Trader Quote #31
“Common Sense is Not common practice” Rhonda Scharf
==== This is a great quote for all the traders reading. I guess, it is an adaptation of Voltaire’s classical quote “Common sense is not so common”. We as traders all know about the typical themes such as: risk management, lot assignment, technical analysis , fundamental analysis stop loss, limit orders, probabilities etc etc. and we are all well-aware that these are very important elements for successful trading, so the question is: Why is this common knowledge not a common practice in our trading overall? Why are there periods of time where we follow our rules by the book and then we go totally off-course?
Don’t feel bad if you have experienced this episode, I have passed through it and any serious trader who has been long enough in this business has lived it. The key is to not repeat it, right?
Knowing is not the same as doing! hahaha! there are many examples: Everybody knows how to lose weight but it is not the same as to always go too the gym and have a balanced diet etc etc. A typical trader knows that he must follow a risk protocol, stop orders but does he constantly execute it?
Doing takes time! Traders always ask me, why can’t I follow my rules all the time? I simply reply, habits take time to develop. Just as bad habits in trading seem to be “faster” to learn, “good” trading habits take time, a long time (but its worth it 🙂 ). It takes many repetitions documentation, learning from mistakes to progressively train ourselves to follow our book of rules!
Start by staring! If you are having problems following your own trading rules, my suggestion would be to first have a set of simple rules you understand and can execute (daily, weekly, monthly) with the appropriate risk management rules. If you don’t have any, investigate, learn, test and share your questions with the trader community to help you polish them,
The most important constant should be the constancy in Something! Common sense is not common practice, let your rules be common practice!
Please feel free to share your comments, experiences or doubts! Best of Luck in your trading and always use stops! Cheers, Dimitri =====
Trader Cheat Sheet #4 – Murrey Math Lines
Trader Definition – “Death” & “Golden” Cross
Definition of ‘Death Cross’
A crossover resulting from a security’s long-term moving average breaking above its short-term moving average or support level.
Investopedia explains ‘Death Cross’
As long-term indicators carry more weight, this trend indicates a bear market on the horizon and is reinforced by high trading volumes. Additionally, the long-term moving average becomes the new resistance level in the rising market.
Definition of ‘Golden Cross’
A crossover involving a security’s short-term moving average (such as 15-day moving average) breaking above its long-term moving average (such as 50-day moving average) or resistance level.
Investopedia explains ‘Golden Cross’
As long-term indicators carry more weight, the Golden Cross indicates a bull market on the horizon and is reinforced by high trading volumes. Additionally, the long-term moving average becomes the new support level in the rising market.
Technicians might see this cross as a sign that the market has turned in favor of the stock.
Trader Definitions – ‘Falling Three Methods’
A bearish candlestick pattern that is used to predict the continuation of the current downtrend. This pattern is formed when the candlesticks meet the following characteristics:
1. The first candle in the pattern is a long red candlestick within a defined downtrend.
2. A series of ascending small-bodied candlesticks that trade within the range of the first candlestick.
3. A long red candlestick creates a new low, which suggests that the sellers are back in control of the direction.
Investopedia explains ‘Falling Three Methods’
The series of small-bodied candlesticks are regarded as a period of consolidation before the downtrend is able to continue. This pattern is important, because it shows traders that buyers still do not have enough conviction to reverse the trend and it is used by some active traders as a signal to add to their short positions.
Money Management – Martingale Probability Theory (Anti-Martingale) & Video
Martingale Probability Theory
Martingale probability began as a popular betting theory in 18th century France. The basic premise of the theory was simple enough: In a game of coin flips that pays 2:1 if the coin comes up heads, but takes the bet money if the coin comes up tails, you should bet double on every loss so that you would automatically win back any losses.
Problems with the Initial Model
Clearly, the game assumes that the player has no limit on financial resources or time. In a practical setting, this game does not work, because as the player bets on each subsequent iteration, he exponentially reach poverty. Although the game does break even over a long enough time line, there is no way to be certain that this will happen quickly enough for the player to adequately recover his losses. However, the idea led to several other theories.
Proof Against Betting Theories
Paul Peiree Levy did much of the work toward proving that successful betting theories were impossible to create. The idea was to illustrate that betting games, in general, are fools’ games. There is no way to create a theory that will allow the player to win a majority of the time. Before his work in fields like Martingale Probability, it was not commonly accepted that gambling was essentially stacked against the player.
Exponential Nature of Losses
- The main interest that mathematicians still have in Martingale Probability is the exponential rate of loss. The idea that can be inferred from the equations that define a Martingale set is that the expected value of the next number in a set of observations can be assumed to be equal to the last observation in the set. In other words, in a fair game, a gambler can assume his losses will be roughly between plus or minus the square root of the number of steps.
Polya’s Urn Model
- George Polya came up with an example to explain this concept using a jar (or urn) containing red and blue marbles. The urn randomly and unbiasedly expels a marble of a given color. That marble is put back into the jar with another marble of the same color, which essentially has the same mathematical model as doubling down the gambler’s bet on any given game. The problem is that it has the false illusion of affecting the outcome.