Dump it Here

[Skate]

"Trading for Beginners - Skate's Practical Guide to Profitable Trading"
A daily series of posts aimed at those just starting out on their trading journey.

10. Hindsight bias – a human defect
A typical cognitive bias that can influence decision-making is hindsight bias, which is especially prevalent in trading. Hindsight bias, also referred to as the "I-knew-it-all-along effect," is the tendency for people to overestimate how predictable historical events were before they happened.

Even when events were unknown or unexpected at the time, it is simple to regard them as inevitable or predictable with the benefit of hindsight. Traders must realise that past occurrences are not always predictable in order to avoid the negative impacts of hindsight bias. This can cause traders to place an excessive amount of faith in their capacity to foresee future market moves and to base their judgements on false presumptions.

It's crucial to approach trading with a realistic and impartial perspective to prevent falling victim to hindsight bias. Instead of using hindsight to guide your actions, concentrate on using the knowledge at hand. You may lessen the effects of hindsight bias and improve your chances of market success by maintaining discipline and adhering to your strategy.

Keeping thorough records of trades and decision-making procedures can also aid traders in assessing their performance and determining where they need to adjust.

In the end, trading well involves a mix of information, skill, and a readiness to change and grow. Traders can enhance their decision-making and long-term financial success by being aware of typical cognitive flaws like hindsight bias and actively striving to overcome them by maintaining a realistic viewpoint.

Skate.

 

[Skate]

How long do we persevere with poor trading results?
It can be difficult to determine how long to hold out after experiencing a string of losses before modifying our approach. This morning, I read a tweet on Twitter about a member who is experiencing ongoing daily losses, which made me realise how crucial it is to keep abreast of changing trading conditions to prevent losses from spiraling out of control by constantly revising our trading approaches when required.

Markets are fluid
It's crucial to keep in mind that sticking with an unsuccessful plan for an extended period of time might result in large losses and missed opportunities. As traders, we must be proactive in evaluating the usefulness of our techniques and modifying them as needed. This entails routinely assessing our performance, keeping an eye on market trends, and keeping up with events that can affect our trading.

Skate.

 

[Skate]

Trading with false hope
There are some traders who continue to hold onto the hope that things will get better in spite of accumulating losses. Observing others go through these experiences is never fun. Maintaining a trading strategy's suitability requires ongoing evaluation ensuring losses from spiralling out of hand.

It's also critical to acknowledge that losses are a typical aspect of trading
There will always be losses, regardless of how good we are at what we do or how strong our trading plan is. On the flip side, a strategy shouldn't be quickly abandoned at the first sign of difficulty. Losses can occasionally only be a momentary setback, and with the right changes, our strategy may recover. Striking a balance between persistence and adaptability is so essential when dealing with poor trading results.

Skate.

 

[DaveTrade]

It's also critical to acknowledge that losses are a typical aspect of trading

It would good to expand on this topic at some point in future posts, specifically ways of managing losses. You probably already had this in mind so I hope I'm not interfering with your flow by throwing these comments in.

 

[Skate]

It would good to expand on this topic at some point in future posts, specifically ways of managing losses.

@DaveTrade, you hit on a very important topic
I thought I was finished posting for today, trying to limit my posts to one a day because I have trouble knowing when to stop. But I always respond when others share, make suggestions, or answer a question.

Developing a good trading strategy
There are many easy ways to manage losses & even reduce their frequency by formulating a sound trading plan that incorporates solid risk management techniques. This requires understanding how to manage losses, which is a crucial topic for traders to investigate. In fact, I think it's essential for traders to have a strong loss management strategy in place since it can play a big part in deciding long-term success in the markets.

Loss management techniques
It would also be beneficial to discuss these in greater detail in subsequent postings because there are numerous different loss management strategies and techniques. Examples include employing multi-level trailing stops, a time & momentum stop as well as a lock-in profit stop, all whilst managing position sizing.

More to follow...

Skate.

 

[Skate]

ways of managing losses

Each strategy will have its share of pros and cons in managing losses
So it's crucial for traders to comprehend how they operate and when to apply them. Examining various loss control techniques in a later post will assist traders in gaining a deeper understanding of risk management and why is so important to create a strategy that best suits your risk tolerance. Meaning, as traders we all have varying levels of financial pain we can absorb before making an emotional decision.

