements of trading. They are also personal "myths" because, i see in my own history times when I felt I understood something, when in fact I had very little understanding.
Gotcha. Well, there is certainly is no end of trading misinformation available. What I was hoping to do was distinguish "various places" from slightly more authoritative sources. The other thing that helps bust myths is avoiding generalizations and getting specific: In books that contain money management references such as Van Tharp, Ralph Vince, Ryan Jones, and Larry Williams, all of the authors talk about the prerequisite of already having established a system with an "edge" or positive mathematical expectation. Some of these books contain other elements important to trading, Ralph Vince and Ryan Jones have written topical treatises on the specific subject, which by definition and intent, are divorced from other elements of trading.

IMO, I do not view money management as myth (Merriam-Webster, Dictionary.com). Granted, understanding position sizing in a portfolio context is definitely not a simple thing. It's way beyond trading 101. It might be a disservice to arm a beginning trader with position sizing concepts, especially when they are used without a clear understanding of the consequences. Unfortunately I see traders wanting to rush off and apply concepts without clear understanding a little too frequently. Perhaps this tendency is really the heart of the matter, not that money management is a myth.

It sounds like we agree on #4 ... it's pretty cliche. Maybe a better revelation to share for the newbie trader is that "no one is your friend", that there is no Barney love to be shared in the market or by any vendor :?

Cheers,

Kevin

damian
Roundtable Knight
Roundtable Knight
Posts: 815
Joined: Tue Apr 15, 2003 8:43 pm
Location: dusseldorf

Re: trading myths.

Post by damian » Fri Aug 20, 2004 6:29 am

Nathan wrote:1. money management is the key to trading. .....a sound money mgt scheme will do more to insure losses than gains. however, brokers will like this, because it ensures that the novice trader pays plenty of commissions before they lose too much. It also reduces the risk to the clearing firm.

2. Position sizing is the key to trading. See above.
Obviously MM is very important. But it is an area where one can carelessly hypnotise themselves on the mantra and forget what you correctly point out. Position Sizing is the perfect tool to bleed to death slowly.

Position Sizing/Money Management does not change the direction of flow, it just regulates the speed and consistency of thereof.

MCT
Roundtable Knight
Roundtable Knight
Posts: 102
Joined: Fri May 16, 2003 7:27 pm

Post by MCT » Fri Aug 20, 2004 11:33 am

Obviously MM is very important. But it is an area where one can carelessly hypnotise themselves on the mantra and forget what you correctly point out. Position Sizing is the perfect tool to bleed to death slowly.

Position Sizing/Money Management does not change the direction of flow, it just regulates the speed and consistency of thereof.
we'll all be served well to read the above quote every so often.

Good thread

Nathan
Roundtable Knight
Roundtable Knight
Posts: 127
Joined: Sun Jul 13, 2003 3:52 am

k

Post by Nathan » Fri Aug 20, 2004 1:57 pm

this was in fact the thought that made me think of this thread, that i forgot to put into the post.

I have heard it said, "a new trader should 'expect' to lose money for at least a year, maybe more".

In my view, this is a horrible attitude.

If you accept losing, it is hard to be commited to winning and doing all that is nessicary to succeed.

It may be true that when viewed with HINDSIGHT, many successful traders started with losses or a losing year(s).

THe error of this thinking is that it derives a rule or lesson after looking at only a very small portion of first year traders, ie, the ones that eventually "made it".

This belief gives new traders psychological comfort as they lose their money and fail to move in a winning direction.

"After all, trader 'X' lost his first 4 years, blew out 3 times, and now he's a huge fund manager, ect ect."

Yes but dont forget traders A,B,C,D,L,Q,Z, ect, ect, who never changed their ways and are poorer than they were 5-10 years ago thanks to trading.

Perhaps a better way to start is, "if you want to trade, be like the great general who looks to win the battle before it has begun."

It still may not happen this way, but at least the person is focused purely on winning and succeeding.

richard
Roundtable Fellow
Roundtable Fellow
Posts: 94
Joined: Tue May 18, 2004 10:17 pm

Re: k

Post by richard » Fri Aug 20, 2004 3:33 pm

Nathan wrote:this was in fact the thought that made me think of this thread, that i forgot to put into the post.

I have heard it said, "a new trader should 'expect' to lose money for at least a year, maybe more".

In my view, this is a horrible attitude.
No, I actually think this is very healthy. If you expect to lose, you will trade small and mimize your losses knowing that you are going to lose anyway.

And you will be more likely to take your losses without getting too upset, and consider them tuition.

