In This Episode
- The biggest shortcut to building your own strategy
- How to build your own strategy without programming
- Exercises that will help you increase your creativity for building strategies
- Thinker Toys by Michael Michalko
- The Compleat Day Trader II by Jake Bernstein
- Guppy Trading: Essential Methods for Modern Trading by Daryl Guppy
- The Turtle Trading Rules
What You Should Know Before Building Your Own Trading Strategy
At first glance, building your own trading strategy might seem like a good idea. But once you start doing it, the task tends to get increasingly daunting.
So in this episode, we'll break down the process and give you some shortcuts to building a trading strategy that fits your personality. It can be fun and give you an outlet for your creativity.
You'll also get a specific example of using a traditional indicator in a weird way.
Read the Transcript:
Hugh: So in the last episode, we talked a little bit about creativity when developing trading strategies. What are some ways that you found to you know, start getting new ideas for trading strategies and, just getting creative with things that maybe aren't out there or you haven't found?
Walter: You know there's some really cool tests in Psychology where they say like, can you come up with thirty things that you can do with a paperclip or you know things like that. There was a book I can put in the show notes for people that are interested called Thinker Toys. It is about this guy who kind of consults with companies and tries to help people to learn to think out of the box and stuff like that.
I think his heyday was in the nineties. I don't know if he's around anymore but one of the things I took away from that was taking something that everybody sees in one way and then using it in a different way. So like paper clips, when I was a kid, I could open a pair of handcuffs with a paperclip.
My step daddy was like a volunteer police officer. When I was a kid, I was a magician. So I did like escape tricks and stuff like that. Jump off the roof into the pool with some handcuffs and try to get out in the deep end. Hopefully get out of that. I thought I was Houdini. When he started volunteering on the weekends as a cop I was like, “Sweet. I've got real handcuffs.” Do you know what I mean? I don't have the toy ones.
So I learned all these different ways to do that. I think in trading you can do the same thing where you go, “Okay, what is a moving average? All right, a moving average is used by most people to determine the direction of the trend or the market. What are other ways you can use moving averages? You can use that support and resistance. You could use it as an exit tool. You could use it as an entry tool. You could use it in lots of different ways” and so that's one thing.
To think about is what everyone uses. The biggest mind blower for me was when I was, this was back in 2003, I learned stochastic pop.
Hugh: Hey there! I hope you find this episode useful. I just want to let you know that Walter and I give away something valuable every month that helps traders improve their skills. You can enter to win by simply leaving an iTunes review and leaving a comment on our YouTube videos.
At the end of each month, we'll look at the comments and reviews from the month and we'll pick a winner at random. Each comment and each review counts for one entry during the month that it's pitted.
So, if you're interested in that, be sure to enter after this podcast is over. Alright, back to the episode.
Walter: Stochastic pop, I will put the link in the show notes from a book called The Compleat Trader. He spelled “complete” weirdly, as “p-l-e-a-t”. The Compleat Trader. Anyway, the guy was interesting because when we were trading stochastics, we would wait for it to go over eighty and sell and wait for it to get back down under twenty and buy, right? Or get under twenty and then go back up over twenty and then buy or go over eighty and then come back down below eighty and then sell. Or thirty-seventy, it depends on you know whatever people have.
Different levels but he was saying — Jake Bernstein, that's right Jake Bernstein, he was saying — when he got up to eighty, buy. It was like a mind blower. Do you know what I mean? I was like, “Wow!” Because I was like contrarian by nature you know and I was like that's interesting and so I started testing like, “Holy crap! It actually worked.”
His point was that usually when the market got over eighty, that wasn't the end of the move. There was still a bit of a pop there and so you're trying to get that little move higher. Sometimes of course it would keep trending but usually you just got a nice big move up there. So you weren't buying when going over eighty and crossing back down.
You're actually just waiting till it got over eighty and then you were buying and the same thing when…
Hugh: It was a profit target, right? If I remember?
Walter: Yeah, it was pretty quick. It was a quick thing. Of course I screwed it up because when I was trading it live, I would take profit too early and then I was beating myself up. What am I doing? Every time I go, “Oh, look. It was perfect. If I just stick to the rules you know.” So I was still learning you know not to take profits early. Which is something really hard to learn I think when you first start.
So that's what I would encourage you to do. Take the tools that everyone else is using and use them in a different way. Use that hammer to eat ice cream. Use that moving average to do something that no one else is doing. Use that stochastic in a different way. Here's another one that I learned. Point-and-figure charts.
It has an X if it goes up fifty pips. If it doesn't go up more than fifty or whatever the number for the box is, it could be a hundred pips, twenty pips whatever but I used to hand draw these Euro and Pound charts on point and figure and you know what I did with it? Then I made moving averages on the point and figure chart and you could use moving average crosses on the point and figure chart.
Totally different to what anyone else is doing and actually a really good way of seeing the trend. You don't get these little whip saws that you get on normal price charts which are normal time-based candles instead of movement-based candles you know which is what point-figures are.
I would just encourage you to look at things in a different way. Make a tool that a lot of people use and decide how else could I use this in a way that I've never heard before and does it work? That's a really cool way I think. What do you think?
Hugh: I agree. I think but like you said I am kind of contrarian by nature. So I'm going to figure out, “Okay, what is the opposite of what's going on here and does that work?” I think you can also draw some inspiration from other areas like maybe architecture or design or hip-hop or whatever it is and kind of figure out what those successful people did differently.
