Forex Newbie struggling with a concept

Beginner Questions
1

I’m struggling with a core issue in Forex.

In one of Jack Schwager’s books on trading legends, he interviews legendary trader Ed Seykota. He may be the greatest trader ever. He was one of the first to computerize his trading decisions using IBM punch cards. Although I read this book over 10 years ago, there are two things Seykota said that I will never forget:

[I]If you can’t reduce your system to an algorithm, you don’t have a system.
The best way to make money in trading is to get the right person to do it for you.[/I]

From this I see that most systems are really part algorithm (recipe) and part art. We see this in other fields like cooking, wine making, and artistic painting. You can give them all the same ingredients and instructions and you get very different results.

Is anyone really making profits over the longer term using pure algorithms? I think they are. I am new to Forex. I have a strong math background and I have traded stocks and commodities. I study Forex material for about 3 hours per day. No matter how much I learn, can I ever be as good and consistent as a proven signal provider?

As an example, I reviewed the signals from foresignals.com. All of their signals are public. Subscribers get them 15 minutes sooner. I don’t think their past performance data is fraudulent because that would be revealed too easily. Look at their track record. I don’t believe in being ignorant of the market and just executing the other guy’s trade. Does any newbie realistically aspire to do better than this? Do you need to do better than this to make acceptable profits? If I am in search for the Holy Grail of algorithms, Seykota is right. I should get someone else to do it for me. But if I am in search of some other decision-making methodology that can’t be coded, then I can’t call it a system. In fact, it more resembles religion that must be believed instead of understood. What am I missing here?

2

Easy questions not so easy answers. So here is my take. Every trade no matter: the pair, time frame , using fundamental analysis, technical analysis, VSA analysis and/or any other analysis I missed; as well as advice from every trader from the beginning of time up to and including this post has 5 things in common that must be addressed no matter what; Trend, Momentum, Cycle, Support and Resistance. The better you get at addressing of all these 5 parts, the better the chance for success based on the balance of probabilities. But that’s only one part of a three part plan.

Here’s the tricky part; all five of these parts can and are addressed in different ways by all the methods listed above. There’s worse news . . at different points they are all successful and fail at sometime. Which is where the 2 and 3 parts of the plan Money Management and Mindset, have to be given as much weight as the 1st part of trading method you use. In my opinion I have changed my view from all three being equal to if I could only choose one it would be money management; if I could choose two I would add mindset. Because with out a well thought out money management plan, and the understanding of how important patience and discipline are, a trader using the best trading method out there at some point will fail.

Now for the crazy part. New and not so new traders are willing to spend all kinds of time perfecting their trading method, but very little to no time perfecting their money management and patience and discipline plans. Instead they will accept 2% of there account balance and 10% leverage as a golden formula and losing a small amount in a live account instead of staying with a demo and perfecting their: trading method, money management and mindset plans. For the more crazy part everyone is an expert at telling you why their method, money management and mindset are right, the best and only way to success.

Here’s what you’re up against as a retail trader in the forex. I don’t use the terms: professional, smart money, big money, insider money or institutional traders. This would emply all retail traders are non professional, dumb, underfunded, with no contacts and or no sense. Which is probably true in some cases but not the retailers that last. So to me anyone who is not a retail trader is an institutional trader plain and simple. There’s only 3 things that can happen once the markets open. 1. buy; 2. sell; or 3 don’t trade. Institutional traders have lots of money mostly not their own, lots of resources to get the most accurate information, assistance and their trades can manipulate the markets. Most retail traders don’t have access to other peoples money, up to date resources and managers to assist in their decisions.

So the simple answer to your questions are: don’t put stock in other peoples words, take the time to get a solid understanding of the basic forex principles. Forex basics are the same for everyone retail and institutional traders alike. So plan a trading method that uses the basics and your strengths (math, etc.) to give you a better chance based on the balance of probabilities to have more positive results than negative. Spend the time to build a strong money management plan based on your abilities, needs and personal situation. The plan should aim to keep you in the game whether your focus is building your account balance, while protecting your starting capital; or building your starting capital while protecting your account balance. Lastly; be patient always exercise discipline when making and following your trading method and money management plan. Your forex success won’t come with one trade, one session, one loss or win: it will come long term. Don’t try to win the race using other peoples words; first you crawl, then you walk, then you run and then you race applying a detailed plan made up of basic principles, your strengths, minimizing your weaknesses and being disciplined and patient. Hoep that helps
Gp

3

My own take on this is that the first statement is not saying that you need to convert your system to an algorithm, rather that he is saying your system should be free of anything that cannot be expressed mathematically such as feelings/emotions/gut instinct, etc.
I think the second statement says that, even if your system is great you may not be the best person to run it, possibly due to how you handle stress or other commitments that may influence your trading.

