Trading beginner has plenty of market ... Beginner has a somewhat ... common sense and strong belief in victory. He also read books, ... tips and tricks, examined handful of t
Trading beginner has plenty of market illusions. Beginner has a somewhat experience, common sense and strong belief in victory. He also read books, instructions, tips and tricks, examined handful of trading programs and believe them in one wrong thing: that anyone could win. Authors of such books are often silent about traders' proverb: 'Market is not creates money. Money is only distributed between players'. One player changes another and only few leaders do make profit.
Beginner is hoping that good analysis and tons of stock knowledge will serve him a good service. He is stay tuned for searching for effective price movement methods for a long, long time. Day by day; he?s keeping spending time and money. Those of beginners who hold the line gets it - there is no common sense Order at the market. The market behaves itself quite like what you think it will; but all the rest is the Pure Chaos. Well, our beginner cannot make effective prognosis. And now he's maturing and he?s not trying to fight this analysis? limitations. He follows the plan and he enters the market only when it is time for follow the plan.
MECHANICAL AND NON-MECHANICAL APPROACHES TO MARKET ANALYSIS
There are two types of approaches on trading strategy selection - either mechanical or subjective. If trader's got a mechanical one he doesn't need to make investment decisions - everything makes everything. MTS is always knows what to do and more important - when to do. The trader is only to follow the market, system signals and to make orders to his brokers.
At the other hand if trader doesn't have clear trading system he is to make subjective decisions. These decisions are impulsive and often made by impression. Often it is not based on analysis - but greed and fear. Human nature is not free from errors and pros are differ from beginners by strict emotional control.
Practice shows that absolute majority of successful traders is using mechanical approach to the trading. Beginners and 'traders just for trade' are inclined to subjective analysis.
Well, what does it mean - 'mechanical trading system'?
We're choosing the market, configure system to it, choosing formulas based on historical data, entry points, exit points for profit and loss positions. System is running and there is no need to sit day by day before the monitor hoping to cry: "All got it!" Practice shows that hour by hour 'monitor duty' is good only for starting stages of learning the market and stage of choosing optimal strategy. Once started, system will work autonomously and trader may rest or do something else without worrying about anything.
RISK MANAGEMENT WHEN USING MTS
Using of mechanical trading principles contains certain risks. Important requirement is not to adjust system to current market situation. The longer test period means the more sceneries of price movement does it knows and as result - means more stable trading. Another important requirement - do not wait only profit signals. There are no such a systems. Profit system may generate and loss signals. Pros self-discipline is just like that: to follow his tactics when loss signal comes.
There is only on criterion of good system: optimal risk/yield parameter. If MTS does generate both signals it have to provide statistical advantage - to generate more profit transactions than loss ones. From statistical point of view it means that after the end of trade interval the amount of money exceeds initial value. MTS has statistical advantage if:
(average profit transaction) * (percentage of wins) > (average unprofitable transaction) * (percentage of losses)
But this expression is not accurate enough. It doesn't take in the count expenses - commission, overheads, etc. If expenses are high profitable MTS may become unprofitable one. If transaction commission is $50 than 40 transactions will cost the trader $2000. Such expenses will shrink $20000 account by 10%. Let's correct our expression:
((average profit transaction) * (percentage of wins) - (expenses)) > (average unprofitable transaction) * (percentage of losses)
One of criterions for measuring MTS effectiveness is selection of optimal amount of transactions called reliable pattern. Choice of the reliable pattern is a quite subjective thing. Some traders require only 10 transactions and others require no less than 1000. Well, last ones are too conservative but mathematically right. But if we are allow these price movements are mostly random then we may say that many pattern transactions are quite random at win or loss. That's why we must have many transactions to reduce influence of random factors on total statistics.
At other hand many experienced traders are contending that 30-35 transactions are enough; for seasoned traders 10 are enough. It is all about the trading is the area where art and experience meet the science. We may say only one thing - the more checks do mean better results. Real pros understand that there is no perfect mechanical system ideally suitable for assets of financial market. Art of pros is the choice of the configurable system - which will be called the best after training.
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