Topic: Goomboo's Journal - page 59. (Read 281461 times)

A word of advice to those who want to be traders.

First off, let's establish - what is a trader?  A trader is someone who will buy or short with equal willingness.  If your objective is to profit from changing prices in the financial markets, you are a trader.  If you are holding onto the concept of bitcoin and believe in its future, you are an investor.

What is a trader's objective?  Profit.  He exists purely to profit from the financial markets and earn a return on his or his investors' capital.  This said, it is a trader's duty to seek out markets in which he can confidently exude a profitable edge which is both consistent and scalable.  At this point, I need to draw the harsh reality to the fact that bitcoin, at the moment, is not a scalable market.  You cannot earn even a moderate return on sizable sums of capital ($1m +).  

Since you are a trader, it is your duty to spend most of your work and energy in markets in which you can earn a return.  This is why I prefer the "real" currency markets.  In a given day, maybe $2,000,000 trades in the bitcoin markets.  In the currency market, a single currency pair - EUR/USD - millions trade every minute.  If your objective is scalabe profit, this is the type of market you should be involved in.

You will hear many voices about technical analysis - "it works", "it's snake-oil" - these comments are just opinions.  The facts about technical analysis is that it is a tool, nothing more, nothing less.  Technical analysis can be used to generate profits in the markets if you know how to implement and use it.  Just like any other tool, if you haven't spent the time to learn how to use it, technical analysis can lead to lots of pain and blame.

I believe that technical analysis is an effective method for extracting profits from the financial markets.  I do not base this opinion on what a book, a person, or a forum says.  I base this solely on the fact that I have spent thousands of hours testing thousands of ideas across nearly every traded asset class and I have found that with dedication, persistence, and effort an edge can be created.

Here is my tangible advice on how you can learn to be a trader:

1.  Develop a system
--Learn about technical analysis until you have a conceptual framework of when to participate in market action
--When will you enter the markets?
--How much money will you risk per trade?  Is this scalable and dynamic?
--When will you exit the markets?  Both profitable exit and unprofitable exit.
--What hours of the day will you trade?

2.  Backtest the system
--You must acquire or create some method of exploring if your system worked in the past.
--My suggestion is a demo feed connected to NinjaTrader and MB Trading.  When you open a chart in NinjaTrader, you can click the arrow keys to move a candle onto and off the chart allowing you to see the price action as though it is happening live.
--Drag a chart of historical prices one candle at a time, recording your trades as though you actually were taking them in a spreadsheet.  Chart your profit and loss.  Analyze, scrutinize, and try to disprove your edge.
--I suggest you do this for 200-400 trades across as much data as you can get your hands on.

3.  Forward test the system
--Once you have confidence that your strategy worked in the past, you must ensure that it works in the future.
--Open a demo account and trade fake money for at least two months to prove that your edge still exists

4. Live trade the system
--Start with tiny amounts of money and adhere to your system perfectly.  The amount of capital at risk should be so small that if you lost it all, you wouldn't be financially disadvantaged.
--If you can continue to make profit for at least 30-50 more trades, you should be able to gradually add more and more capital to your system.


Of course this isn't easy and more than likely the majority of people won't do it.  My purpose in saying this is just to let you know that this is what it takes if you wish to have a sustainable edge in the market.

I've been lurking for a long time :p ... basically I didn't want to influence the community because to be honest, I believe that the masses are almost always wrong.  I would listen to the opinions of all of the people on the speculation board and when they were screaming that it was going to "da moon" then I was looking to get short.  Additionally, BTC is kind of my "pet project" - I spend most of my time / efforts / money in the "real" currency markets trying to find ways of compounding larger quantities of money.