I appreciate all suggestion
Dave, I'll be sure to keep in mind your suggestion as I prepare future posts on this significant subject you have raised. But in the meantime, I'll post up a few backtests to show the difference in how "timing the entry" can make an enormous difference in managing your losses going forward.

But first
I want to explain how risky it is to rely exclusively on backtesting results. Many of us, see the great results & become starry-eyed believing it as reality.

Skate.

 

[Skate]

It can be risky to rely exclusively on backtesting results
A useful tool for traders to test their trading methods and assess their past performance is backtesting software. Results from backtesting, however, are only as reliable as the inputs and assumptions that went into their development. Traders may unintentionally incorporate biases or flaws into their backtesting procedure, producing results that are exaggerated or incorrect.

We all trade in probabilities
Additionally, because backtesting uses historical data, the results could not properly predict how the market will behave in the future. What worked in the past might not work in the future because the markets are always evolving. Consequently, it is crucial for traders to continuously assess and modify their trading tactics in order to account for shifting market conditions.

Skate.

 

[Skate]

Backtests always look promising
Relying entirely on the outcomes of backtesting might result in arrogance and complacency. Based on past performance, traders might believe their techniques are infallible, taking on more risk than they ought to or failing to adjust to shifting market conditions.

Backtesting is a helpful tool
But it's important to understand its limitations and not rely primarily on backtesting findings. Traders should be wary about believing that past performance will inevitably transfer to future success and instead constantly analyse and change their methods based on the current market conditions.

Skate.

 

[Skate]

Skate's 200kay Strategy
This strategy is 100% cash at the moment. The actual results mimic the backtesting (shown in the next post) with only slight variations I've previously discussed.

I'm using the "200kay Strategy" to display a point I'm trying to make
This strategy makes a perfect example of how incorporating a well-crafted "Buy" timing filter compares to using a vanilla 10-period Index Filter that I will show in the next post.

Setting benchmarking
Showing the actual trading results versus backtesting hopefully, reinforce the advantage of using timing filters over using a simple moving average (SMA) to determine the timing.






Skate.

 

[Skate]

It would good to expand on this topic at some point in future posts, specifically ways of managing losses. You probably already had this in mind so I hope I'm not interfering with your flow by throwing these comments in.

Managing losses
By starting out with this premise (managing drawdowns), we should all develop a strategy with this as our prime objective.

Benchmarking (1st January to 17th May 2023)
Showing the actual trading results versus backtesting hopefully, reinforce the advantage of using timing filters over using a simple moving average (SMA) to determine the timing.






Skate.

 

[DaveTrade]

View attachment 157025

Skate's 200kay Strategy
This strategy is 100% cash at the moment. The actual results mimic the backtesting (shown in the next post) with only slight variations I've previously discussed.

I'm using the "200kay Strategy" to display a point I'm trying to make
This strategy makes a perfect example of how incorporating a well-crafted "Buy" timing filter compares to using a vanilla 10-period Index Filter that I will show in the next post.

Setting benchmarking
Showing the actual trading results versus backtesting hopefully, reinforce the advantage of using timing filters over using a simple moving average (SMA) to determine the timing.

View attachment 157026

View attachment 157027


Skate.

So far 'max consecutive losses' is not larger than 'min consecutive wins', this would feel comfortable to trade for me. Well done with this one Skate.

 

[Skate]

So far 'max consecutive losses' is not larger than 'min consecutive wins', this would feel comfortable to trade for me. Well done with this one Skate.

Creating a good trading strategy requires careful loss management considerations
As traders, our main goal should be to develop a strategy that is customised to meet our unique objectives, risk tolerance, and goals that incorporates efficient risk management methods to reduce losses.

How?
To do this, we must first do an in-depth analysis of the market Index we intend to trade in. This entails keeping up with news and events in the market, analysing market patterns, and locating important indicators that can aid us in making better-informed trading decisions. We start out by creating a trading plan that incorporates efficient risk management strategies once we have a thorough understanding of the markets we intend to operate in. This entails managing position sizing, diversifying our portfolio, and implementing trailing stops, and momentum stops, as well as incorporating a well-defined "take profit stop".

