Do you have to validate your trading ideas?
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  1. #1

    Do you have to validate your trading ideas?

    Hi, traders!

    This is Value trader, I’m back from vacation and I want to start my activity on the forum with the article on pretty interesting thing that is rarely spoken about.

    How do traders find their trading ideas? Process of finding any trading idea or building algorithm consists of several steps – first they find idea, then they test it on historical data, calculate profit-factor and other parameters (if they aren’t satisfied with). In other words, they validate their hypothesis – they find confirmation for their ideas in the past. This type of thinking is very popular and wide spreaded, though it might not be very efficient – markets rarely provide good setups with linear correlation between event and outcome.

    The opposite type of thinking is to find events that don’t happen or happen very rarely and bet against them. Our brain might be confused with that – we are taught to find repetitive patterns and validate them with historical examination. But once you find a good pattern, you may notice that its' efficacy decreases over time. The more and more traders will notice a pattern and good opportunity will disappear or become less profitable as more traders try to benefit from a pattern. It is especially true when we talk about very popular currency pairs (or other trading instruments), for example – EURUSD, this pair attracts many traders and is often very overcrowded.

    It’s harder to think in terms of what will not happen rather than in terms of what will happen.

    Let me provide you couple of examples.

    Many traders like to trade-off possible reversals. If we see price that we consider as «high», we tend to seek for possible reversals whereas it is very tough to identify exact moment when price is starting to move in the counter-trend direction.
    If you would like to validate the idea of reversal, you would have to seek for possible reversal patterns that may look like this:

    reversal patterns.png

    But if you examine real price action using strategy tester in MT4 trading platform or any other software that allows you to simulate historical data, you would recognize that it’s pretty tough to spot a reversal – you would have approximately 4 losing trades in a series of 5 trades. Of course, if you keep your losses small and gains bigger, you can eventually trade with a profit. But if you start to think in terms of what will unlikely happen, your view has to become completely different. You may examine fake reversals and find most of reversal patterns can provide you good entries in the direction of the existing trend. You may have more modest profit/loss ratio in this case, but nevertheless you can achieve 2/1 or greater. And what is important – you will have probabilities on your side.

    I have put fake reversal patterns in the screenshot below with possible continuations. I employ them in my own trading, so can you.

    continuation patterns.png

    When it comes to reading real market context, we could have seen very obvious situation on GBPUSD so far. Strong trend could allow you to trade in the direction of existing trend at least 2 times:

    fake reversals example.png

    Those trades may not seem very attractive, moves are modest, but after all, you build your account out of winning trades, not of losing ones, don’t you? Two winning trades are better than two losing ones, that’s obvious.

    Good luck!

  2. #2
    As pr my experince i use the validation in my trading strategy to confirm the trade idea.Like validating the wave pattern by counting all the waves or validating the chart pattern by all the properties.So validation give us more probability to get the success in trading.Validation is confirmation.

  3. #3
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    It is quite interesting if the trader makes confirmation on the side of the market the trader want to take, this will filter the trade of the trader more often, than just to be doing trading with the anxiety of just doing it. This is very bad for traders to do. I know that if you validate the system you use for trading, it will help you to know the direction with better probability.

  4. #4
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    Quote Originally Posted by cozard007 View Post
    It is quite interesting if the trader makes confirmation on the side of the market the trader want to take, this will filter the trade of the trader more often, than just to be doing trading with the anxiety of just doing it. This is very bad for traders to do. I know that if you validate the system you use for trading, it will help you to know the direction with better probability.
    that is good, traders need to do this way, useful to filter some data and get the right correction before enter the market, so will make them sure to enter the market for open position, some traders will use some methods or system to validate it, maybe use indicators combination and etc,

  5. #5
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    Quote Originally Posted by newentry View Post
    that is good, traders need to do this way, useful to filter some data and get the right correction before enter the market, so will make them sure to enter the market for open position, some traders will use some methods or system to validate it, maybe use indicators combination and etc,
    That is what it is used for exactly, the beauty is in filtering, the validating of the trading is very important, it is way of getting double trading assurance on what the trader is doing, this gives better room for the suggestion of the place to put the stop loss because you know the trading position you are about to take is worth risking more.

  6. #6
    Quote Originally Posted by cozard007 View Post
    It is quite interesting if the trader makes confirmation on the side of the market the trader want to take, this will filter the trade of the trader more often, than just to be doing trading with the anxiety of just doing it. This is very bad for traders to do. I know that if you validate the system you use for trading, it will help you to know the direction with better probability.
    confirmation of trade is something tough in this market we get direction after detailed analysis about market , we have to validate our techniques for getting more profits , once we make better strategy then we follow it and we get good results also , we have to change strategy for getting good results .

  7. #7
    Quote Originally Posted by cozard007 View Post
    It is quite interesting if the trader makes confirmation on the side of the market the trader want to take, this will filter the trade of the trader more often, than just to be doing trading with the anxiety of just doing it. This is very bad for traders to do. I know that if you validate the system you use for trading, it will help you to know the direction with better probability.
    yes its happens not much time but yeah almost trader know that cause of its experience in this field if you have a that thing you can do it very easily no one sure about market but the only 1 trader who have a many experience in this field they are almost judge this field very near to market but its not easy ...

  8. #8
    Registered user mohabbat's Avatar
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    Quote Originally Posted by vipuldevkar View Post
    As pr my experince i use the validation in my trading strategy to confirm the trade idea.Like validating the wave pattern by counting all the waves or validating the chart pattern by all the properties.So validation give us more probability to get the success in trading.Validation is confirmation.
    Dear vipuldevkar ! this is very wonderful market analysis , and I think your calculation very pure, but I think validating the chart pattern very strong from wave pattern, but there is trend is fact for secure analysis. and when you follow to wave pattern then it is not more safe, so I am focus to chart pattern from H1 to W1 .
    Don't loss you hope.

  9. #9
    Trader nsawork's Avatar
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    Quote Originally Posted by mohabbat View Post
    Dear vipuldevkar ! this is very wonderful market analysis , and I think your calculation very pure, but I think validating the chart pattern very strong from wave pattern, but there is trend is fact for secure analysis. and when you follow to wave pattern then it is not more safe, so I am focus to chart pattern from H1 to W1 .
    Using the Pattern analysis is being considered as the best trading by many traders since they are able to see where the markets are heading and then they can make use of this knowledge in their trading to gain income. We also know that both Trend identification as well as Trend validation are important for us.

    And deciding on the time frames for our trades is what we have to learn and take advantage of

  10. #10
    Quote Originally Posted by nsawork View Post
    Using the Pattern analysis is being considered as the best trading by many traders since they are able to see where the markets are heading and then they can make use of this knowledge in their trading to gain income. We also know that both Trend identification as well as Trend validation are important for us.

    And deciding on the time frames for our trades is what we have to learn and take advantage of
    You are right dear that identification of trend is more important for every traders. In the Forex business when we are facing loss that many times we are disable to understand trend condition of market. With the help of validating chart patter and wave pattern we are able to detect of trend condition of market also able to making better trade from this business.

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