Do you have to validate your trading ideas? - Page 199
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Thread: Do you have to validate your trading ideas?

  1. #1
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    Jun 2013
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    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:

    Attachment 10883

    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.

    Attachment 10884

    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:

    Attachment 10885

    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!

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  2. #1981
    Trader Sascha's Avatar
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    Dec 2013
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    Quote Originally Posted by Striker$ View Post
    Your ideas are mere ideas and nothing much to prove that they will work, it is needed that so as to be sure of what you are doing in the market, there should have been a way to have it validated, because as a matter of fact, when the validation has been done, then it shows that the trader has all what it takes for them to become profitable. Validation is so much important to increase our certainty in trading.
    ideas of trading can come from any sources even with naked eyes observation we still can get some of them easily. fortunately, with our responsibility to create validation of each ideas we have, we can select and correct some of them that actually working and accurate than others so we choose them for our main ideas. it does cost us quite some time to verify the ideas and need to confirm that our strategies approve them.

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