Skate.

 

[Skate]

Risk management is an essential component of a trading plan
It's crucial to keep in mind that risk management ought to be an essential component of our overall trading strategy rather than merely an afterthought. We can reduce losses and raise our prospects of long-term market success by prioritising risk management and creating a plan that is personalised to our unique needs and objectives.

In conclusion
Creating a good trading plan requires that you learn how to control your losses and emotions. We may reduce losses and raise our prospects of long-term market success by prioritising risk management and adjusting our approach to meet our unique needs and objectives.

Skate.

 

[ducati916]

Risk management is an essential component of a trading plan
It's crucial to keep in mind that risk management ought to be an essential component of our overall trading strategy rather than merely an afterthought. We can reduce losses and raise our prospects of long-term market success by prioritising risk management and creating a plan that is personalised to our unique needs and objectives.

In conclusion
Creating a good trading plan requires that you learn how to control your losses and emotions. We may reduce losses and raise our prospects of long-term market success by prioritising risk management and adjusting our approach to meet our unique needs and objectives.

Skate.

Good morning @Skate, just catching up on the significant number of posts that have promulgated over the past week or two.

So you posted your results:



The 'shape' conforms nicely to the index:



Your strategy avoided the nasty period and caught the good. Two points: (a) the 70/20/10 rule and (b) risk management combined with trade management converted that rule into a profitable undertaking.

Since your thread or recent posts at least, seem aimed at newer traders:



I find this and other posts to be abstract.

If I were starting out again I would be very interested in practical applications or examples that I could use as a basis for further study/thought.

Risk management is all about the overall portfolio. Finding the balance to the various strategies employed. Trade management is something different. Trade management is how each trade within the overall portfolio is managed as driven by your risk management. For example in a $200K account Risk Management states no more than a 2% loss on any position. Trade management will position size for that. However, position size is variable on how that trade is managed, ie. closed out for either a win or loss. A trade will have different position size depending on whether (using an Options example) the trade runs to expiry or is closed out on a % loss basis.

The above will be driven by your 'EDGE'.

What is an edge? There are all manner of edges. Timeframe can be developed as an edge. Technical analysis via setups (patterns) can be developed as an edge, combinations of instruments, macro/micro fundamentals all can be developed as an edge as can position size adjustments while in the trade. Many swear that 'price' is the primary indicator, others (myself) laugh at that notion and maintain that price is only a momentary illusion and fade price. Either way, it can be developed as an edge.

Markets change. Sounds kinda profound. However, ultimately they go up/down or sideways. Always have. Still do. Probably always will. So what is actually being referred to? It is the tenor of the market, the news-flow, the latest hot sector, political winds, regulation, CB policy. It changes constantly. It is a predictive heads up if you are adept at reading the tea leaves. Some swear by only looking at the 'charts'. Others like to monitor news flow, others macro fundamentals. It doesn't really matter how you do it as long as it is somehow incorporated into your 'edge'. If you say: I don't have the time/interest/knowledge/whatever...that is fine. You will essentially rely on risk management coupled with very tight trade management coupled to a (likely) short(er) timeframe.

The 'problem' with financial market participants is that an 'edge' is highly competitive. They will not divulge their personal edge. Paranoia is very high. The thing is, my edge is suited to my personality, so that even if I were to divulge my edge to you, you may be unable to trade it as it simply jars with your personality. Which is why when you are building your own system just imitating someone else's system could prove a very costly mistake. Buying a system is guaranteed to be disappointing. There is a reason it is being 'sold'. Ultimately you need to first really understand (honestly) your own risk tolerance and secondly your desired activity level.

Generally speaking, the shorter your trading time frame, the harder is the game. The reason being that all of the emotions, adjustments, wins/losses, management and broad decision making are compressed into that time frame. The shorter the time frame the faster everything 'happens'. My trades operate on an 8 month timeframe, sometimes a year. Why? Many reasons but primarily: (i) timeframe is part of my edge, which drives my overall method of assuming risk, (ii) it better suits my personality, I can no longer tolerate the frenetic day trading pace, (iii) profitability and (iv) other/lifestyle.

jog on
duc

 

[Skate]

"Trading for Beginners - Skate's Practical Guide to Profitable Trading"
A daily series of posts aimed at those just starting out on their trading journey.

