Assessing Trader's Strengths, 3

In my last post, I mentioned that there were two themes that seemed to emerge from Dr Steenbarger's recent post on assessing trader's strengths. One was on discipline and the need for it. The other was on probabilistic trading. Today, I will have a few words to say about that. But first, I want to repeat the questions that I asked in my last post when I addressed the topic of discipline

• What is the success rate of your chosen indicator?


• What percentage of your chosen trade set-ups give you that "good average move"?


• Does your indicator tell you when to expect a better than average move?


• What percentage of "the trades of the day" does it capture? 100%? 80%? 50%? Or do you believe that it can or should capture every one of them?


• If you are in a trade, does your indicator warn you of a possible swift reversal?


• Does your indicator keep you out of bad trades?


• What is your indicator's signal-to-noise ratio?


• Does your indicator tell you when the market is in chop?


• Does your indicator tell you when to stay out of the markets? When it's not safe to trade?


• These are some of the questions that you should be asking. And the answers will help you to develop a probabilistic approach to trading.

The markets, as I noted before, are extremely complex. Even experienced pros can get surprised by events. So if the talking heads on CNBC can't always get it right, how can you expect to? If you don't believe me, then go to:  http://www.cxoadvisory.com/    and look up "Guru Grades." The results may surprise you.

So what does a probabilistic approach to trading entail? Well, the questions that I asked will point to what you should be thinking about.

• Start with the assumption that there is no indicator that will give you 100% of a move or capture 100% of all the moves in the market. (It's a pretty good starting assumption, by the way.)


• Make sure that you understand what the "good average move" is for your chosen stock or futures market is.


• Try to determine how many "good average moves" there are in a trading day


• Then look at your past trading set-ups and try to determine what percentage of those moves they gave you.


• Look at the trades that you took and try to determine what percentage of the total move, they allowed you to get.


• By the way, good record-keeping is a must if you plan to do any kind of reasonable analysis, or even a minimal kind of analysis.


• Try to determine what is a reasonable goal to aim for. I am satisfied if I can capture 60 to 80% of a move.


• .Are there particular times of the day that you can anticipate the "good average move"? A better than average move?


• What does your indicator's past performance tell you about trading around the times of major market announcements?


• Are there certain times of the day when market reversals are more likely to occur?


• Are you familiar with the term, "reversion to the mean?"


• How does your indicator handle opening gaps?


• How do you analyze an opening gap? Can you tell in advance what the probability of a gap closure will be?


• How do you handle trades that are getting close to the high/low of the day (HOD/LOD)?


• What is the signal to noise ratio? When does noise turn into signal?


• Are there repeatable signals (head-and-shoulders, wedges, trend lines) that you have observed and what percentage of them work out?


• And once again,good record-keeping is essential if you plan to do any of this kind of analysis.

For those of you who do not or have not done any record-keeping, or even asked any of these kinds of questions. I will point out that Dr Steenbarger and CXOAdvisory have already done so. And they have answered many of these very questions in their blogs. It is up to you to get up and look them up.

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