What is the real truth about trading?

Beginner Questions Trading Psychology
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Hi all, there is something I really need to understand,

First of all, thanks for looking at my post.

I get it, people selling courses are usually not so honest and most of them wont make us money.

But, I keep doing the same thing over and over and it’s been for months now.

I look at babypips’s school of trading and other sites about trading, most of the stuff is about technical analysis.

Then, what I would call insecurities, come in play.

I look on the internet for things like ‘‘Does technical analysis really works’’ then I stumble on many, many threads about how ‘‘everything they teach about TA is a lie, TA doesn’t work, it’s not the way the big institutions are making money, etc’’

**I really don’t mind spending a lot of time on learning Forex, the only problem is going back to the tought of ‘‘Am I only wasting my time reading useless stuff that doesn’t work?’’ Because let’s be honest, once you look further on the net for Forex answers about technical analysis, it’s really a mess of opinions. **

You have 50% of the traders / websites who say '‘Yes Technical analysis (indicators, Support/ Resistance, Chart patterns) work, then you look a bit further and you have the other half who say that all of this is litteraly a big ol’ lie.

So what’s up with that? Is there 50% of the internet that is ‘‘lying’’ ? I have never seen anything like that on any subject apart from Forex.

Why would the whole babypips school be a lie? Why would they loose so much time writing false theories? Or why would all these traders lie on the internet by saying that the technical analysis stuff doesn’t work?

Any of those two possibilites don’t make sense to me.

It is so weird, I am surely not the only one who wants to learn but who is constantly afraid of learning stuff because ‘‘it might not work’’.

I have never been so motivated in my whole life for something and I want to succeed, I am not one of those who think that I will get rich in an instant but this whole ‘‘50% says that, 50% says the opposite’’ thing is demotivating.

It looks like the only thing I can do is to test by myself to see what’s right, and that’s what I’m doing but, it doesn’t make sense to test TA for a long period of time if there is A LOT of people saying that it’s completely useless.

I would appreciate answers especially from people who manage to make money from Forex for a long period of time.

Here are 2 pages that are the perfect example of ‘‘everything about TA is a lie’’:

https://www.forexfactory.com/showthread.php?p=7388850

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And he ended the article with the oldy goofy " Contact me if you want to know how to trade" lol. I call Bs.

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I don’t pay any attention to the way big institutions make money. I’m not a big institution. Same response to non-traders talking to me about the way Warren Buffet “trades”.

What I do know is that the base TA pattern is trend. Look at a chart and see price rising in a trend. At each point along the trend, the most likely next occurrence was and is that price rises some more. The next most likely next thing to happen is price falls back a little for a short period and then resumes rising. Can it still be said TA doesn’t work?

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I fully agree with this.
The idea behind TA is not to just employ some TA technique (indicator, line, pattern, crossover, etc) and endow it with some magical property that enables it to somehow control the market for you.

You need to first determine what you actually want to know about the market and in what timeframe that suits your trading style and then decide what kind of TA tools are best suited to provide you with that information.

For example, if your trading is based on identifying and running with trends then you may prefer a certain combinations of MAs. But if you are looking to trade ranges then maybe S/R levels will provide a suitable structure to help identify the likely turns and assist in optimising R:R.

One has to remember that markets are not random but they are erratic and your tool set should be helping you to recognise within the price movements what you are actually looking to trade.

All indicators and techniques would work really well if all markets always moved in constant wave patterns with constant characteristics and smooth progress - but that is not the case, unfortunately. Therefore any tool will sometimes work well, often only partly and occasionally not at all. Even S/R lines do not constrain price within its levels indefinitely - obviously, at some point it breaks through one or the other (sometimes even both!)

Often you will hear people saying indicators are rubbish because they are lagging, but this not really the problem. If fact, it is often the very reason why they are useful - e.g. where current price is trading relative to its recent history. Even patterns and S/R lines are all based on comparisons of where we are now relative to where we have been before.

The real reason why indicators like MACD and RSI do not always work is simply because every trend wave is different - different in duration, strength, momentum, pull-backs, corrections, consolidations, reversals and so on. But since indicators are mostly built on mathematical formulas using price data streams it is clear that the “message” they provide will vary according to the profile of what they they are designed to follow - and will sometimes/often give false signals.

Unless you are looking to build a mechanical trading system, you need to know what you need to know to make your trading decisions according to your chosen trading style and then find the TA which is going to assist you in that process best. But you also need to recognise its weaknesses as well as its strengths (e.g. MA crossovers in tight ranging markets).

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Thank you all for these great answers, especially Manxx!

So I might of been thinking the wrong way then.

My technique was more like: I am waiting for a majority of signals to press the trigger as my probability of being right is higher, for example:

if I have a S/R, Fib, RSI signal at the same time, I will buy/sell

Isn’t it what the School of pipsology tells us about?