How they were going against the grain and you can kind of figure a different way to do that in trading that sounds kind of weird but I think it just gives you more creativity when you do that.
Walter: I think you're right. I've always thought that looking into harmonics, I feel like there's something in the market charts that maps on the harmonics. I haven't figured out what it is. You can get into things like sacred geometry and stuff. There's actually quite a few books on that stuff but I do think there are some elements that you could take from other fields like even Physics or whatever you know applied the right way, it could possibly give you an edge.
It could just be our minds just looking for connections too like that could be it too but who cares if it works. If it works, do you know what I mean?
Hugh: So what do you think of this idea that if enough people know the trading strategy, it loses its edge?
Walter: I understand why people are saying that and I suppose if everyone was using the same robot that would be the case. The problem is if I give you my rules to my kangaroo tail strategy and I give them to you and then we give them to five hundred people and then we say, “Okay, now go and trade that.”
We all trade the same pairs, the Yen, the Pound, the Euro, the Aussie, the Kiwi, the CAD, we come back a year later and we look at our chart, our trades, we have different trades. In fact some of us are going to throw it away six months into the year or three months into the year and the others are going to say this is amazing.
So that to me is the real thing about the markets. We're looking at it through our own filter and what I think is a great kangaroo tail someone else is going to go, “No way would I ever take that” and vice versa.
This was really driven home to me by a book by Daryl Guppy who's a trader and I read this you know back in 2005 or 2004. His books are kind of hard to read but he was talking about moving averages and how you know he would look at the market this way. He would say, “You would look at this change in the moving average and that would suggest that the market's going to go this way”. He said but if I tell you this, it doesn't matter because everyone else is going to have their own way of seeing it and it's so true.
It is so true. I get questions from traders on our Sunday night webinar that we do and they're like what about this kangaroo tail? They'll tell me the chart. They'll tell me the time frame. I'll look at it and I’ll go, “Which one? Where?” I don't see it. To me, it would be like an obvious kangaroo tail if it was and I'd say, “No, I don't think for me this isn't really because of this, this and that” Do you know what I mean?
It never fails. It's so obvious. So I think it is possible what you're saying is true. If we all have the same software. The problem is we all have different software in our head and we’re all seeing it through our own filters. As long as we're still discretionary traders, I just think we're all trading something different even if we have the same rules.
It's crazy. I mean, it's crazy how people modify it. If you give someone your rules and you say, “Okay, this is what works. This is what I do. These are my data. This is blah, blah, blah” you give it to someone. I swear to you you come back a year later they're going to have slightly different rules because they're going to say something like, “Well what I noticed was, when this happens then I have to do this and that's why I've added this rule and I’ve you know modified it” and that's cool.
I think that's good because that's good for them. They shouldn't follow exactly what I tell them. They should use their own beliefs in building it. I just don't believe this idea that if everyone you know, if enough people have the rules that it stops working because I just don't think we're all doing the same thing. Even if we all have the same rules which is crazy to say.
Hugh: I agree. Especially if you have to think about it, the retail market is so small in most markets. Options, futures or whatever then I don't think you could really move the market. I think the only way that you would really move a market like you said is with an automated system. Traded by some sort of bank or some sort of hedge fund that has a huge volume. I think that's the only way that a system could play itself out maybe.
Walter: Yes, it is difficult to imagine a situation in our lifetime like where we are right now where that's possible. Now what people will sometimes do is they'll point to like the Turtle rules and they go, “See, it didn't work you know from 1998 to 2006.” It stopped working, that's because everyone read the Market Wizards. Everyone started trading the Turtle’s rules.
I don't think that's really true. I think it's just a case of the system going through a terrible stretch you know or whatever.
Hugh: It is just a long draw down.
Walter: Yes, totally. Even if you talk to some of the Turtle, they'll tell you that they're trading different rules now. They are still trend following. Many of them but they're not trading the same original rules. They've modified them which is good, that's the whole point of trading.
So it's a tricky one. I understand and you know it's kind of like the idea of brokers out to get you. It's this idea of you know the system stops working because everyone's right you know don't share it. Everyone's going to get it and it'll ruin it. The brokers are going to, you know, ruin your account. There's a lot of these things that we get as traders that we hear about. So just part of the landscape I guess.
Hugh: Cool, great insights. Thanks, Walter.
Walter: Thank you.
Hugh: All the information in this podcast is for educational and informational purposes only and is not trading or investment advice.
SHOW NOTES:
- Thinker Toys by Michael Michalko
- The Compleat Day Trader II by Jake Bernstein
- Guppy Trading: Essential Methods for Modern Trading by Daryl Guppy
- The Turtle Trading Rules
Enter the Monthly Contest
We give away a trading prize every month, so be sure to enter to win.
You can win by doing one or more of the following:
Each action counts for one entry in the month that it was posted. We will pick a winner at random from the entries that month.
The giveaways can include books, coaching sessions, trading tools, or surprise gifts.
Click Here to Suggest a Podcast Topic
Listen to the Audio Version
Click the play button below to hear the audio-only version. You can also download the mp3 file below.
Podcast: Play in new window | Download
How to Get New Episodes of The Think Profit Podcast
You can get notified of new episodes of the podcast by subscribing to our email list, or subscribing via any of the major podcast platforms that can be found here.
If you enjoyed this episode, a 5-star review on your favorite podcast platform is always greatly appreciated!
Thanks for listening and we hope that your trading is going well!