Topic: Goomboo's Journal - page 53. (Read 281461 times)

Sage words indeed.

Great thread!
Advice to live trade by!

One last thing before I sign out,

This thread is directed at individuals who are trying to trade bitcoin for a profit (myself included) - not the long term investors / developers / enthusiasts.  My hope is twofold - 1.  Give a reality check to people risking their money and 2.  Give you a way of actively, impartially, and rationally approaching the markets.  It's definitely not the "Holy Grail", but it's a system and if you stick with it, you are miles ahead of most people on the other side of your trades.  You still have a high probability of losing it all - commissions + spread + volatility are really, really rough in this market, let alone the fact that the market can't be explained by technical analysis as well as other, more liquid markets.

For those of you who are trading without a plan (by the seat of your pants), betting it all on the next huge move, hoping to make a quick billion...let's say you actually did.  What if you did 10:1 leverage and sold your house and made a few million dollars?  Now you're rich, but not for long.  The character traits - rash, impulsive, irrational, gambler - are still there.  You never faced your flaws and you more than likely will risk this windfall profit again.  You've earned your million and suddenly you see an opportunity to turn it into a billion!  Quick, take the trade!  Wait, this time it's not doing what it did last trade ... You see where I'm going with this?

It is how we manage our risk that defines us as traders.  I've worked for two trading firms and been on 10 different trading floors where millions (billions) are made and lost each year and I can tell you that we don't care if you can make a lot of money.  If I were hiring you and giving you a trading book, I care that you won't lose my money.  I'd rather have 200 traders who can consistently grind out profits at a low risk than one trader who can earn more than all the others combined yet has a significant chance of failure.

If you approach risk-taking haphazardly, throwing caution to the wind, rather than with a tested plan, you will eventually face ruin.

I'm certainly not making trading sound glamorous talking about losing more than winning, but I think that's okay!  Too many people enter this business with dreams of making millions rather than the harsh reality that most people fail and lose money they couldn't afford to risk in the first place.

These are the highest profitability numbers I've ever seen in the FX market.  Typically 20% of FX traders actually make money in a given quarter.  Most of those marginally so with only a handful actually making "the millions".  I would be very interested in seeing Bitcoinica publish their client profitability numbers so we have a comparison to the "real" market.

http://forexmagnates.com/forex-brokers-profitability-report-q4-2011-shows-steep-drop-number-accounts-increase-traders-profitability/

Cool link and easy to follow, thanks for finding that for us!

A note about not allowing a trade to mature...

It's really important in trading to start with a tested system, backtest this system, and then trade it in real time as close to you did in your testing.  It makes no sense to test a strategy if you will not trade the strategy exactly how you tested it.  And if you don't have a strategy, how do you know when to sell?  How do you know when to take a profit?

When you take a trade, you have no idea if it will be a profit or a loss.  The only idea you have is what has happened in the past.  This is the basic definition of technical analysis - studying the past gives you a rough idea of how history will transpire.

Here is a chart showing the backtest of this moving average crossover on daily charts in the Euro-Dollar market (this picture has been shown in a previous post).  Your eye is probably drawn to the trade right in the middle of the chart - the largely profitable one.  See something interesting about this trade?  Right as you would have purchased, the price went against you.  If you didn't have a plan, you probably would have cut this trade because you didn't like the feeling of an open loss.  Imagine it, you open a trade and *boom*, you are losing money.  By sticking with the simple strategy, you would have won quite a bit of profit on this trade.

Now look at the other trades.  There are 6 trades on this chart, 2 of which are profitable yet the strategy made money.  Can you handle losing 4 out of 6 times?  Can you continue trading a strategy even if you are wrong AND lose money 5, 6, 7 times in a row?  Psychology has shown that one of the most marring experiences is being wrong and losing money.  Now look at the second picture (I'll keep typing there).



