Last week I wrote an article about a situation that often stymies traders who are serious about learning a discretionary strategy. During forward-testing, many tools inadvertantly give clues as to what the next bar will do, rendering the effort useless.
One tool, however, presents a clean view of the chart at all times. That tool is Telechart by Worden Brothers.
Forward-testing – done correctly – gives a trader the chance to see a trading strategy in action does bar by bar. Even though it lacks the emotional component of live trading, its a necessary step to learning discretionary trading. It does take real effort though.
If you’re serious enough to do forward-testing, then you owe it to yourself to set up an environment without “cheats” that cheat yourself out of the real experience. Telechart is the one tool in my kit that helps me do that.
Many of the tools I’ve tried subtly spoil the surprise when used for forward-testing.
What I mean by forward-testing is taking a chart, scrolling back in time – without peeking! – and then stepping forward one bar at a time. The purpose of the exercise is to try out a discretionary trading strategy in a safe environment. Granted it is not the same as live trading but it does give one a way to see how the decision-making might work, if not feel.
The trouble is that many tools give away the secret of the next bar with subtle and not-so-subtle hints about what the next bar is going to do. These type of signs you wouldn’t really find at the right edge of a real chart, they are artifacts of display in the middle of the price history.
Take this example at the top of this article. Can you guess what happens with the next bar without applying any trading strategy, just looking at how the chart is rendered?
Next post will explain this example and show you a tool that’s not a spoiler.
In a previous post, I lamented the way StockFinder by default gives a non-standard plot of the MACD indicator and the MACD Histogram. To fix it, you need to do two things. The first is to set all the moving averages, even within the MACD, to Exponential. That’s quick and easy. The second is to get the MACD lines and the MACD Histogram aligned in one pane. That is a little trickier.
This article explains how to get both MACD lines and histogram plotted in a pane with the same zero axis. The steps are:
1. Select the MACD as shown (click for bigger image)
2. Right-click to bring up menu as shown (click for bigger image)
3. Select “Edit Plot” on the StockFinder dialog box (click for bigger image)
4. Center (click for bigger image)
5. Repeat for MACD histogram indicator in same StockFinder pane
While you are in there, don’t forget to change the default Moving Average types in the MACDH plot from Simple to Exponential. See the Stockfinder’s Quirky MACD post for more info.
Watching the football teams psych up for the playoffs today, I’m reminded how big a factor emotion can be! In sports and many other competitve endeavors we strive to pump ourselves up emotionally to win. Check out this video by Adam Hewison to see how dangerous those same emotions can be to your trading.
Adam Hewison’s Minute 3 video (click here to watch) suggests traders choose between technical and fundamental information for their trading decisions.
I have to ask: How about using what works?
We have the technology now to check out how well each of the different types of data performed in the past. You can look at the track record of experts writing newsletters, back test technical indicators, back test fundamental numbers like Earnings Per Share (EPS), Price/Earnings, and most of the key statistics of a company. Services tell how well seasonal predictions correlated with actuals, and even programs to data-mine for dates a market “always” moves.
With all that at our fingertips, we’re in a great position to estimate the quality of data source, and cherry-pick the data sources that demonstrated their effectiveness — or at least avoid the ones that are complete hooey.
However, our human brains are wired for stories. Both fundamental analysists and technical analysists can weave compelling stories. Unfortunately, at times the juiciest stories are not based on the strongest data.
Perhaps the key question is: Do you want to make your decisions based on objective data with a known track record, or do you want to remain a sucker for a good story? Adam Hewison is right in that you need to decide what type of information you will use to trade.
One way to facilitate that decision is to list the types of traders and their time frames:
Buy and Hold Investor – forever
Active Investor – longer term of a year or more but has a plan to sell eventually
Position Trader – catch one leg of a trend, hold trades for weeks or months
Swing Trader – get in for a quick pop and out within days
Day Trader – doesn’t hold overnight
Market Maker – constantly offers a bid and ask price
Understanding yourself is essential. Understanding the different risks and rewards of trading in each of these timeframes gives you a framework to find the optimal spot for you. A good place to find out more is the BackTesting Report Baseline – click here to download it directly (no registration required).
The reasons these works are revered as classics is not because he gets the Market Wizards to reveal their “magic” strategies. In fact not one says explicitly how to profit trading and they all have different methods. What we do get is insight into what makes them tick. See below for a partial list of traders mentioned in the video. Its a very accomplished group.
In the lecture, Schwager pulls together the common traits of these elite traders and distills them into critical success factors. All are important ingredients for success. The one I want to highlight as critical is Schwager saying that none of the wizards would do something like “la-de-da today looks good to buy bonds”. They all had some sort of pre-planned strategy, that strategy gave them an edge in the market, and they knew what to do with it. Schwager also pointed out that by entering the market without a plan, the amateur trader can do worse than chance.
Schwager touches upon the paradox that trading seems easy yet requires a tremendous amount of work to master – I can definitely relate!
The video (and the books) are somewhat dated. I doubt the traders Schwager mentions are today getting chart books delivered to their homes on the weekends. These days, the web and services like Market Club offer charts on about every market that moves so we can all pour over thousands of charts like the masters. Or, we can program our computers to scan for us. Schwager’s comments on computerized trading is another area that is outdated.
Even so, many of the traits and behavioral patterns that made these traders great can offer us timeless lessons towards success. Here’s who I heard Schwager cite as Market Wizards: Jim Rogers, William O’Neil, Ed Seykota, Michael Marcus, Marty Schwatrz, Paul Tudor Jones, Monroe Trout, Linda Raschke, Van Tharp, William Eckhardt, Stanley Druckenmiller (worked with George Soros).