That's my attitude and it is serving me well. If I expected not to lose, I'd be very upset and would probably have quit trading. I also would have been losing more money than I have lost.

ksberg
Roundtable Knight
Roundtable Knight
Posts: 208
Joined: Fri Jan 23, 2004 1:39 am
Location: San Diego

Post by ksberg » Fri Aug 20, 2004 6:24 pm

Nathan wrote:this was in fact the thought that made me think of this thread, that i forgot to put into the post.

I have heard it said, "a new trader should 'expect' to lose money for at least a year, maybe more".

In my view, this is a horrible attitude.
I tend to agree with Richard, a healthy dose of skepticism and realistic aims is probably more fruitful than expecting to win. That said, it probably depends on the context of the statement. If it were a new daytrader ... perhaps a better aim is "keeping your head above water". If it were for any trader starting a new LTTF system, I'd say it's pretty accurate.

For instance, I've attached a worst-case-analysis quantile distribution of a successful mechanical system. With this system, there was roughly a 21% chance of not making any money during the first year of trading. With a proven system, the chance of making money generally increases given the second and third year of trading. In fact, the same system has negligible chance of losing money over any given 3 year time span.

Cheers,

Kevin

BTW: The signature of the example system is very close to Turtle.
Attachments
ProfitQuantile.jpg
Probability of profit in 1st year of trading
ProfitQuantile.jpg (25.92 KiB) Viewed 19561 times

Nathan
Roundtable Knight
Roundtable Knight
Posts: 127
Joined: Sun Jul 13, 2003 3:52 am

j

Post by Nathan » Sat Aug 21, 2004 7:08 pm

it seems people would rather attempt to argue than share any thoughts from their personal experience. Great but, im not interested in that.

Richard, I disagree with you but who cares. it seems people are so eager to contradict with their two cents, they may not even bother to first understand a different perspective...

ksberg obviously if you have a defined system and define specific expected results and have ranges of expected outcomes, you measure yourself by that standard, not the arbitrary units of time that I mentioned, simply for example. Has nothing at all to do wiht my point.

ksberg
Roundtable Knight
Roundtable Knight
Posts: 208
Joined: Fri Jan 23, 2004 1:39 am
Location: San Diego

Post by ksberg » Sat Aug 21, 2004 9:45 pm

Nathan wrote:it seems people would rather attempt to argue than share any thoughts from their personal experience. Great but, im not interested in that.

Richard, I disagree with you but who cares. it seems people are so eager to contradict with their two cents, they may not even bother to first understand a different perspective...

ksberg obviously if you have a defined system and define specific expected results and have ranges of expected outcomes, you measure yourself by that standard, not the arbitrary units of time that I mentioned, simply for example. Has nothing at all to do wiht my point.
Hmmm. Nathan, I did share thoughts based on personal experience, and offered both opinion and data to back it up. In an online forum, you can expect to find a wide variety of opinion. I provided a counter-point because I believe it and think it fits. It's especially pertinent when I encounter people that see trading (or day trading!) as a road to riches. In my experience, trading can take hard work and a lot of patience. Then I see many traders that give up after a few attempts (e.g. maybe it's giving up on a particular trading concept instead of following through on it). Often they give up because of their unrealistic expectations around money (either making it or keeping it). If more people were made aware of the statement you found so horrible, they might re-think and recalibrate their expectations, and that could have enormous benefit.

I can understand the "trading psychology" aspect of thinking like a winner, and how setting expectations of not making money feels like being a loser. However, IMO this is shallow psychology. It's akin to people thinking they need to win 95% of the time to be a succesful trader ... while those winning 35% of the time clean up with the greater profits. It's a matter of being focused on the wrong goal. The hardest thing for the beginning trader is discipline (actually for most any trader). Traders are an independent lot and often have a pension for wanting to do things their own way. How long does it take for a beginning trader to rein in those tendencies? Some never get it. Also, people starting new things will make mistakes, and mistakes will cost money. They will take profits too early and let losses run, totally upsetting their mathematical edge and chance of making money. From those things, it may take a year to recover. It all depends.

In my view, the best practice a beginning trader can learn is defense. In this context that means disciple, risk management, and following established rules. Follow those rules even if it means losing. Do the hard thing. I believe you'll find this is consistent with lessons you'll hear from successful traders.

So, I don't think it's a horrible thing to say, but I do see it as yet another statement without much context, which has been the theme throughout much of this thread.

It sounds like you are seeking only people to backup and confirm your ideas. If what I said has nothing to do with your point, perhaps you can illumate us with what you really mean, and give us some context.

Kevin

Nathan
Roundtable Knight
Roundtable Knight
Posts: 127
Joined: Sun Jul 13, 2003 3:52 am

l

Post by Nathan » Sun Aug 22, 2004 10:14 pm

Thank you for ksberg, for conttributing to this thread that I started. it came about as one of those things that happened after a long car ride: I realized how my views had changed over time, belief becomes disbelief, one sided views become many sided, and for some reason, wanted to get it down.