4

I used to be a subscriber to forexsignals.com and I have to say that I placed all trades exactly as told but my results were alot different and alot worse than what they showed. After looking back at my history and their historical results, the pip results were vast, even taking into consideration the spreads\commissions.

I’ve only ever had luck with one signal provider (can’t remember their name) but there were quite expensive for a small timer like me and they traded around 4-5amGMT each morning.

5

The most important aspect for you to think about, which most, if not all people do not mention is finding yourself as a person. Think about your own objectives and goals. Why do you want to trade or have someone else trade for you, what financial returns are you hoping for, how long do you want to be in this business, what time available do you have which you can apply to trading…address these answers and think if they are realistic.

There is no point searching or creating a trading system and agreeing on a money management and position sizing theory (in my view all three of these will not make you money) without setting your objectives. Without objectives you will never know how you are progressing, and if you are meeting your original plans. I’m pretty sure all business ideas start with objectives, rather than jumping into designing a product or a service without any thought - the same applies to trading.

6

Ed wrote a trend following system in '70s that he probably perfected with time.
Do the same or indeed follow a signal provider.
Nick got Jeff on that site which is a very good trader with small but steady returns.

7

I think you should work on your mindset and stop being too emotional whenever you’re trading

8

An article from 1.5 years ago.

“Quant” hedge funds: Computer says no | The Economist

IF SOMETHING has not worked for five years, most people would conclude that it was broken. Tell that to the geeks managing “quant” hedge funds, who craft elaborate algorithms to profit from market movements. Once money-spinners, their prized formulae have misfired since 2009, losing money in four of the past five years. Unless their results improve markedly, the giant funds will finish this year as the worst-performing of the most common hedge-fund strategies.

…

The main problem is not with the quants’ models, practitioners insist, but with the markets themselves. In the aftermath of the financial crisis, they have been dancing to the tune set by politicians and central bankers. Efforts to save the euro or stave off deflation regularly send markets into convulsions, in the process distorting the historical patterns that the algorithms are designed to exploit. The ensuing jolts and crashes have no precedent, leaving even the most finely crafted trade at risk from political meddling. Not even the world’s wiliest supercomputers can predict what the European Central Bank will dream of next, apparently.

9

Getting specific, I think the second quote you are referring to is on page 83 of the Market Wizards book wherein Ed was asked: “[I]What is the most important advice you can give the average trader?[/I]”

His answer is: “[I]That he should find a superior trader to do his trading for him, and then go find something he really loves to do.[/I]”

Now this can stand to use a little bit more context. A few questions earlier Ed was asked: “[I]Very few traders have enjoyed the spectacular success you have. What makes you different?[/I]”

Ed’s answer was: “[I]I feel my success comes from my love of the markets. I am not a casual trader. It is my life. I have a passion for trading. It is not merely a hobby or even a career choice for me. There is no question that this is what I am supposed to do with my life.[/I]”

So it should be understood here that Ed makes a strong distinction between a passionate trader who trades with a love of trading as though that is what he is supposed to do with his life and an average trader that doesn’t really love trading but who would much more love doing something else. His advice in this context to that average trader is to defer his trading to a passionate lifer who will by virtue of his being born to trade accomplish performance levels that will be superior to those of the average trader.

So the question Ed is putting before us is a personal existential one. Am I a passionate lifer or a hobbyist? Am I doing this out of some hope for a stroke of luck and sudden riches or am I naturally wired to trade regardless of my luck? Am I doing this to see a certain dollar or percentage gain or am I in love with the process? Would I do this even if it paid virtually nothing to the best of the best?

The passionate lifer trader will develop systems or algos that will not only perform well, but will be masterfully executable. Emotions will not override them, laziness will not prevent them from being run. In that same interview Ed said: “[I]Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible.[/I]”

While a given system is a dead machine. The art, the craftmanship, the skill, the bringing to life of that machine is in its development and execution. Ed understands the value of a good machine, that it is only put there by an excellent maker and controller.

-Adrian

10

Great Post and so true. Thanks Adrian
Gp