About two years ago I entered a slump in my day trading. I decided to hunt the internet, and there I found many day trading chat rooms. One by one I signed up for trials to see what they were about. I had never been in a chat room before.
After being in a few rooms, my impression was that the members of the room were looking for a leader, a guru, someone with the answers. I guess I was too, although I already had about thirty years of trading behind me. Iâ€™d like to think is was just more curious than actually looking for answers. Most of the room members seemed very naive. Iâ€™m sure they thought theyâ€™d be given an indicator or method that would allow them to start making money right away. The other thing I noticed right away was the ego of the moderators. They spoke with great authority, and suggested that their way of trading was the one and only way. Only they had the answer. And the room attendees, in each of the rooms, seemed to agree.
I did not see much new in any of these rooms. Each one had some kind of gimmick or special oscillator. Some had a black box approach, where you were supposed to just sit there waiting for the moderator to call out the trades. I did not see many winning trades from the little time I spent in any of these rooms. From what I saw, I doubted if any of these people ever made a dime trading. I kept moving on.
Eventually I came upon a chat room that was free. Free was interesting. How could it be free? They must be selling something. I logged on.
I heard the voice of a very calm, relaxed man that had just taken a huge win out of one of the stock index futures. Dozens of traders posted congratulations to the moderator for the winning trade, but more so for such a wonderful, magic indicator, and all the wonderful trading patterns from this magic indicator.
The magic indicator being used was actually introduced around 1980, but this moderator had some interesting improvements on the way it was displayed and the patterns it produced. And the room was not only free; there was a charity involved. He asked everyone to donate a little out of his or her winnings. How could anyone criticize anything that was done for charity?
The moderator made the claim that he invented the use of applying patterns to an indicator. He did rename all the patterns, but I recognized many of the patterns that were well documented in many old books. He just put strange names on existing patterns. The mostly new traders did not know these were old patterns. Nobody questioned anything in this room.
Despite nothing new here, it seemed he did an excellent job of categorizing many different patterns and putting them all together into a package that would be more readily accessible to new traders. So that was good. And there were many good concepts offered on trading in general, and money management. Also, the chat room was upbeat and positive. Most of the previous chat rooms I attended were negative and angry. I thought I should continue on.
I spent the next few months learning as much as I could. As much as I wanted to believe he had wisdom worth listening to and a viable approach, many things started really bothering me. One was his insistence that his indicator could lead price An indicator, which is a derivative of price, cannot lead the price. Thatâ€™s just mathematically impossible. Another was his insistence that you cannot be watching prices while you are trading. What?! You cannot see what you are trading? If you were driving a car would you cover up the windshield? The people in this room would if he told them to.
I had a hard time believing that nearly a thousand people would accept everything that was being said. Accepting it so readily. Were they all drinking Kool-Aid? It was an interesting study on the need to believe in a leader, a guru. Someone that can help make dreams come true.
But I persevered. His trading results certainly looked more encouraging than mine did. I would get the recaps after market close on days that they were available. Nearly every trade in the recap was profitable. I tried to write down the trades as they were being called, and then tried to reconcile them in the recap after the market closed. But I began to notice in the recap that the winning trades were selected very carefully out of the real time comments. Again, nobody questioned any of this. Was I the only one who noticed the discrepancies?
At this point I decided to do my own testing. I had been in the room long enough to know every pattern and every nuance. I was good at programming and had the data to test. I took each pattern individually so I could find which patterns had profitable or encouraging tendencies. For my tests I decided I needed thousands of samples. I decided to test each of the patterns on five years of data, and broke them up into one year segments. I was just looking for profitable tendencies and robustness.
After programming everything, I tested the signals by hand; just to make sure my programming caught all the signals based on the rules, and did not create signals that should not have been there.
After spending weeks and reams of paper for my printouts, I found that none of the patterns resulted in a profit in any of the previous five years when tested mechanically. A pattern that was touted as winning 90% of the time, actually lost money, and in most years had less than 30% winning trades. Results on the rest of the patterns were less reliable than the flip of a coin, far less in most cases.
To summarize my testing: nothing worked. Nothing came close to a favorable tendency. I tried to tell other people in the room about my research and the dismal results. Most of them would not hear it. They did not want to hear the truth. They were too invested in the method, and they had to believe they would eventually become successful if only they would hang on a bit longer, learn that secret that is just around the corner. But most of these people stayed in the room, some had been in for years, and kept showering congratulations onto the moderator for the great trades, and great magic, leading indicator. Did they ever look at their account statements?
You might assume my time spend in this room a waste of time. That maybe I thought that this guru did have the answer to trading success. I knew better than to expect this. The sad part is that so many other people donâ€™t know better. They are told something that they want desperately to believe, and they believe it. They don not test it. They do not question it. They believe blindly. They invest much time and money, and then they get past the point where they simply want to believe. Now they are too invested and they have to believe. They will disregard all common sense and all facts and proof in an effort to keep the dream alive. I certainly learned about psychology and the mind of chat room traders that I compete with every day.
Trading is hard work, and every trader has to find what fits his or her own personality and temperament. Nobody is going to easily give it away, whether in a free chat room, or a paid room or seminar, or a so-called trading school. Thereâ€™s a whole industry out there that supply traders with tools and education. Very little of it is good. Most of it is a waste, taught and promoted by people who are not successful using the approach themselves.
Doug Tucker has a blog with daily commentary on stock indexes, precious metals, and other markets. There are many articles on technical analysis and indicator design and interpretation. To visit go to: http://tuckerreport.com