Goomboo's Journal

[Crypt_Current]

Another way of thinking of it is this: would you play a game of dice in which you win $1,000,000 any time 1-5 is rolled, but if 6 is rolled you lose your life?

Spending some time injecting a bit of drama into this thread, eh?   

[1714857306]

1714857306

[1714857306]

1714857306

[1714857306]

1714857306

[Seal]

Apologies if this has already been answered. Are you calculating candlesticks and SMA's based on bid prices, ask prices or traded prices?

[phoenix1]

Another way of thinking of it is this: would you play a game of dice in which you win $1,000,000 any time 1-5 is rolled, but if 6 is rolled you lose your life?  Of course not. 

I would gladly play this game, but just once, one roll win or lose. Live or die.
Not through greed and lust for money but for other more personal reasons.

[Goomboo]

Spending some time injecting a bit of drama into this thread, eh?   

Lol, that's the point :p  It's a hyperbole to provide an example of what the majority of traders and investors actually do.

[Goomboo]

Apologies if this has already been answered. Are you calculating candlesticks and SMA's based on bid prices, ask prices or traded prices?

I'm calculating it based on closing price - the last price in a given timeframe.  It's pretty much what is on http://bitcoin.clarkmoody.com/

[Goomboo]

Many times in our trading careers, we experience periods of prolonged drawdown.  What I mean by this is that for days, weeks, or even months on end, we are unable to push our account balance to fresh highs through trading.  These periods are frustrating and what we do during drawdown defines us as traders.

During a period of drawdown and loss, the immature trader will attempt to trade more.  He tricks himself into believing that if he doubles his size, it will only take him a successful trade or two to win back his losses.  This mindset is prevalent, widespread, and deadly.  What this trader fails to understand is that ultimately the outcome of each trade is essentially random.  The market doesn’t particularly care if you need to earn a profit on any given trade.  The trader who increases his size after progressive losses will eventually destroy himself.  The markets are instruments of change and what the trader believes to be “normal” will eventually prove wild and uncontrolled.

The successful trader focuses on defense during drawdown.  As the good trader watches his account dwindling, he exerts effort to defend what capital he has remaining.  Specifically, this means that he not only trades less, but focuses more on flawless execution of only the best possible opportunities.  In other words, he only acts if there is a very compelling reason to do so.  The great trader is not addicted to or obsessed with the physical action of buying and selling securities but is rather passionate about two things: 1) defending what capital he manages and 2) growing assets under management through wise market decisions.

[Qoheleth]

The successful trader focuses on defense during drawdown.  As the good trader watches his account dwindling, he exerts effort to defend what capital he has remaining.  Specifically, this means that he not only trades less, but focuses more on flawless execution of only the best possible opportunities.  In other words, he only acts if there is a very compelling reason to do so.  The great trader is not addicted to or obsessed with the physical action of buying and selling securities but is rather passionate about two things: 1) defending what capital he manages and 2) growing assets under management through wise market decisions.

Hmm.

In a white room, it's good advice, but I feel like it clashes with the running theme in this thread of "make a plan, backtest it, and then stick to it regardless of your heat-of-the-moment feelings". If the backtest included the occasional long period of drawdown, isn't reducing your trades and thereby increasing your risk of missing the next big move nearly as bad as increasing your trades and doubling down on bad weather? Doesn't either one amount to second-guessing the math?

[RyNinDaCleM]

The successful trader focuses on defense during drawdown.  As the good trader watches his account dwindling, he exerts effort to defend what capital he has remaining.  Specifically, this means that he not only trades less, but focuses more on flawless execution of only the best possible opportunities.  In other words, he only acts if there is a very compelling reason to do so.  The great trader is not addicted to or obsessed with the physical action of buying and selling securities but is rather passionate about two things: 1) defending what capital he manages and 2) growing assets under management through wise market decisions.

Hmm.