I also thought perhaps others had had this experience and would want to add to the list or name their own personal experience with changing viewpoints or "myth" busting, as i stated in the original post with my question.

I was not particularly looking for confirmation or refutation, I more just envisioned plain old, possibly boring, sharing of conquered trading myths, either real or emagined. After all this IS the psychology section.

:lol:

ksberg
Roundtable Knight
Roundtable Knight
Posts: 208
Joined: Fri Jan 23, 2004 1:39 am
Location: San Diego

Post by ksberg » Mon Aug 23, 2004 12:52 am

Nathan, thanks for providing the context of personal revelations. It changes things from being universal (i.e. widespread myths) to something that you've personally uncovered and/or transformed. In this context, mine is just another opinion, not having travelled in your shoes.

Cheers,

Kevin

BARLI
Roundtable Knight
Roundtable Knight
Posts: 650
Joined: Sat Jan 17, 2004 6:01 pm
Location: USA

Post by BARLI » Sat May 14, 2005 4:08 pm

Nathan, thanks for a post!

When i was just starting in trading i had way too many expectations... i always read words of Market Wizards and other great traders: "when you begin trade, small , do not over trade cos its when you will have your losses. "Richard Dennis said that in Market Wizards when he was asked to give an advice for a novice trader.

concerning myths, i'd like to add that i can see that theres no manipulation or some kinda "inside" traders who can manipulate the markets. the one can do it only for 1 or 2 days, if he will proceed messing with the market participants it'll screw him up and he'll get a lot of losses. its what Marty Schwartz said in his book Pit Bull, and thats what happened to Barings Bank from England when Nick Leeson lost 1.3 billion dollars on Nikkei at Simex.
Nathan wrote:this was in fact the thought that made me think of this thread, that i forgot to put into the post.

I have heard it said, "a new trader should 'expect' to lose money for at least a year, maybe more".

In my view, this is a horrible attitude.
i consider trading as any other work, until one finds his niche he will NOT have consistent profitable trades with only 1 exception:
if a guy is a son of some profitable trader who taught him how to trade personally. turtles were personally taught by Richard Dennis. i dont have such a dad, so i knew i'd have bigger losses than profits in first year of trading.

another myth is RANDOM WALK THEORY AND EQUILIBRIUM OF FINANCIAL MARKETS George Soros proves it to be wrong beautifully in his book the Alchemy of Finance, when he's got about 100% return that year.

Kiwi
Roundtable Knight
Roundtable Knight
Posts: 513
Joined: Wed Apr 16, 2003 1:18 am
Location: Nowhere near

Post by Kiwi » Sun May 15, 2005 8:13 am

A good set of "myths" and some interesting responses.

I would take partial exception to one "myth" and one comment.

"staring at live charts during the day is productive or will help trading. monitoring the markets is important, If it serves a Well defined, specific purpose. But, i wonder. for the vast majority of retail traders, I feel it is about being titillated by the markets and feeling "apart of the action". "

IMO this one "depends." For a start it depends on your timeframe and it also depends on what type of edge one is either trading or trying to develop. Personally I think that there is value in spending time living with the flow of the markets and building hypotheses about what one is seeing and how one could trade it. But, with caution because the ebb and flow of the markets is very deceptive and will tempt many into winging it with untested strategies.

For my long term strategies I dont look at all. For my 1/2 hour strategy I look every 30 minutes. For tick based day trading I watch the ebb and flow and respond whenever one of my setup/trigger combinations occur.

"i'd like to add that i can see that theres no manipulation or some kinda "inside" traders who can manipulate the markets"

This is not even close to true. I have not studied long term manipulation but I assure you that in the short term it is there and very real. If you need to prove it to yourself watch the eurofx during the european morning session and figure out what drives the high volume spikes and what happens in the short period following the spikes -- the think about the ability to use the futures market to make a profit from the cash forex markets (they drive each other to an extent). It is also very evident in the HSI futures.

BARLI
Roundtable Knight
Roundtable Knight
Posts: 650
Joined: Sat Jan 17, 2004 6:01 pm
Location: USA

Post by BARLI » Sun May 15, 2005 8:40 am

"staring at live charts during the day is productive or will help trading. monitoring the markets is important, If it serves a Well defined, specific purpose. But, i wonder. for the vast majority of retail traders, I feel it is about being titillated by the markets and feeling "apart of the action". "



i also disagree with this one, as it depends on the time frame you trade. from Marty Schwartz i learned that to day trade you HAVE TO watch the screen all day long during the entire time session to get a feel on the market. the guy proved it by being one of the best S&P day traders, he suggests to do this in his Pit Bull book.

