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For day trading, i prefer devising scenarios instead of trying to predict the future. Devising scenarios involves making some assumptions about potential market outcomes, which can resemble predictions to some extent. However, there are important differences between devising scenarios and making predictions:
Range of Outcomes: When devising scenarios, traders consider a range of possible outcomes based on different assumptions and market conditions. These scenarios are not necessarily viewed as definitive predictions but rather as plausible scenarios that could unfold. In contrast, predictions often imply a single expected outcome without considering alternative possibilities.
Probability Assessment: Scenario analysis typically involves assessing the probabilities associated with each scenario based on historical data, market dynamics, and other relevant factors. Traders recognize that certain scenarios may be more likely to occur than others and adjust their strategies accordingly. Predictions, on the other hand, often lack a probabilistic framework and may be presented as absolute forecasts of future market movements.
Adaptability and Flexibility: Traders who employ scenario analysis remain flexible and adaptable in response to changing market conditions. They understand that market outcomes are uncertain and subject to change, so they continuously monitor developments and adjust their strategies as needed. Predictions, by their nature, can be more rigid and may not easily accommodate unexpected changes or deviations from the forecasted outcome.
Risk Management: Scenario analysis emphasizes risk management by considering potential downside scenarios and developing strategies to mitigate risks. Traders focus on controlling risk and preserving capital, regardless of which scenario ultimately unfolds. Predictions may not always incorporate robust risk management practices and can lead to excessive risk-taking if the predicted outcome does not materialize as expected.
Learning and Reflection: Scenario analysis encourages traders to learn from past experiences and reflect on the factors driving market outcomes. By considering different scenarios and their associated outcomes, traders gain insights into market dynamics and improve their decision-making processes over time. Predictions, especially if they prove to be incorrect, may not always prompt the same level of reflection and learning.
I mean, does the trader need to be right on the direction of the market more than 50% of the time. (However, I am not referring to a winning percentage of greater than 50%, just referring to the trader being able to predict whether the market will be up or down at the end of a specific time period. The time period could be anything, 5 minutes...1 day...1 year.)
I thought the risk management paragraph of your answer was particularly relevant to my trading. Looking back at the larger losses I have endured, they have mostly all happened after I try to make predictions about future price movements. For instance, I was trading oil last Friday during the PPI news release. The market made it's initial move higher and I predicted that the move was over and the market would start to retrace the other direction. I went short and the move continued higher. I took the largest loss of the day by a factor of 10 because I entered a trade where the predicted outcome did not materialize as expected as you so excellently worded it above.
To quote Mark Douglas "An edge is nothing more than an indication of a higher probability of one thing happening over another."
What set-ups do you use and what are the outcomes of each.
With each set-up there are several possible outcomes. I have no idea when I take a trade what the outcome will be. Over time I expect that I will make more money than I lose.
I don't neccessarily win more trades than I lose, I make more with the winning trades than I lose with the losing trades.
"The days when I keep my gratitude higher than my expectations, I have really good days" RW Hubbard
To be profitable, your strategy (or bundle of strategies) needs to have a (net) positive expectancy.
I think there are lots of different systems that could go into the "trading strategy" formula to result in a positive expectancy.
For example:
- sleep quality
- mental focus
- discipline
- risk management (dynamic sizing, fixed $ stop loss, fixed $ profit target)
- accuracy of trades (% of winning trades vs. losing trades)
- average winner ($)
- average loser ($)
- ATR of the symbol
- which instruments you trade (futures, stocks, options... and leverage)
- ... lots of little things
Legendary / Stochastic Calculus is not your friend
Experience: None
Platform: Ninjatrader, Python API
Broker: CQG
Trading: S&P, Crude, Gold
Posts: 863 since Oct 2009
Thanks Given: 3,466
Thanks Received: 1,548
I do...and my directional edge starts with backtesting my strategies on 2 different data sets. If that proves favorable, then on to the next phase and I start my analysis....a dozen or so robustness and volatility tests. All of my strats have a min 20 to 1 profit to drawdown and are favorable in all the usual models...sharpe, expectancy, sqn, cpc, etc.... If it worked in the past, it will probably work in the future...kind of sort of....
If I decide to use my strat for manual trading then much more comes into play....such as market context....and my ability to read the market for the possibilities/probabilities about the outcome of the trade that I'm considering...and very important, no fuck it I'm jumping in trade, or as some say FOMO....no setup, no trade.
Jumping in is fine as long as you're wearing a wingsuit and have the alps behind you....but for trading it will vaporize any edge that you perceived you had.
There have been some great comments on this thread. The fuzzy word here is "predicting." Some will say they don't predict, but when you put on an outright position, it's really semantics to argue that you're not predicting. You might say you're "expecting it go to higher X amount before it goes lower Y amount", which certainly involves some measure of "prediction."
I think @trendisyourfriend said it extremely well when he said: "Predictions, on the other hand, often lack a probabilistic framework and may be presented as absolute forecasts of future market movements." Often, traders will say "I think we go to 5100 tomorrow" and then are quick to give themselves a medal when it happens. But, that's not an actionable trading idea. This is to me one of the biggest differentiators of a "prediction" vs a real trade. A prediction is wide open, no mention of risk, and very much has a gambling mentality. "yoloing calls" comes to mind.
A couple of things here:
I will say that backtesting may be useful to you, but it is not for everybody, and I don't do it. There are many, many variables during the day, and taking more than a handful of these during a backtest is next to impossible. Even the seasonality alone (week of the year, day of the week, time of day) is often not taken into account during a backtest, and this is one of the more important factors IMO. I like what Lance Breitstein had to say about this. Go to 43:17 in this video, his answer is about 4 minutes long. Essentially, he advocates for forward testing in not so many words. ... which leads us into:
In that same answer on the video just referenced, he talks about analyzing your own trades. I'd say that if you're not tracking your trades, you have all but zero chance of success. If you don't track your trades, you have no way of knowing which are the best and why. Repeating success without having any specifics about what you did to achieve that success is basically impossible and fraught with randomness. We already have to deal with market randomness; that's a given. We can not then add on top of it our own randomness and expect to have a repeatable recipe for success.