Here's a little "proof" of how the masses are almost always wrong.  FXCM, a large Forex brokerage posts a chart showing the aggregate positions of all of their traders.  When the red line is above the green, traders are mostly short and when the green is above the red, traders are mostly long.  Notice how most people consistently lose money by betting against the trend?  They have a mentality of "I'm getting a good price, it's lower than it was yesterday...I'll buy!".

http://www.dailyfx.com/forex/technical/ssi/eur-usd/2012/01/19/ssi_eur-usd.html

And here's one more for you - here's a breakdown of all of the forex brokers operating in the United States and the percentage of their profitability.

http://forexmagnates.com/us-forex-brokers-profitability-report-for-q3-2011-oanda-back-on-top-profitability-up/

So basically - if the speculation board starts screaming buy, you can be fairly confident that a good short is coming up.  I didn't want to influence it and be a voice screaming "be rational".  Too late :p.

The pleasure is mine. Looking forward to updates.

Yep, this is basically where discipline comes in.  Do you have the emotional strength to sit on the sidelines until the moving averages cross?  Right now you SHOULD be long according to the system, but if you are not, it is too late.  You have to wait until the crossover to go short.  This is why many traders just can't make the cut - a lack of discipline.


Prediction - this is the sell-side of technical analysis.  Individuals who try and predict where prices are going typically do so so that they can sell their information to subscribers / etc.  Predictive technical analysis is normally not done by actual traders.  Traders are reactive to technical events.  Basically, we react to the moving average crossover by trading rather than predicting where prices will be.  I have absolutely no idea where price will be tomorrow or next year, but I absolutely have a game plan as to how I will handle market events as they come along.  I am a trader - I react to events, I don't predict them.

wow this stuff is crazy!  so are you pretty much out of luck using this system until one of the 2 lines crosses to start a new position using the technique? 

for example right now the bigger number (21) is above the lower (10) meaning its saying an uptrend.  I assume there is no way to use this system to predict when they may cross?

For those who are new to the idea of a moving average crossover, I'll go into the benefits / detriments of it.

One of the main benefits of a trend-following system is that it aligns you with the direction that prices are actually going.  Below is a chart showing the S&P 500 and how you could have protected / made money during the financial crisis and crash of 2007-2009.  The comically-big red arrow shows where you would have exited a long position and entered a short position.  This would have earned you a 59% return during the financial crash.  Following this, you would have exited your short position and entered long, earning you a 31% return on the run-up in prices.  Basically, trend following earns a great return when prices actually trend!



However, prices don't trend that often.  Lots of times they just chop around - this is known as whipsaw.  Basically you get whipsawed around and can steadily lose money practicing trend following.

In this thread, I'm going to attempt to trade my way to a regained account balance through a simple system.  If I am able to do this, then I will be justified in adding a few thousands dollars to my trading account to attempt to continue profitable trading of the bitcoin market.

Thanks man!  I'm really hoping that having a simple system helps many of the traders on here.

Sent you 0.1 Bitcoins in appreciation of this thread.

I strongly disagree with you proudhon.  One of the simplest trading systems is known as the Turtle Trading System.  In the system, you basically buy if the price is higher than the past 20 periods or sell when the price is lower than 20 periods.  This system generated millions for the participants and followers of it.  One of the "Market Wizards" did a test in which he hired a group of random people and taught them to trade the simple system - the majority of them made several million dollars in the following years.

If you would like to learn more about the Turtle Trading System, the complete rules can be found here:
http://bigpicture.typepad.com/comments/files/turtlerules.pdf

Also, here is an image of the historic performance of this system for the past 41 years.


This was found in this thread:
http://www.tradingblox.com/forum/viewtopic.php?t=7379

Also, the great book on the Market Wizards - or some of the best traders ever:
http://www.amazon.com/Market-Wizards-Interviews-Top-Traders/dp/1592802974/ref=sr_1_1?ie=UTF8&qid=1327115564&sr=8-1

Hi chsados,

1.  Go to www.bitcoincharts.com
2.  Click on Mt. Gox on the right
3.  Change the time period to 10 day, 1 hour - it's kind of hard to see on my monitor, but in this type of market, it doesn't make too much sense to scrutinize price action
4.  In the "Moving Averages" box at the top, click on exponential on 10.  Next, click on exponential for 25 and type 21 instead and click draw.