In a white room, it's good advice, but I feel like it clashes with the running theme in this thread of "make a plan, backtest it, and then stick to it regardless of your heat-of-the-moment feelings". If the backtest included the occasional long period of drawdown, isn't reducing your trades and thereby increasing your risk of missing the next big move nearly as bad as increasing your trades and doubling down on bad weather?

I think the idea is to reduce exposure during times of drawdown by keeping trades smaller than during times of gains. Not so much to ignore the signal all together.
Trading less could also be switching data periods from hourly to daily or something in between.

[MJGrae]

--Technical analysis only works in markets in which there are enough participants to make it work.  It's a self-fulfilling prophesy.  Elliot Wave / trend lines don't mean very much here in my opinion :p

Yes, but at the same time a huge, resounding no. Technical analysis is the process of using mathematical studies to understand the psychology/history of the market in order to identify patterns in market behavior. As a trader (bitcoin, forex, futures, derivatives.. just about everything) I have the experience to say that as a whole, people are pretty predictable. At that rate, the programs that people create to trade for them are also extremely predictable.

Technical analysis worked when there was only a handful of people that really knew/understood it and there is a very good reason for that. If it never worked, nobody would have ever pursued it this thoroughly.

A note on simplicity -- This is very true. The simpler strategies that I have made have been my most rewarding and I don't expect this go change any time soon. Technical analysis can be as simple as identifying a certain condition on the chart and then calculating the probability that a certain result will happen every time that condition is met.

[Goomboo]

Yes, but at the same time a huge, resounding no. Technical analysis is the process of using mathematical studies to understand the psychology/history of the market in order to identify patterns in market behavior. As a trader (bitcoin, forex, futures, derivatives.. just about everything) I have the experience to say that as a whole, people are pretty predictable. At that rate, the programs that people create to trade for them are also extremely predictable.

People are predictable and of course that's the basic theory behind the school of thought.  What I'm getting at is this: it's pretty foolish to apply something like Elliot wave to the mortgage-backed security market or the ICE-settled electricity markets.  It's senseless.  You're not dealing with crowd psychology, you're dealing with securities which settle based upon underlying, real-world economics.  In a market with maybe 10 buyers or sellers, and one trade every week, it's silly to trade intraday moving-average crossovers.

That's my point.  Technical analysis only works when there are enough people / correct market conditions to make it work.  It's naive to try and apply TA techniques to every market.

[Goomboo]

In a white room, it's good advice, but I feel like it clashes with the running theme in this thread of "make a plan, backtest it, and then stick to it regardless of your heat-of-the-moment feelings". If the backtest included the occasional long period of drawdown, isn't reducing your trades and thereby increasing your risk of missing the next big move nearly as bad as increasing your trades and doubling down on bad weather? Doesn't either one amount to second-guessing the math?

As the post above mentions, in the context of this thread this refers primarily to trading less size.  If you were to only risk 1% of your account equity on any given trade, you will find that you mathematically trade less during periods of drawdown.

The advice is meant to be generally taken in that it can be applied to both systems and discretionary traders.  It is a cross-method guideline.

[Goomboo]

The backbone of the successful trader is discipline.  Discipline is the central character trait which all seeking to trade should cultivate.  The reasons why discipline is so important is not terribly difficult to grasp.

Intellectually, profitable trading doesn’t have to be that hard.  It is relatively easy to design and test a logical trading system, as has been demonstrated through this thread.  The true test in trading is the ability to follow through with the established plan.  In my opinion, a large percentage of traders fail not due to lack of research, but rather due to the inability to follow through with what they know to be true.  In essence, they lack the ability to separate their emotions from their reasoning.  It is for this reason that some claim that trading can be learned, but not taught.  The aspiring trader must learn a way of controlling his emotions and acting on a clearly-established plan.