So maybe what I lack is a bit of context with the TA.

I never really bothered to ask myself if I wanted to trade trend or range, I was just going with the opportunity that I saw,

For example, If I saw a trending opportunity, I would go for it.

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Actually, that is not such a bad combination if you want to use indicators because they are providing info about somewhat different things. Your S/R can act as target levels or as entries for reversal or for re-entries if they are broken. Equally Fib retracements and extensions are identifying possible target levels or entries but based on mathematical ratios instead of previous market behaviour like with the S/R lines.

The RSI can be used to confirm a trend direction whenever it crosses over the 50 line or to warn of an overbought or oversold condition whenever it goes outside the 75/80 or 20/25 levels. However, these OB and OS levels are best for exiting rather that entries because a strong trend can continue a long way while the RSI stays in the same OB/OS condition.

The main point here is to avoid a collection of indicators that are all designed to identify the same thing because you will not know which one to follow when one says “go for it” and the other say “not yet!”

On one hand, if you find e.g. Fib levels and S/R levels coincide fairly closely then that is probably a strong signal, if only because a lot of other traders will be looking at it too!

But on the other hand, as I mentioned, signals from too many indicators can give contrary signals or leave you unsure which one to act on! This is often called analysis paralysis and is one reason why many traders have given up indicators totally.

A typical problem might arise with S/R levels, For example, if you have 2-3 lines above your long position which line do you go for? If you always close at the first level you will be restricting your profit potential but to leave it for the higher levels risks a reversal at the 1st and even a possible loss.

This is why your risk/management parameters and your trading style and timeframe have to be clear in your mind when choosing where to get out.

Easy ain’t it! :joy::joy:

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Excellent posts as usual @anon46773462.

What always makes me smirk are the famous dudes who say “no indicators”. I have several books written by well known traders. True enough: for the most part we go through all the exchange stuff (ticks, pre-market volume, pivots, sector maps or heat maps, you name it). NO INDICATORS. But what do we find as we delve further into the books??? RSI, moving averages, trend lines, and the rest AND reasons why they work no less!!! LOL!!!

As for the dude that wrote that article: he lost my vote when he noted that there is no difference between FOREX and stocks. I just continued reading after that so as to confirm my suspicion that there was bound to be a “well if you pay me I’ll tell you my secret”. And there it was!!! LOL!!!

Regards,

Dale.

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Practice is the only answer my friend, but even if you create your own system you need to understand the basics, that is why the school of pipsology is so important.

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Hi Dale!
Yes, I agree with you!! Sometimes it seems that we all spend far too much time pondering the relative merits of PA or indicators or naked charts and so on. But, actually, I think we tend to totally overlook the really important factor behind trading - the trader themselves!

I am pretty sure that a good trader can still work with a mediocre method whereas a poor traderwill not succeed even with a Rolls Royce of a system!

I think we should think of indicators/PA as the tools we use along the way. If we want to drive somewhere then we can use a map or a navigator or road signs, etc - but whether we actually get there and in what condition is more down to the driver themselves!

Developing patience, consistency. discipline, risk/money management, and the background to our markets is surely at least as important as the parameters we choose (or not) for our tools.

What are you favourite tools, Dale?

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RSI and an SMA. Indices, stocks, and commodities only. Daily charts only. Nothing exciting this side. The exciting stuff always got me into (big) holes back in the day. And it’s a conscious effort on my part to not read any analysis, opinions, forecasts, or worse still glue myself to the likes of Bloomberg and CNBC. I’d avoid the daily news too if I could (but then I’d be TOTALLY isolated from the world!!! LOL!!!).

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Interesting comment, Dale!

I have spent most of my trading career in forex, but a few years back started to take in interest in Crude Oil and , more recently, in indices. And I do find a difference.

Now it seems far more sensible to trade a single product like oil than try to squeeze money out of what amounts to a one-way bet on a wrestling match, or tug-of-war between two competing, totally different, currencies supposedly moving in opposite directions to one another!!! :thinking: :sweat_smile:

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I did indeed read your oil thread the other day. Impressive research and insights I must say. Too much for me though. I gave up a long time ago trying to understand the where, why, and what for prices move (on any market). I got to a point some years ago where I came to the realization that the more I delved into the intricacies the more it hurt me. But that’s just me and my experience.

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I think you are probably far from alone with that experience! :smiley:

The only reason that I follow the oil market fundamentals is because I am so interested in it for its own sake - I always have been. At school it was a battle between chemical engineering and refineries or marine engineer school and oil tankers! The end result was neither! :joy:

But I like to follow the oil commentaries because it covers unbelievably much of what is going on in the world and one learns so incredibly much alongside actual trading, - but I only trade what my charts are saying - reading charts is like deciding what to wear according to the weather conditions. I think one needs to have such confidence in them that it is like a conversation where both parties always agree with each other without even saying a word! haha!