The simple logic behind moving averages:

Moving averages basically show you the trend / direction price is going.  They are used in many industries for a variety of purposes, but here in trading, we use them for trend following / support and resistance.  I use them to give trade signals and the trend direction.  When the trend is going up, the shorter term moving averages will be above the longer term moving averages.  When the trend is going down, the longer period moving averages will be above the shorter term moving averages.

I use the 10 and 21 because they fit price well and I have found them to generate not too many or too few trading signals.

Here's a chart of the financial sector.  Basically, the moving averages give you an idea where price COULD be heading in the future:

thx

Haha yeah, I've found that the easier the strategy to understand and implement, the better the results!  One of the best books I have ever read on technical analysis is below.  In the book they have a whole chapter on old and simple strategies backtested for nearly a hundred years.  Their findings is that even a simple and well thought-out system outperforms the market by a cumulative of hundreds of percentage points.

Technical Analysis: The Complete Resource for Financial Market Technicians
http://www.amazon.com/Technical-Analysis-Complete-Financial-Technicians/dp/0137059442/ref=sr_1_1?ie=UTF8&qid=1327114543&sr=8-1

Lol, yes - I have seen some of the silly stuff posted here about Elliot Wave / Lunar Cycles / "Look at this LINE"

--Technical analysis only works in markets in which there are enough participants to make it work.  It's a self-fulfilling prophesy.  Elliot Wave / trend lines don't mean very much here in my opinion :p

Hi nmat, I have been trading bitcoin since April of last year.  I made the same mistakes that many here have made.  I am very experienced with technical analysis / risk-management / trading / markets, but I believed BTC was different.  My first trade I bought at $14 and sold at $18 (after the huge bubble) using technical trading / my plan.  I then caught onto the "bull fever" thinking that maybe this was the future and it would go to $100,000 a coin.  I reinvested my profits and sold out at $6, losing 50% of my small investment.  Basically, I have snapped back to reality - "there is nothing new on Wall Street, since speculation is as old as the hills" - and I am trading using my system / methodology once again and I thought I'd document it on this thread / talk to other bitcoin traders to see what they're up to.

I view bitcoin as highly speculative, so I have only put "play money" here.  I trade the currency market with my company and retirement accounts.

By the way, if no one has read this, it is awesome...a great reality check.  I think you can get it free in some places, but I suggest buying it to support the authors:

Reminiscences of a Stock Operator
http://www.amazon.com/Reminiscences-Stock-Operator-Investment-Classics/dp/0471770884/ref=sr_1_1?ie=UTF8&qid=1327114156&sr=8-1

Not for long.

Oh, and one more word about leverage!

I do use Bitcoinica, but I DO NOT use more than 2.5 times leverage.  My method is a trend following system which simply means I'm looking for a new trend to start and I want to be trading in the direction of that trend as long as it remains.  Trend following systems typically only have a 30% profitability ratio which means that if you trade, you have a 70% chance of being wrong and losing money on that trade.  If you are using 10:1 leverage and are wrong 3-5 times in a row, you're bankrupt!

Leverage is great in some situations, but it is a double-edged sword.  The beautiful thing about leverage from my perspective is that it allows individuals to practice fixed-fractional money management on lower timeframes.  Basically this means that leverage allows you to adhere to your risk management system by giving you buying power.

An example of an appropriate use of leverage:
-You have a $1,000 account.
-You are willing to risk 2% on a trade.  This means that if you're wrong, you lose $20.
-You know that a logical stop / place for you to exit if you are wrong is $.30 away from the market price.
-This means that you should buy > Dollars At Risk / Price move > $20 / $.30 = 66 bitcoin.  If you didn't have the money to buy 66 bitcoin, leverage finds a use.

can you go into a little detail about what exactly 10/21 means?  how do i set btccharts up for EMA?

You'd think that simple strategies like this would not work.

They actually do.

Beware! The Boogie Man resides in these parts!  

Good luck!