Here's a page of stats on the moving average crossover strategy.  We've covered a few aspects of this in a previous post.  The thing I want to draw your attention to is the max consecutive losers row.  Can you handle trading a strategy in which you lose up to 7 (or more) trades in a row?  Now look at the average loss row.  On average, you lose 1.58% (in the normal currency market) on a losing trade.  Multiply that by 7 - do you have the discipline to sit there and trade again when you are down 11% and you have lost 7 trades in a row?  This is in the "normal" currency market...a move of 2% in the currency market in a given day is a _massive_ move in most pairs.

Can you see how BTC is a very difficult market to trade, emotionally and financially?

Draw your eye to one last thing - the MAE at the bottom.  MAE stands for max adverse excursion.  Basically this number tells you on average how much a trade (winning or losing) goes against you before the end of the trade.  On average, every trade you did would be down 1.64% at some point in the trade.  If you have an "itchy" finger and need action, you could sell out of a trade which would have driven you to fresh profits.

Thanks for clarifying.

Well no, my exit strategy is two-fold.  1.  Exit at the crossover either at a loss or at a profit.  2.  In the event of extreme price shock (10-15%), exit immediately.

I've just stared at enough charts that I have a pretty good idea that if the market were to drift down, it probably would crossover in the range of $6.10 (give or take 5-10 cents).  This is based on the price action at the time of writing...in a few hours, this $6.10 number will be obsolete, but it's still a point for me to know roughly where I'll be wrong.  It is really, really important in trading to have an idea where "wrong" is so you can cut your losses.

You know you need to step out of the house when you can draw where the averages will be without them actually on the chart  

The crossover is based purely on price, not volume.  If there is no activity and price just sits there, the indicators will eventually converge / give an exit signal.

When it comes to trading, the uncomfortable thing is typically the right thing to do.  I'm not happy that it's going against me, but if I were to cut it right now, I could be left in the dust if it reverses.  A tried and true statement in trading - don't chase prices.  If you miss your entry or sold out early, you're pretty much done with that trade.

For anyone wanting to know more about the exponential moving averages Goomboo is using checkout this video. It is very helpful and makes a point of caution just as Goomboo has in that there are often crossovers which turn out to be false positives.  Not a long video, just a few minute introduction for anyone unfamiliar with the concept.

Here's the video: http://www.investopedia.com/video/play/SMA-versus-EMA#axzz1k74XrzO4

So  if the signal is wrong, you will probably be exiting at $6.10, anticipating the crossover to happen around that price?

So what about this situation?
You went long at $6.35. Then had an opportunity to get out at a small profit, but didn't because the indicator said so, and now it's a nickel below entry. The EMA's still look good (in relative terms).
It seems to me, if the price crept down slow enough, you could end up losing a sizable chunk of capitol due to the next crossover being delayed by very low volume. Obviously, it could still go either way, but it's not looking very good.
I suppose the stagnation is...good! At least it's not going down fast. 

Oh and I just eyeballed the chart and saw that that area was a prior area of support where price reverted into this new trend.  Basically that's the point where it reversed, so if it fell below it, it's safe to say that the averages will have crossed and I will be in a losing trade.

For those who are trading this kind of system, remember that we typically only are "right" by making money on 30-40% of our trades while we lose on up to 70% of our trades.

Wrong for me = loss on the trade.  If I thought the price was going to go down and instead it goes up, then I'm wrong.  Basically if a crossover happens below my entry price, I'm wrong and need to get out to prevent further losses.

Thanks!

FTFY 

How do you know when signal is wrong?

Is it a percentage drop, or -.25 cents is a good gauge for wrong signal, or just your gut feel ?

Lol yeah, that is a conventional problem with showers these days.  Glad to hear the email alarm worked.

Was just away from pc. Lost 2% on trade now long @ 6.42  

One good point my email alarm worked. Only problem is you cant read your mail in the shower 

Right, and if this signal is wrong (which it has a high probability of being wrong), I'll be exiting around $6.10, probably.