Thursday, September 29, 2005

ZEN in the markets

The title of a book by Edward Allen Toppel, which I recently came across and whose approach really fascinated me.

I thought I already had a KISS approach to trading, still some huge market moves just did not trigger in my trading system, regardless what indicator I used. Just to name an example: Look at some V-shape moves, the market makes. On my favorite Euro that means 25–40 ticks down, bottom made, no retest, just 30–60 ticks up. As I say a V.

For me having acquired discipline it means: Watch it, wait for your signal, you will get one, be patient. And sure enough there is a signal long after 45 ticks, but Euro being 55 ticks up, followed by a retracement of 10 ticks does not mean the direction is now up again, regardless what your indicator tells you. The direction is choppy sideways.

‘Till reading Eddie’s book, I just did not get a decent entry signal to these moves.

The Zen approach to the markets is quite different. We all rely heavily on TA, PA, on indicators telling us what to do, giving us probabilities of future movements: If the Turbo-cci makes a sling against the regular CCI, the probability is high, that a retracement has come to an end and the trend will be resumed. If price touches, bounces and then crosses the 34ema, the probability is high that a trendchange has happened. If a double top has been made, go short.

Zen is different: It accepts, that noone knows the future. Actually Eddie states, that you can’t predict the future from past pricemovement. I won’t go sofar, as imho, while you can’t predict the future with TA, you can say there is a 75% probability, that such and such pattern will develop, if you see such and such pattern on your chart. So TA can give you a statistical probability, that such and such pattern will win over time. Simply speaking: TA gives you an Edge.

Fine. But…it leaves you standing aside, when the market is doing some huge moves, which do not fit any pattern you have in your tradeplan. And we all know: To pay for your stops, to really succeed in the markets, we need to be in the markets at times, when the big moves occur.

So, why am I writing this, what holy grail does Eddie’s Zen approach have, which TA does not give us?

It is KISS. It is so basic, that at least for me I have to admit, that it became buried under a ton of market knowledge, of indicators, of looking at charts, until I was no longer seeing the obvious.

ER trading at 661.0, 661.1, 661.2, 661.5

First trader willing to pay 661, next one paying 661.1, next one 6661.2 and then 661.5

You all are able to visualize this plotted on a chart.

You can’t know if the next trade will be at 661.6 and then 661.8 going upto 663.0. Your indicators might tell you 661.5 is a good entry for a long, but let’s look at the series again:

The only thing you know for certain is, that prices go up. And what is the prudent thing to do, if prices go up? Go Long, trade with the trend, don’t stay in front of a freight train.

And if the trading goes 661.5, 661.3, 661.2, 661.0, 660.9?

Prices go down. You have to assume that a trend will continue until it reverses. Therefore you go Short.

The only thing you need to introduce in your trading is a kind of Switch parameter, something which tells you the previous trend has reversed and it’s time to turn around and look in the other direction.
It’s like swimming in the ocean. You go up, up, up with the wave, you are carried over the crest and then it’s down, down, down into the trough, from where it’s again up, up, up.

But when do you know you have really made the top? You can’t know it. Simple as that, so don’t try to predict the top.

Know your market and then use a parameter, which tells you, that if your market retraces x ticks from the top or bottom, the trend has changed. Will you be right every time? Sure no, that’s what Stop’s are for. But using this approach at least the market has already told you, by trading in the new direction for x ticks, that traders are already taking profits and looking for the market to reverse the trend. And the only thing you do is assuming that this new direction, this new trend will continue.

I’m new to this approach, to this thinking. But applying it to my charts I see one thing: I have tradesignals everytime my indicators tell me to go long or short as well, plus quite some, I don’t get with my indicators. Now it’s up to backtesting to see, whether this new approach gives me a better overall performance, better statistics, than the TA based approach.

I will let you know, what I find out.
For the time being, what i can sure say about Zen in the markets: 
It is a great KISS approach to the markets, and it let’s you concentrate on the really important aspects of your trading system:

Trade management

BTW:

The very last question I ask myself, before I press the trigger is now:

Are prices going up? Yes…Go long

Are prices go down? Yes….Go short

1 comment:

An Investor said...

"The only thing you know for certain is, that prices go up. And what is the prudent thing to do, if prices go up? Go Long, trade with the trend, don’t stay in front of a freight train."

"Prices go down. You have to assume that a trend will continue until it reverses. Therefore you go Short."

This sounds a little like the Teresa Lo's description of the "Forrest Gump" trading of "Oleman:"

"In the early days of the Internet, before the explosion of financial information related to the current mania, there were few places where traders could exchange information outside of the brokerage business. I stumbled upon the AvidTrader site and they had a free chat line. I hung around there for a long time and one day, a gentleman using the handle "oleman", an S&P futures trader, came into the site. We became regulars on the site and at some point, I sent him an email, asking him about his methods. He replied that he traded like Forrest Gump.

"Armed with the definition of uptrend and downtrend Oleman said that in his trading he would buy every dip on the way up and be wrong once at the top, whereupon prices would fail to make a higher high. And on a downtrend, he would sell every rally and be wrong once at the bottom when it would fail to make a lower low. How much simpler could it be?"