Kiwi wrote:This is not even close to true. I have not studied long term manipulation but I assure you that in the short term it is there and very real. If you need to prove it to yourself watch the eurofx during the european morning session and figure out what drives the high volume spikes and what happens in the short period following the spikes -- the think about the ability to use the futures market to make a profit from the cash forex markets (they drive each other to an extent). It is also very evident in the HSI futures
Please note, i've mentioned:
Barli wrote:the one can do it only for 1 or 2 days, if he will proceed messing with the market participants it'll screw him up and he'll get a lot of losses
What you see in intraday Euro FX or Crude Oil is not always a manipulation(it might be hitted stops, or day traders who get out of the profitable/losing position and unload), but theres no doubt that there can be 1-3 day's manipualtion. but its absolutely impossible in long term...
Last edited by BARLI on Wed Nov 23, 2005 2:25 pm, edited 1 time in total.

damian
Roundtable Knight
Roundtable Knight
Posts: 815
Joined: Tue Apr 15, 2003 8:43 pm
Location: dusseldorf

Post by damian » Sun May 15, 2005 1:00 pm

BARLI wrote:
What you we see in intraday Euro FX or Crude Oil is not always a manipulation............ but its absolutely impossible in long term...


BARLI inadvertently mentions crude oil. I have a wacko loony theory at the moment which I don't fully believe at all but amuse myself with: the US government is manipulating the crude market to keep it from rising further and /or rising further too quickly.

1. There are lost of people very very very long crude. Very long.
2. after a strong and long bull move crude has formed an obvious congestion, perhaps even sign of medium term reversal.
3. If I wanted to force a market this is when I would strike. Add to the congestion profit taking, push it down a little further, add some bearish jaw-boning, push it down some more and eventually you will force very very long funds to exit thereafter the market does the rest of the work for you. Crude ends up back in the high 30's and the rise through 75 is delayed.
4. I have no interest in keeping crude low, but by crake the US government does. Peak Oil theorists have been calling it for years and now major US investment banks are putting out plus $100 research forecasts. For some, the writing is on the wall.
5. A while ago Greenspan came out with a rather silly reason why rising oil prices did not worry him: because distant future expiries were not pricing it a problem. Dec 08 CL at $35 therefore no problems. How scary that he could think like that. Anyway, that was then, things are real different now.

Like I said at the start, it is a screwy theory, but the price action in CL now is perfect for manipulating it to the downside. One thing is for sure: the more it is manipulated, the more you must be long. Disequilibria never lasts.

There are other markets with chronically unnatural imbalances. JPY is one. The government manipulation of that market is nothing short of astronomical. Japanese govt buy USD, sells JPY and they are SO LONG USD.... guess what they do with it: they fund a massive % of the US government debt. Whoops. A nasty relationship between two chronically imbalanced egg shells. The Japanese government also manipulates the Nikkei as well as investing in the domestic corporate commercial paper market (because banks wont lend to corporates in Japan). That is another mess I wont go into. Lets just hope the May 22nd earthquake prediction is wrong. I suspect that it will be, given that it was made by an Indian gent that bases his forecasts on the position of Venus. Although he has been correct in the past.

Believe me, I am not the crack-pot that this post makes me sound like.

Damian

BARLI
Roundtable Knight
Roundtable Knight
Posts: 650
Joined: Sat Jan 17, 2004 6:01 pm
Location: USA

Post by BARLI » Sun May 15, 2005 4:28 pm

damian wrote:Like I said at the start, it is a screwy theory, but the price action in CL now is perfect for manipulating it to the downside. One thing is for sure: the more it is manipulated, the more you must be long. Disequilibria never lasts.

Actually i love this theory...its what Jim Rogers talk about in his new book Hot Commodities. he brings lots of reasons for Crude Oil to reach 150$ a barrel till 2015, and as we know from Market Wizards, this guy has a very strong views and usually proves to be right. Jim is very bullish on Oil in his book. Japanese got lots of money, this country is the creditor #1 in the world, they can afford manipulating the currencies for their benefit 8)

PTCM
Roundtable Fellow
Roundtable Fellow
Posts: 82
Joined: Fri Dec 19, 2003 2:58 pm
Location: Hong Kong

What Kiwi said about HSI futures is very true

Post by PTCM » Wed Nov 23, 2005 5:30 am

Kiwi wrote:A good set of "myths" and some interesting responses.
). It is also very evident in the HSI futures.
What Kiwi said about HSI futures is very true. That's exactly how systematic traders pulled millions from HSI every month.

When someone's size is big enough(some guys here are even bigger then Paul Rotter), these guys could control the trend for a couple hours and make a lot of dough...

Post Reply