Repeating patterns and misleading percentages.

I am a pattern reader by nature. I see patterns in people, charts, nature, etc. I guess it stems from my love of observing. I was able to excel at football because I loved to study film. Till this day I can still watch a game and narrow it down to a few plays. What most people do not realize is that as you go up in level, the game gets more predictable. Now, even though as a player I knew what was coming I couldn’t always do something about it. Knowing what is coming didn’t mean anything unless I could execute it. I couldn’t execute as well as others, hence why you are reading this now instead of watching me play.

Earlier in my trading career, I was going to be a billionaire and revolutionize trading by transferring that football thought process to trading . This was when I thought trading was a get rich quick scheme. I had designed a way that allowed the user to see these patterns without actually observing them. I thought that I could take a pattern and match it with the pattern from a previous time to see how that day/trade finished.

I made them sign a NDA and I did the whole mail yourself a letter and never open it.   The idea was met with laughter. As the saying goes, history doesn’t repeat itself it rhymes. Here is why I was laughed at:

  • There is no context. If your time frame is 30 years you should consider a 30 year chart.  The further you get from the data the less accurate the data is. Comparing a pattern today to a pattern from 20 years ago is less accurate.  Finding a day like today in the recent past is less likely.
  • Complicated, there is a way to some extent, to gather the necessary inputs to provide some context but would have been cost prohibited.
  • Finally, trading does not work that way.  Charts and tools are meant to provide focus and breadcrumbs not to predict.   They can and are often self fulfilling prophecies.  You have to know the past but be focused on the future.

There is no doubt the system that I designed would be helpful but there was a more efficient ways to get there.  I was able to see the pattern in football because there are less moving parts.  Removing the moving parts is harder in the market because there is a game within a game at times.

Trading is hard, there are no easy fixes for most individuals.  I see advertisements for systems that are 86% accurate and I am sure it is helpful for some. But it doesn’t address what happens between point A and point B, it just allows you to put it off when the system is working.  Also, there are many ways to get from point A to point B and not all the right risks.

I am not saying that these systems are bad, whatever works.  But I think by not dealing with loss or the idea of a loss the 14% of the time you are destined to not get the right results.  Trading isn’t eliminating losses it is accepting them. Risk should be seen in the trading world as an opportunity.

A system does not make a trader the trader makes the system.  Do not fall in love with percentages, some are intended to take your eyes off of risk and that never ends well.

If you have experience with those type systems leave a comment would like to know how you use it in your trading.

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  • Risk should be seen in the trading world as an opportunity. – can you expand on this?

    • Will make it the subject of tomorrows post. Thanks for reading. 

  • Anonymous

    Great post. Most people don’t realize that’s it’s the exits that make or break a trader much more than the entry. There is a large number of traders who want near certainty that a trade will work before they take it.

    The traders who think having the “best set-up” is the most important part of trading, are in reality the ones being set-up.

    Andrew Menaker, PhD

    • It is perplexing to me that people think that.  Well frustrating but easier to blame someone or something than yourself.  It is the old saying, you hire a guru so you can yell at them. 

  • Hi,  Interesting observations… fwiw It reminded me of a couple things I read some time ago.  Though I am not giving the entire context of the following quotes I think that they are still relevant.

    Regarding patterns (specifically shrt patterns) William Eckhardt said “the human mind was made to create patterns.  It will see patterns in random data.” He went on to say “….”every pattern recognition chart reader I know makes the tradeshe really likes larger than the trades he doesn’t like as much.”

    And regarding risk I agree… Marty Schwartz said “…this is the point that offers the maximum profit potential but also has the greatest risk.”

    Anyway, I enjoyed the post as I do your others.
    Regards,
    Marc

    • Marc as a pattern reader you must always be aware of your bias.  I call them ghost bars.  Bars that are there while in the trade and not when you go back and look at it. 

      That is a great quote from Marty Schwartz, I hadn’t heard it before. 

  • Fantastic post. Thanks for sharing.

    I see advertisements for systems that are 86% accurate and I am sure it is helpful for some.

