Many people know me as Mr Trading Plan. There are some with damaged hearing that refer to me as The Singing Trader. I earned that title when I sung / murdered a verse of a classic Sinatra song at the start of a presentation on applied technical analysis. Having completed the verse, to every one’s delight, I thanked the audience because now I could put on my resumé that I had sung to a packed house of over 200. I then added that putting it on my resumé did not make me a singer. I challenged the audience to think about speakers who had stood in front of them suggesting that the only way to be successful was the way being offered by the speaker.
Many in the audience started to see what I was suggesting. Some of them, and you, may be aware there are unscrupulous people out there trying to separate you from your capital by offering less than legitimate schemes for making money out of trading. Then there are those who, in good faith, supply concepts that have exceeded their ‘use by’ date. The challenge is in sorting out the wheat from the chaff.
Looking at it from another perspective I would suggest that all ideas should be treated as chaff until you can prove otherwise. And that may be more simple than you think, though note I didn’t say it would be easy.
What I want to offer is an idea drawn from the classic business book, The E Myth by Michael Gerber. From his insistence on developing systems and then quantifying the results I now use and advocate what I refer to as the Identify, Qualify and Quantify
Identify the concept
Pick something you want or need to quantify such as the reliability of an indicator, a breakout, or a parabolic stop, or even the reliability of a particular system. Then you have to…
Qualify the components
It is most important that you accurately define what it is that you have identified as worthy of study. For example, I often challenge people to define a trend. Many find that a lot harder than you think. And some find it impossible to define when a trend does not exist. But make sure you take the time to be accurate and then having accurately qualified or defined the subject…
Quantify the results
Count how many times the idea has worked and according to the statisticians, find at least 30 examples. In some cases it may be expedient to do the testing by computer, but I would suggest that it is better to either do the counting by hand, or visually examine the computerised results one example at a time. This is important at a number of levels. For example if in the sample period, all the result are bunched at one end, it may suggest that the idea is either working well now or only worked well in the past. And if it takes 15 years to find 30 examples, then frequency may become an issue.
Also, as you go through the exercise of counting the results, you with either build confidence in the particular indicator or system or you will become more sceptical. Either way you will have a more personal understanding about the idea. According to Dan Gramza quantifying results is the basis for developing understanding, which leads to confidence and that leads to comfort while trading.
Another point the ‘Candlestick King’, Dan Gramza, suggests is that look at what happens when an indicator fails. Sometimes this can have more profitable results than using the idea the way it was intended, but you will never know if you don’t have a look yourself and quantify the results.