TA says:

No indicator will ever replace skill and hard work

Exactly TA.  Exactly, exactly, exactly.  Indicators indicate, that’s it.  You need an understanding of why the move you expect should occur, and you need a way to identify these conditions, and you need to execute it and so on, and all of that has to do much more with the latter, than with the former.

I present a thought exercise, one of many I have to explain this exact situation (I’m saving the best ones for my materials that I will be presenting soon):

7, 65.

Dead or alive?

That’s the indicator data, or score, and you need to make the call.

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Think about it.
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I told you 7, 65, dead or alive?  What’s the call?

Well, dead or alive implies a person, so if we’re talking about a 7 year old with and their diastolic blood pressure, probably alive, since 100/65 is normal for a 7 year old’s blood pressure.

A 7 year old and their body temp, then dead, since 65 degrees is way too far from normal.

7 weeks, 65 hours of pregnancy, definitely having problems, I’m going with dead.

Or are we talking about certifications, ie financial licenses?  Then 7, 65 dead or alive could refer to theoretical financial acumen, or study hours, in which case super dead.

The point is those numbers indicate something, they indicate something meaningful, and in a context are absolutely critical in determining the small matter of life and death in humans.  But absent context there is no meaning. To blindly follow them with no plan for what one conclusion over another could mean for the prognosis of the patient, is bad at best, reckless at worst. Similarly, in terms of financial risk management, or losses, a reading or judgment with no context will result in similar problems.

After all, 7, 65 for blood pressure means I send the kid home with a clean bill of health and am heralded a great soothsayer.  7, 65 but it’s body temp means I send the kid home with an a-OK stamp and the mom comes back screaming because the child is dead, but I just saw the 65 and assumed that no way could that be the childs temps, it must be blood pressure related.  Whoops.  Malpractice.

If the counter argument is that this example is silly because anyone can tell if a dead child, then I would counter that we’re looking just at data here to make a conclusion, and that anyone could have told you the market is trending (ahem, cough).

Making a better algorithm will not prevent this from happening again.  To think you can beat mathematicians and doctors of physics at their own game is a fool’s errand.

Next step?  To prevent the dead child fiasco from occurring again, NOW I take age, blood pressure, and temp into consideration, but woefully still ignore method.

7, 60, 98.  –> Dead or Alive?

Obviously alive, in fact, ideal, right?

Well, not if the child is 7, has a blood sugar of 60, and has a temp of 98 degrees.  The risk for low blood sugar is high.

Curve-fitting, re-doing algos, they all fall victim to the trap exemplified above.  There is no jump to conclusions mat for this stuff.

I’ll say it again –

Absent context there is no meaning. To blindly follow numbers with no plan or understanding for what one conclusion over another could mean for the prognosis of the patient, is bad at best, reckless at worst. Similarly, in terms of financial risk management, or losses, a reading or judgment with no context will result in similar problems.

However, you can create and exploit an edge.  You can use math and statistics to find positive expectancy.  Absolutely you can, because many, many traders successfully do.  It’s not about not making better indicators or using none at all — it’s just understanding what it is they actually do.

All indicators do is indicate. It’s even possible to identify trending vs mean reversion with a free charting program, a couple of EMAs, and an RSI(2).  Best method ever?  Probably no.  But certainly KISS enough for most and it will keep you on the right side of the trade, which is the most important thing.

And just to make this more convoluted (and lifelike), just because you get the kid’s prognosis right, it doesn’t account for the other nuances that make a physician successful.  In other words, if you nailed the trade, but you guess on the entry and exit and if things don’t go your way you’re fucked, then that’s just guessing and luck.  If you study the method of a trade and understand it, then it will become as clear in your mind as temperature, but again, just looking at the temp can mislead you.

Swimming in the pool, (long market) yes or no.  84 degrees.

Perfect!  I want in.

Unless the pool is filled with sulfuric acid and/or sharks with laser beams attached to their heads.  You getting my drift?

I’m on the twitter.

SPYder_Crusher

I’ve been more active on there lately, so it may behoove you to click that follow button.

More than that however, I want to show you guys something.

Yesterday I rec’d 4 stocks, APL, GROW, FIRE, MRX, but ended up recanting one, FIRE.

Of those three stocks, APL was up .7%, MRX down 1.9%, and GROW up 13%.

–> In one day, and on the very day the orphanage exploded via EQIX server error.

This is money.  You sell most of GROW, and keep your targets/stops for the other two.

The point?

The point is I find stocks like GROW, like GORO, even a VHC, among many other ripping stocks, nearly everyday when conditions are good.

How?

That’s not the scope of this post, but it IS duplicatable and teachable to find and profitably trade these stocks. It’s not brain surgery — it’s momentum trading.  Both are difficult, but one has more dire implications if proven wrong (that’s the brain surgery).

Imagine how good it must feel to know that you are getting in on these plays, and not have the temerity or uncertainty inherent in trading them.

In the next couple of weeks, I will be finalizing some materials that will go into great depth on these issues, and I hope to see many of you enjoying the fruits of my labor in the months to come.

What is the first metric or indicator or stock or whatever that you check every morning?

For me, I immediately glance at /ES, then intraday tick.  Then on to my regular routine.

You guys?

All ANY indicator does, no matter the sophistication level, is indicate.

— Confucius, circa 2009