Ed Mamula.com

Well, I’m back from my self-imposed two week break.  Within 48 hours of turning the systems back on, I’m down 3%, mostly on the back of two losers in the Cable Glider system.  It’s time for me to face the fact that Cable Glider has been a consistent loser all year, and it needs to switched off.  I am doing that immediately.  I will continue to monitor it in paper-trading mode, and if it shows two months of consecutive profitability, I will re-consider using it.

My plans had no provision for System Death.  I plan on becoming more studied on this subject, and I will incorporate it into future system deployments.    There is some good information over at Vertical Solutions, which I hope will point me in the right direction.

In the meantime, I will keep Euro Ranger active.  It was virtually break-even last month, but it has shown several consecutive months of profitability. 

The linear regression system that I was testing on the Japanese Yen totally fell apart in out of sample testing.  It’s a little bit disappointing, but then again, that’s why we test strategies before deploying them.

I’ll also be tinkering with tick charts a bit…this is something that I’ve never considered before, but I believe that it makes good sense to use tick charts instead of time based bar charts in a 24 hour market where most of the ticks are clustered into a small time frame.  For example, if we use a 500 tick bar on the Euro FX contract, we’ll see that sometimes a single bar can span a few hours (usually right after the session opens), and as little as 1 minute in a fast market.  Very interesting indeed…and that’s what I need right now…new ways of looking at the data.  We’ll see what it yields.

Ray Barros has posted a great series of articles on routines and habits and how they relate to the construction of a trading plan.  This is a great post and deserves to be read and re-read several times.  It highlights, among other things, the tendency of beginning traders to favor discretionary approaches rather than mechanical ones.  This preference can be quite damaging though, as beginners have not likely developed the ability to trade what they see rather than what they want to see.  This is referred to as confusing intution with “into wishing”.

Mechanical approaches are ideal for beginners, as they force us to trade what we see as we develop a feel for the market.  In my former life as a stock and option trader, I would bounce around from one idea to the next, blowing up my account several times in the process.  The problem with such a random approach was that sometimes luck did shine on me and save me from losing…and of course these random rewards are the most addictive and difficult to reproduce.

When I shifted focus to the currency markets and became aware of all of the great tools for developing mechanical trading systems, I firmly made the mental shift that a mechanical approach would be best for me…after all, my discretionary trading had led me to a track record of 8 consecutive losing years.  You know what they say…quitters never win and winners never quit, but those who never win and never quit are idiots!

Now that I’ve focused almost exclusively on the British pound for a few years, I believe that I’m starting to develop a reliable feel for the market.  I am certainly NOT ready to incorporate much discretion into my trading plan, because the mechanical approach has worked so well, but I’m becoming more interested in how an experienced trader moves from a mechanical approach to a discretionary one and consistently outperforms the mechanical approach.

Of course, when we talk about intuition, we must carefully define the term.  The first definition on dictionary.com comes closest to what we are referring, but it is still incomplete:  “direct perception of truth, fact, etc., independent of any reasoning process; immediate apprehension.”  Well in this case, we’re not really talking about understanding that is independent of reason, but rather immediate understanding derived from unconscious integration of our experience trading the market.  It’s quite a fascinating process, but one that I’ll admit that I’m at a loss to describe the mechanics of.

All that I can do is make a note of just how long it has taken me to begin to develop a market intution and remind beginners that the goal of consistent profitability is a mountain with an unseen (and uncertain!) peak.  If your trading plan keeps you in the game long enough, your “into-wishing” just might turn into intuition after all.