In essence, there are two stages in the trader’s progression: 1) education and 2) practice.  During the education stage, the trader learns the guidelines which govern the market and constructs a system or a plan which allows him or her to participate.  The practice phase is when the trader actually does his buying, selling, and waiting.  There is a healthy tension between these two areas in that traders should both be learning and practicing, but neither too heavily.  The vast majority of individuals spend very little time in the education zone and instead jump straight to trading.  This path is deadly in that an ill-informed trader is the fodder for the professional.  A smaller group of individuals spend too much time learning and very little time practicing.  The flaw here is that the individual never actually distills knowledge into market wisdom, which only comes through experience.  I have even heard of a few individuals who have read literally hundreds of trading books but have never been able to profitable trade.

We all struggle with emotional decision making periodically, but the good trader proves resilient through demonstrated effort to continue acting on what he knows to be true.  There is no prescriptive formula to dictate what a healthy ratio between learning and acting is, since it will vary from trader to trader.  The important thing which I have reiterated time and again is to develop a tested, logical plan, and work to flawlessly execute your strategy.

[woodrake]

Dear Goomboo,

Thank you for sharing your methods. They remind me of what my Dad used to tell me (he did stock exchange hardware in the 70's, including FTSE's); simplicity is key! I have a couple of questions though if you'd not mind? I must admit that I am a novice, so please be patient. Also, apologies if these have already been asked and answered, but there is no easy way to trawl through all the pages here. :/

I trade a 10 and 21 exponential moving average crossover.  When the 10 crosses over the 21, I buy.  When the 21 crosses under the 10, I sell short.

When you say "sell short" do you mean that you're just selling the BTC at that point, or are you actually shorting BTC? I'm not sure if there are many functional sites selling BTC options, though I did see an advert for one claiming to do so called Plus500 (British too!).

Also, on your S&P 500 example you refer to "entering a short/long position". Does "entering a short position" in this context basically mean selling the securities (or BTC), and "entering a long position" mean buying back in again?

I use hourly charts on www.bitcoincharts.com and guarantee that there is liquidity to prevent slippage on bitcoin.clarkmoody.com.

To what exactly are you referring when you say "liquidity"? Is is the size of the orderbook in whichever direction you're going (buy/sell)? As an aside, it is a great shame that CryptoCoin Charts is not yet doing Mt. Gox; they are one of the few sites that provide a visualisation of the orderbook. Assuming I have understood correctly what you mean by liquidity, any tips for those of us not used to looking at a page full of numbers as to how to make that determination quickly?

I have a small account in the Bitcoin market, which I hope to grow through trading!  If anyone makes money trading and they take a signal based on my recommendation, please consider donating a small amount of the profits!

Having tried manually trading, and failed miserably (I've too many other things todo being a CEO of more than one company, and anyway am definitely prone to "emotional trading" ) I have decided to buy BTCbot and plug in your rules. Once setup I intend to leave it to it for a while; fiddling will undoubtedly cause me to mess things up! If it works I shall gladly share a portion of my profits with you.

Finally, I am currently trying BTC/EUR trading on Gox. This is actually because I've a large USD balance I don't wish to risk right by letting BTCbot get at it, but I was also thinking in the longer term it might be a good plan as there will likely be less 10/21 traders on that pair. However, the volume is only about 15% that of USD/BTC (36k vs 6k last time I checked). Do you think the BTC/EUR volumes are adequate for your methods to work / is my idea of switching away from a main pair good?

Thanks in advance,

Kate.

[RyNinDaCleM]

Kate,
I will try to suffice until Goomboo is around to answer your questions. "sell Short" is exactly as it sounds... to short sell BTC. There are a few sites currently ( ICBit, Bitfinex, etc...) as well as a few that are soon to be put to work (Kraken, Coinsetter). Shorting BTC is the only way to profit during the declines. If you don't feel comfortable with trying a new exchange, simply selling your stash to preserve your profits will do just fine. You could give an estimate of approximately 50% of the gains otherwise possible if you were also shorting.

Assuring there is enough liquidity is to minimize slippage. If you buy BTC100, you wouldn't want to pay 68EUR for the fist coin and 100EUR for the last one. Look for larger orders near the spot price and increase/decrease your order size depending on what is available.