    I have experience with systems such as those. My experience:

    – Most, if not all, of those systems suffer from some form of “curve fitting” I’m willing to bet.

    Many have to be “trained” (re-fit) on a regular basis (weekly, monthly, etc). My guess is an 86% winning system is a heavily curve fit double Moving Average crossover system, or a system that trades 4 or 5 times a year, or an RSI(2) mean reversion system with a wide stop and short profit target.

    – 86% accuracy could be the result of a very tweeked curve fit on a decade long back test of an index. The most popular index to back test on is the S&P-100. Where they get the “86%” accuracy and why it’s a lie is that stock indexes are churned yearly with the poor performers cut and replaced. Naturally, any back test more than a few years out is going to look great. So did Lehman Brothers.

    Obviously, not every highly accurate system is curve fit rubbish, but such systems probably aren’t for sale in a magazine. 😉

    • Thank you for your comment.  Yep all “systems” need a constant, I prefer that constant to be me.  I watched a few presentations and I am still not sure what they are trying to prove.  

  • Adam Grimes

    this is a great post and important points.

    i just finished the slides for my webinar today and one of my points is that risk is actually opportunity.  interesting to read same thing here!

    good post thanks.

9 Responses to Repeating patterns and misleading percentages.

  1. Tarhini_smb says:

    Risk should be seen in the trading world as an opportunity. – can you expand on this?

  2. Anonymous says:

    Great post. Most people don’t realize that’s it’s the exits that make or break a trader much more than the entry. There is a large number of traders who want near certainty that a trade will work before they take it.

    The traders who think having the “best set-up” is the most important part of trading, are in reality the ones being set-up.

    Andrew Menaker, PhD

    • Eradke says:

      It is perplexing to me that people think that.  Well frustrating but easier to blame someone or something than yourself.  It is the old saying, you hire a guru so you can yell at them. 

  3. Hi,  Interesting observations… fwiw It reminded me of a couple things I read some time ago.  Though I am not giving the entire context of the following quotes I think that they are still relevant.

    Regarding patterns (specifically shrt patterns) William Eckhardt said “the human mind was made to create patterns.  It will see patterns in random data.” He went on to say “….”every pattern recognition chart reader I know makes the tradeshe really likes larger than the trades he doesn’t like as much.”

    And regarding risk I agree… Marty Schwartz said “…this is the point that offers the maximum profit potential but also has the greatest risk.”

    Anyway, I enjoyed the post as I do your others.
    Regards,
    Marc

    • Eradke says:

      Marc as a pattern reader you must always be aware of your bias.  I call them ghost bars.  Bars that are there while in the trade and not when you go back and look at it. 

      That is a great quote from Marty Schwartz, I hadn’t heard it before. 

  4. Jack Damn says:

    Fantastic post. Thanks for sharing.

    I see advertisements for systems that are 86% accurate and I am sure it is helpful for some.

    I have experience with systems such as those. My experience:

    – Most, if not all, of those systems suffer from some form of “curve fitting” I’m willing to bet.

    Many have to be “trained” (re-fit) on a regular basis (weekly, monthly, etc). My guess is an 86% winning system is a heavily curve fit double Moving Average crossover system, or a system that trades 4 or 5 times a year, or an RSI(2) mean reversion system with a wide stop and short profit target.

    – 86% accuracy could be the result of a very tweeked curve fit on a decade long back test of an index. The most popular index to back test on is the S&P-100. Where they get the “86%” accuracy and why it’s a lie is that stock indexes are churned yearly with the poor performers cut and replaced. Naturally, any back test more than a few years out is going to look great. So did Lehman Brothers.

    Obviously, not every highly accurate system is curve fit rubbish, but such systems probably aren’t for sale in a magazine. 😉

    • Eradke says:

      Thank you for your comment.  Yep all “systems” need a constant, I prefer that constant to be me.  I watched a few presentations and I am still not sure what they are trying to prove.  

  5. Adam Grimes says:

    this is a great post and important points.

    i just finished the slides for my webinar today and one of my points is that risk is actually opportunity.  interesting to read same thing here!

    good post thanks.

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