An excellent article in today's Wall St. Journal describes the science behind upsets in the NCAA tournaments. The article points out:
"Despite all the hunches about sleeper picks, teams often win basketball games at any level for a simple reason--they create more chances to score than their opponents do by forcing more turnovers and grabbing more rebounds. More shots at the basket usually generate more points."
The article later provides examples of teams that perform better or worse depending on the quality of their opponents. These statistical tendencies greatly alter the odds of tournament upsets.
The implications for trading are significant. Much of trading success boils down to consistency: being able to "score" against a variety of opponents (in different market conditions). Many times we see a trader make money, only to find that it's primarily made on the long side when buying the market. Little wonder that the trader experiences a tournament upset when the trend changes.
Similarly, just as basketball fundamentals--rebounding, limiting turnovers--alter the odds of winning, the fundamentals of trading affect profitability. Does the trader wait for weakness before buying or strength before selling, thereby improving the risk:reward profile for the trade? Does the trader limit losses promptly, using information from those losing trades to score with new, winning ideas? Does the trader take a level of risk in the trade commensurate with the trade's potential and uncertainty?
The most important implication of the article, however, is that many upsets are not really upsets, once we drill down to performance statistics. Most traders don't know how they perform in different market conditions; in their long vs. short trades; in their trades in different names or markets; in different times of day. It's difficult to improve yourself as a performer if you don't truly understand your strengths and weaknesses as a performer. Playing to your strengths and minimizing your exposure in weak areas can help ensure that you will be the one pulling off upsets in the markets, not the one who gets smoked in seemingly easy market conditions.
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8 comments:
Brett, like you, I am also on the road, so to speak, at the HK Money show.
One way to keep track of our weaknesses or strengths is to keep a journal and statistics of our trades to see how we score over say a sample of at least 30 trades to be meaningful.
Today the first day of the show has Jim Rogers whose talk is spiced with humor too. Would follow up with an article .....stay tuned.
Thx Coach, yu bring the best out in me.. yu write the same concepts in different ways to reach all levels of new/developing traders & say it again & again, drilling it into me/all.
I'm starting to see it real time my man, after many hours of study/replay...
yur article yesterday fit right in to the break off the 10:00ish high, sellers didn't "step up when they should have". price struggled lower on weaker vol on each break (3min chart) it's was screaming at me "efficient market on a my time frame" now where do i buy this b-tch.. passive bids showed up right into the opening price area halting the auction lower... this happened realtime not after the fact..... luv-ly, gave some up into the night mkt high after surviving a 2-3 pt break just below this mornings high (buying op) exited into 64 area,(supply to the left) only a runners left. looking for a selling op into the 67's. one small victory in many mis steps & missed opportunities. this event will keep me "at it" for a few more years!!
I have folders of yur articles & notes from yur books set up with the "environment were in" (context),"what type of day were trading", possible "range days", possible "trend days", "calming oneself" in a heightened state, "slumps" & "review". all have annoted charts I refernce during mkt hrs.
I want to thank yu by saying, I'm seeing it real time & not referring to the folders as much, it's part of me now..
thx coach, JT
"Similarly, just as basketball fundamentals--rebounding, limiting turnovers--alter the odds of winning, the fundamentals of trading affect profitability. Does the trader wait for weakness before buying or strength before selling, thereby improving the risk:reward profile for the trade?"
I hate to be pendantic, but buying on weakness or selling on strength does not necessarily improve a risk/reward profile. If you adopt any sort of trend following strategy you most likely buy on strength and sell on weakness. I know there are plenty of ways to skin a cat profitably through different trading strategies but saying that buying on weakness improves the risk is false. As my old boss in London with his street smart East End school of hard knocks education used to say 'bottom pickers get smelly fingers'
Zircon,
I've made by far the vast majority of my returns with trend following, and I *ALWAYS* wait for at least a slight pullback from the trend before I start accumulating my position.
I used to buy tops and sell bottoms and can tell you that doesn't work for me at all. The only time I ever do that now is with very small positions for scalp trades when the $TICK is totally in my favor and the chart technicals are outstanding.
I am not trying to argue what type of trading strategy works best. Every profitable trade is a trendfollowing trade by nature i.e you buy and it goes up allowing you to sell higher for a profit is a trend and if you sell and it goes down and buy lower you have also followed the trend to make money. Every definition of trend is dependent on time frame. My point again was that waiting for a dip does not improve a risk/reward scenario in absolute terms. For all the novice traders reading this blog it is a false sense of security suggesting to them that buying on a dip will skew the risk/reward in their favor. I am pleased you tested both methods and determined with hard data the buy on dips strategy works for you.
Hi Ana,
Yes, tracking those last 30 trades or the results of the past month can be very helpful in gauging shifts in performance. Thanks--
Brett
Thanks, JT; great use of review for learning. I appreciate the feedback--
Brett
Good point, Zircon-212; in and of itself, waiting for weakness for long entries or strength for short ones will not guarantee good risk reward. The idea, rather, is that *if* you have correctly identified a trend or range, selling into a bounce or buying into a dip can help you make the most of it. The exception would be high momentum breakout moves, where sometimes you just have to lift offers or hit bids to get into the trade.
Brett
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