MtGoxLive.com is a decent visual representation and has settings to change into any currency Gox offers. There is also Bitcoinity.org and Bitcoinwisdom.com which are free services. If you don't mind a small fee, there is BTCCharts.com which has many great features.

Good luck!

[Goomboo]

Hi Kate,

Thank you for the questions and compliments.

When you say "sell short" do you mean that you're just selling the BTC at that point, or are you actually shorting BTC? I'm not sure if there are many functional sites selling BTC options, though I did see an advert for one claiming to do so called Plus500 (British too!).

At the time of writing, I was shorting through Bitcoinica.  These days, I will just exit my entire BTC position and hold cash.

I have always been very skeptical of companies that allow "shorting" in the BTC markets.  In the stock market, when you short, someone is lending you a share which you sell and buy back later, while paying interest to the lender.  In the Bitcoin market, I have seen no such offering which means that you are engaging in a synthetic short position.  A synthetic short means that you are trading against the broker which can be a recipe for unscrupulous behavior.

Also, on your S&P 500 example you refer to "entering a short/long position". Does "entering a short position" in this context basically mean selling the securities (or BTC), and "entering a long position" mean buying back in again?

You are right - in the context of BTC, I consider a short position to be selling coins and holding cash and a long position to be holding coins.  In the context of the S&P 500, I call a short position actually shorting the shares rather than just sitting on the sidelines.

To what exactly are you referring when you say "liquidity"? Is is the size of the orderbook in whichever direction you're going (buy/sell)? As an aside, it is a great shame that CryptoCoin Charts is not yet doing Mt. Gox; they are one of the few sites that provide a visualisation of the orderbook. Assuming I have understood correctly what you mean by liquidity, any tips for those of us not used to looking at a page full of numbers as to how to make that determination quickly?

You're right about this one as well - liquidity is one of those five-dollar finance words that answers the question "can I trade without moving the market?"  The best way to gauge liquidity is through the order book.  In my opinion, the best one out there is http://bitcoin.clarkmoody.com/

To answer your second question about how to make sense of the numbers: you should already know how much liquidity you need prior to even looking at the book...here's why:

Liquidity protects you from "slippage".  Slippage occurs when you place an order at one price and inadequate liquidity causes you to have an average price different from the market price.  For example, the current price is $95/BTC.  If I were to buy 100,000 BTC, I would "slip" up the book as I ate away the liquidity, resulting in an average price of around $125 per BTC.  If I expected to make 10% on the trade but moved the price by 25% when entering, then I have made a mistake by not looking at the order book.

The best way to use the order book is to start with two questions: 1)  How many coins will I be trading and 2) What is my expected return on investment.  For example, if you are trading the moving average crossover system on an hourly timeframe and expect to earn 3% on each average trade, but you are trading in such a size that you will cause the market price to move 5%, you have inadequate liquidity and need to change your approach.

Finally, I am currently trying BTC/EUR trading on Gox. This is actually because I've a large USD balance I don't wish to risk right by letting BTCbot get at it, but I was also thinking in the longer term it might be a good plan as there will likely be less 10/21 traders on that pair. However, the volume is only about 15% that of USD/BTC (36k vs 6k last time I checked). Do you think the BTC/EUR volumes are adequate for your methods to work / is my idea of switching away from a main pair good?

I have few things to say about this, but I'll cut straight to your question first.  This question feeds back into the previous point about liquidity.  If you are trading in such a size that liquidity could be a problem in BTC/USD, then you are magnifying your problems by going to BTC/EUR.  As liquidity diminishes, your expected return will diminish in that your entry price will be worsened.

Now about BTC/EUR.  I don't think I've ever looked at a chart of any other currency vs. BTC, but I'm pretty sure that I know what it shows.  Due to triangular arbitrage, all BTC pairs will essentially show the same price movements.  For example, if BTC/USD starts rising, but BTC/EUR isn't moving, traders can sell their BTC for USD, convert USD into Euro, buy BTC and lock in a "risk-free" profit.  This relationship virtually ensures that as long as money is allowed to freely be exchanged, price movements across currency pairs will be similar.  Since the moving average crossover system is a trend-following strategy and the trends will be similar, it doesn't make too much sense to me to change to a less liquid pair.