11. Selective recall
A selective recall is a cognitive bias that significantly affects trading decisions. The information that supports a trader's pre-existing ideas may be selectively retained, while information that contradicts such beliefs may be ignored or forgotten.

This bias can show itself in a number of ways, such as the tendency to selectively recall information that supports a particular idea while ignoring evidence to the contrary. Traders face a greater risk of making costly mistakes by being overconfident remembering only successful trades while forgetting unsuccessful ones.

Therefore, traders must actively work to lessen this bias by being aware of it. You can keep note of all trades, successful and unsuccessful, and often reflect on them to check for any patterns of selective memory.

Mental blind spots impair our ability to make decisions despite our best efforts, it can be challenging to avoid stumbling into their traps, as we sometimes do not realise our mistakes until it is too late.

The negative consequences of selective recall can also be lessened by considering various points of view. By approaching trading with an open mind and acknowledging one's own abilities and limitations, traders can make more informed trading decisions when they are aware of their strengths and flaws.

Despite our best attempts, biases can nevertheless affect our judgement in trading and other areas of life. It can be challenging to avoid falling into their traps, and occasionally we do not understand our errors until it's too late. Therefore, it is essential to keep exercising caution and strive to improve our capacity for reasoned decision-making.

Skate.

 

[DaveTrade]

"Trading for Beginners - Skate's Practical Guide to Profitable Trading"
A daily series of posts aimed at those just starting out on their trading journey.

11. Selective recall
A selective recall is a cognitive bias that significantly affects trading decisions. The information that supports a trader's pre-existing ideas may be selectively retained, while information that contradicts such beliefs may be ignored or forgotten.

This bias can show itself in a number of ways, such as the tendency to selectively recall information that supports a particular idea while ignoring evidence to the contrary. Traders face a greater risk of making costly mistakes by being overconfident remembering only successful trades while forgetting unsuccessful ones.

Therefore, traders must actively work to lessen this bias by being aware of it. You can keep note of all trades, successful and unsuccessful, and often reflect on them to check for any patterns of selective memory.

Mental blind spots impair our ability to make decisions despite our best efforts, it can be challenging to avoid stumbling into their traps, as we sometimes do not realise our mistakes until it is too late.

The negative consequences of selective recall can also be lessened by considering various points of view. By approaching trading with an open mind and acknowledging one's own abilities and limitations, traders can make more informed trading decisions when they are aware of their strengths and flaws.

Despite our best attempts, biases can nevertheless affect our judgement in trading and other areas of life. It can be challenging to avoid falling into their traps, and occasionally we do not understand our errors until it's too late. Therefore, it is essential to keep exercising caution and strive to improve our capacity for reasoned decision-making.

Skate.

TIP: When developing an aspect of your trading, get in the habit of going back and looking for times when it hasn't worked and try to see the reason why. Sometimes there is no reason but this gives you feedback about the reliability of the thing you are considering.

 

[Skate]

Since your thread or recent posts at least, seem aimed at newer traders. I find this and other posts to be abstract.

If I were starting out again I would be very interested in practical applications or examples that I could use as a basis for further study/thought.

The single biggest issue however is 'edge'. What is it, do you have it, how do you know that you have it?
If your edge is simply a psychological toughness to execute 100% of the time...watch out, the market has a nasty way of burning that edge out of you.

Duc, after reading @Gringotts Bank's and @rcw1 recent posts about basic market truths I thought what a fantastic idea!

Giving new traders a heads-up about trading may be beneficial
Especially when it comes to knowing the fundamental facts and ideas that form the basis of successful trading. In my experience, trading typically benefits from simplicity. Even though the markets can be confusing and unpredictable, concentrating on creating a systematic strategy might help.

Building a trading plan
Risk management, technical analysis, fundamental analysis, trading psychology, and building a trading plan are some topics I'm going to discuss over the next three months that beginners could find useful. New traders can increase their chances of success in the markets by comprehending these ideas and creating a trading strategy that fits their personality, as you say.