So my oil thread is more just a place to talk out loud and that helps me crystalise my thoughts. I have often thought that the best way to learn something is to have to explain it to someone else! :sweat_smile:

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I agree with this 100%. Really comes down to the person and the tools they employ whether it’s indicators, price action, s&r, s&d … How they see them, understand them and use them

Sometimes, depending upon the trader, I think this could even be more important.

KC

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All very true about the individual trader’s personality and skill set. My system is a good case in point. It is slow and methodical and lacks excitement. For somebody that cannot handle that type of thing: it will result in them overtrading or getting bored and they may be tempted to take chances that they maybe ordinarily would not take. That same person may do just fine on a faster moving system and shorter timeframes. Don’t get me wrong: it frustrates me too sometimes. I do get a bit jealous when I read one or two of these threads where the gains are very high per day or per week. Believe me: in my current predicament I sure could use those types of gains. But I have learned the hard way that I just don’t have the skill set or the intuition or the personality to be able control a fast paced high risk high gain system. It’s odd though. In other aspects of my life I’ve been known to carry on like a wild animal mostly!!! LOL!!! Then again: sometimes I make trouble for myself if the truth be told. So maybe there is a lesson in that right there!!! LOL!!!

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Thanks again guys for your time, really really interesting stuff!

What do you think about back testing?

Do you suggest to test trading systems by back-testing or live testing?

I wanted to do some back testing as it is a lot easier to test without always waiting for the results (faster), but some people tend to say that it’s useless to test data from the past.

Personally I don’t really see the difference about testing data from last month instead of now?

Because it would seems pretty long to finally find a working system by live testing, especially if you are trading on the daily chart.

Thanks!

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It is certainly not useless to back-test a method but, naturally, one has to appreciate its limitations. It is true that anything that seems to work historically is in no way guaranteed to continue working in the same way in the future - but that is a standard fact in our trading whether we are just back-testing or trading live in the present!

But back-testing can provide a lot of useful data and experience on how it performs in various markets and timeframes and can highlight some obvious faults and/or adjustments/improvements.

But…:

One big limitation with back-testing is that you only really have price as an input. This is ok if you are testing some kind of mechanical trading method but is almost impossible if one’s trading decisions also include an element of discretion based on one’s own interpretation of other external factors e.g. end of week, upcoming meetings, other TF input and so on.

I know there are products for back-testing but I have never used them so maybe someone else can comment on those.

The only back-testing i do is to regularly use the simulator built into my trading platform. I can select any period going back even some 8 years and run my charts “live” on fast-forward using the actual past data. Every weekend I spend some time running through a randomly picked month or two really just to practice keeping my discipline intact. But even then, it is limited because I trade with a high degree of discretion concerning whether to go with the “signals” or not.

I understand what you are saying about daily trading methods - it takes a long time to forward test it. I have been working on a daily-based approach for about 2 years now and I am still not “there” with it yet. I still watch the 4H/1H charts as well! :smiley:

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Hey Tony.

Funny you should ask this.

For reasons which I have never been able to figure: backtesting results have never confirmed my live results. For example: I have made consistent and nice gains over the past five or so years (part time until now I should add) with a particular trading system. But I know that (based on other people doing this i.e.I have never bothered) mechanical backtesting yields less than stellar results for the exact same trading system. There are indeed some variables that mechanical backtesting just cannot factor in but I’m not sure just how much of a part they play in the overall end results. Never been able to figure it out as stated.

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Hey @anon46773462

We were overtyping each other.

Interesting observations (in your post).

I don’t use that much discretion though. Yet my live results are way different and better than some backtesting results that others have done.

Put another way: the results I get are pretty much in line with those of the developer of the system (otherwise I would not have bothered let’s face it). Yet backtests done by others don’t concur.

Interesting. Always wondered about this. And not limited to what I do now either i.e. had this same conundrum years ago with one or two other systems at the time.

One thing I do remember from back then is that the broker and time zones seemed to have made a difference when it came to automated backtesting (and of course modeling quality and one or two other technicalities).

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Hi Dale!
Were these back-tests done using specialise products for that purpose or how?

I don’t have any proper experience of this having never really done any serious testing under strict conditions.

I did once, years ago, run some tests just to prove that MA crossover systems will never work on a mechanical basis long term and it did “prove” just that - but it was not what one could call “laboratory conditions”.

If the system that the method is being tested on is accurate and the data is same then the only other inputs are surely just personal discretionary and a degree of “slippage” between a machine acting and a human’s natural variations in time before acting?

Have you tried comparing a current period of your live trading with a subsequent back-test of the same period? Could be revealing! :slight_smile:

There are other posters here who I think have done a lot of work with testing programs. It would be interesting to hear their findings!

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