Best of luck with your trading!

[RyNinDaCleM]

At the time of writing, I was shorting through Bitcoinica.  These days, I will just exit my entire BTC position and hold cash.

I have always been very skeptical of companies that allow "shorting" in the BTC markets.  In the stock market, when you short, someone is lending you a share which you sell and buy back later, while paying interest to the lender.  In the Bitcoin market, I have seen no such offering which means that you are engaging in a synthetic short position.  A synthetic short means that you are trading against the broker which can be a recipe for unscrupulous behavior.

https://www.bitfinex.com/credit

[Goomboo]

I have a small account in the Bitcoin market, which I hope to grow through trading!  If anyone makes money trading and they take a signal based on my recommendation, please consider donating a small amount of the profits!

And I've gone back and changed my initial post due to a few PMs, etc. trying to send donations.  Please no donations, if you earn a profit from this thread, please give a portion to some charitable cause and not to me.  The reason for this is that I am a trader, not a system seller.  When I wrote that last year, I envisioned this thread turning out differently than it did.  The only payment I take as a trader is a percentage of profits I actually earn on accounts under management.

Thanks all!

Goomboo

[Goomboo]

https://www.bitfinex.com/credit

Yeah, I can't access that page, but I bet it's some sort of information about how they pay you for holding BTC as "shortable".  The reason I don't have much of an appetite for this discussion is that there is very little legal framework to hold them accountable (SEC/CFTC).

It was the same thing with Bitcoinica.  They pay you to hold BTC in the system for shorting.  That smelled shady to me as well and I would move all funds out of the system and back to Gox between trades.

Just as I warned users of Bitcoinica last year, so I warn users of shorting services now: it probably doesn't work like you think it works and there are more risks than you know.  Imagine yourself running a business trading against a crowd of individuals, the majority of whom consistently lose money.  What is your incentive to actually ensure that BTC are available for shorting considering that the trader is probably just going to lose?  Why not just "say" he is short any time he wants to trade and collect the commission / losses from his account? 

In the world of finance, there are many snakes trying to steal your hard-earned money.  Be wise.

[RyNinDaCleM]

https://www.bitfinex.com/credit

Yeah, I can't access that page, but I bet it's some sort of information about how they pay you for holding BTC as "shortable".  The reason I don't have much of an appetite for this discussion is that there is very little legal framework to hold them accountable (SEC/CFTC).

It was the same thing with Bitcoinica.  They pay you to hold BTC in the system for shorting.  That smelled shady to me as well and I would move all funds out of the system and back to Gox between trades.

Just as I warned users of Bitcoinica last year, so I warn users of shorting services now: it probably doesn't work like you think it works and there are more risks than you know.  Imagine yourself running a business trading against a crowd of individuals, the majority of whom consistently lose money.  What is your incentive to actually ensure that BTC are available for shorting considering that the trader is probably just going to lose?  Why not just "say" he is short any time he wants to trade and collect the commission / losses from his account? 

In the world of finance, there are many snakes trying to steal your hard-earned money.  Be wise.

I won't try to sell you on something, but unlike Bitcoinica, Bitfinex is not a bucket shop. It offers P2P lending where someone offers their USD/BTC/LTC as loans, and the trader takes out this credit to margin trade, just like you referred to in the stock market. The trader pays interest on the loan once the loan is returned.
They are not regulated by the SEC however, so some risk is involved, but it is not the same.

[Goomboo]

They are not regulated by the SEC however, so some risk is involved, but it is not the same.

Yeah, that's why I'm constantly skeptical of BTC firms.  If mainstream financial firms regularly participate in deception and fraud, how much more will anonymous firms in an unregulated market with no oversight?

My general advice to anyone who cares is just be very cautious.  You've worked too hard to allow yourself to be robbed.