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Trader Bill Learns to Win with Testing, Trial, and Error

04/26/2017 2:48 am EST


Jake Bernstein

Publisher, The Jake Bernstein Online Weekly Capital Markets Report and Analysis

In this final of three weekly articles, Jake Bernstein outlines trading discipline in a parable about Trader Bill. He’s the longtime publisher of The Jake Bernstein Online Weekly Capital Markets Report and Analysis.

Inspired by hope and motivated by ambition, Trader Bill continues his quest for success. His exhaustive search leaves no stone unturned. He investigates self-help courses, motivational courses, neurolinguistics approaches, various forms of psychotherapy, and one-on-one mentoring. He buys the latest, most up-to-date trading software package.

One evening while searching through hundreds of symbols to find a trade that meets his latest strategy requirements, Bill has an epiphany. He attempts to add an indicator to a price chart. Going to the “add indicator” command he realizes something he never appreciated until now: there are hundreds of indicators he could add to this chart.

These include the standard moving averages, regression lines, flags, retracements, regression lines, Fibonacci, Elliott wave, ADX, DMI, momentum, etc. The sheer magnitude of indicators overwhelms him. He does a quick count. There are over 233 indicators that he can add!

But, where does it describe what they mean? He searches the entire program finding only vague or general descriptions of each indicator. He turns to the internet. There he finds more detailed descriptions.  What he does not find, however, are the rules for the application of each indicator. This is most disconcerting.

When we buy a car, it is assumed that we have passed the driver’s license examination and that someone somewhere has taught us how to drive.

When it comes to trading, no such due diligence is required. In effect you’re given tools but you are not told exactly how to use them. If you are given rules, it is usually in very general terms. I for one would never give anyone the keys to my fast cars without making sure they knew how to drive.

Trader Bill has identified problem number one. Specifically the problem is that there are many indicators and strategies available to traders but there is very little information on objective rules for using these indicators and strategies. This leads to subjective interpretation which may change from one instance to the next, which in turn leads to insecurity and lack of procedures which in turn, undermine self-confidence and then erodes trader discipline.

Without clarity and rules, it is impossible to develop a consistent procedure for the application of rules. The result is inconsistent or interpretive application of the rules.

Most traders make up the rules or develop the rules as they go along. Lack of rules will lead to a lack of confidence which in turn will lead to a lack of discipline. But where will these rules come from? They will come from testing, trial, and error.

Trader Bill believes that he has made considerable progress. I agree.

Now begins the search for trading strategies that make money. It’s simple and very obvious. Perhaps it’s so obvious that few traders can see the forest for the trees.

Here’s a synopsis of what Bill has discovered. Simple as it may sound, it took Bill several years to arrive at these conclusions.

  1. Lack of discipline as a trader is a natural consequence of subjective, interpretive, non-rule-based strategies.
  2. Discipline derives from confidence.
  3. Confidence is a result of clarity and specific procedures.
  4. Without confidence in trading methodologies, traders revert to interpretation.
  5. Interpretive methods are the stock in trade of those who sell ideas and concepts as opposed to rule-based procedures.
  6. In order to develop confidence and discipline, traders must find methodologies that produce results.
  7. This can only be achieved through the testing clear-cut rules and determining if these rules go forward profitably.
  8. In order to do so, we need to develop and/or use statistically valid back testing methods.
  9. The job of the trader as simple as it may seem on the surface is much more complex and must be treated as such if profits are to follow.

Best of trading!

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