Trading is a journey
There will be both wins and disappointments along the route, it's vital to keep this in mind. However, those new to trading can grow their skills and ultimately reach their trading goal by concentrating on the fundamentals and adopting a disciplined approach to trading.

Daily posts
Hopefully, my series of posts will be a practical guide to profitable trading (from my perspective). Sometimes it's the simplest things that are the most helpful in developing new trading skills. I believe it is imperative to follow an organised process rather than starting off with no prior knowledge. Being a good trader involves patience, perseverance, and dedication, and anyone can develop these skills and do so with the appropriate attitude and strategy.

Skate.

 

[Skate]

TIP: When developing an aspect of your trading, get in the habit of going back and looking for times when it hasn't worked and try to see the reason why. Sometimes there is no reason but this gives you feedback about the reliability of the thing you are considering.

What helpful advice!
@DaveTrade, I'm with you on this tip. Going back over previous trades and figuring out why they didn't work out maybe immensely helpful. Traders might enhance their approach and decision-making in subsequent transactions by comprehending the causes. Even when there is no obvious cause, analysing prior trades can nonetheless yield insightful information about the dependability of a given strategy. Trading may be continuously improved by frequently evaluating previous trades and analysing both successful and unsuccessful results. Applying Dave's simple tip will eventually result in more profitable trading over the long term, which I can guarantee with certainty.

Skate.

 

[Skate]

Your strategy avoided the nasty period and caught the good. Two points: (a) the 70/20/10 rule and (b) risk management combined with trade management converted that rule into a profitable undertaking. If I were starting out again I would be very interested in practical applications or examples that I could use as a basis for further study/thought.

The 'problem' with financial market participants is that an 'edge' is highly competitive. They will not divulge their personal edge. Paranoia is very high. The thing is, my edge is suited to my personality, so that even if I were to divulge my edge to you, you may be unable to trade it as it simply jars with your personality.

Which is why when you are building your own system just imitating someone else's system could prove a very costly mistake. Buying a system is guaranteed to be disappointing. There is a reason it is being 'sold'. Ultimately you need to first really understand (honestly) your own risk tolerance and secondly your desired activity level.

@ducati916 has a knack for sharing ideas and perceptions on trading tactics and in particular the significance of creating a unique edge. I wholeheartedly agree that there is no one-size-fits-all method to trading and that each trader must create their own strategy that is suited to their character, level of risk tolerance, and prefered level of activity.

The 70/20/10 rule
This is a well-known trading principle that recommends investing 70% of your capital in low-risk assets, 20% in medium-risk assets, and 10% in high-risk assets. It's crucial to remember that this rule is merely a suggestion and not something that all traders are required to adhere to. The secret is to strike a balance that serves your needs and your trading objectives.

A successful trading strategy
Every successful strategy requires effective "risk management" at its very heart. You may minimise potential losses and maximise potential earnings by carefully monitoring your risk and making sure that your trades are effectively managed.

In general
The internet has made it simpler than ever to get access to a plethora of knowledge and materials on trading methods and strategies. Traders can obtain important insights and learn how to adapt such strategies to meet their own needs and goals by investigating and examining instances of successful trading techniques that have been previously used.

Skate.

 

[Skate]

Many swear that 'price' is the primary indicator, others (myself) laugh at that notion and maintain that price is only a momentary illusion and fade price. Either way, it can be developed as an edge.

Both sides of the dispute on the significance of price in trading are debatable
Although price is undoubtedly a significant factor, it is not the sole one. Combining price with market timing and technical indicators can all influence how a trader formulates their approach. Each trader must ultimately decide which indicators and information sources are most helpful to them.

This is the dilemma we all face
Making a decision. It can be difficult to make a financial decision, especially when the stakes are high. The worry of choosing poorly and losing money may be paralysing. This is why making a decision can be so difficult, after all, since trading funds are always limited, we want to make sure we're getting the most out of it. Finding the best entry and exit locations for a trade based on price changes can be challenging, even with the benefit of hindsight.

Looking at the chart where should we enter & exit?
When reading charts you fall victim to hindsight bias. It's simple to determine where the best entrance and exit positions were when looking back at a chart, but making these decisions in the moment can be very difficult.



Skate.