Find a Process, and Trust the Process


This has been a constant meditation this week that I am sharing with you. I've been reading through Annie Duke's 'Thinking in Bets' for a month or so. I'm bad that way. I pick up a book and have so much going on in my life it takes months to finish it, even if I love it. But I digress. Her book is about managing life and decision making probabilistically from a person who is a world class poker player, and 'almost Phd in Psych'. It's not a trading book but the connection is obvious and she has spoke to trader groups and hedge funds. 

Note, If you are aware of her shady side, I am too. It doesn't change my view of the wisdom contained in her book. 

In her book she discussed how we are shaped far too much by outcomes, most often by recent outcomes. At the poker table, a player may be following all the typical strategy points and lose the hand to luck. In markets, early traders often think of themselves as smart and the market owes them something. They see this or that setup and take it. After losing a bunch of trades on said setup they think it's a bad strategy, move on, find some new indicators, only to repeat. Over time, because new traders always put too much on each trade, they blow out, and they are another stat in the 90% failed traders out there. Guaranteed, each story follows this way with the same failure points. 

 If you are new to EW, and you have a bad trading using it, you might throw up your hands and say 'this doesn't work'. How many times have I heard that in my years here? I have no idea.  When folks post that, it doesn't matter whether multitudes on the site say, ' I make money you can too, and  'give it time,' or 'look to your actions first,' or whatever, typically they are not willing to look at their side of the responsibility. They are not looking at the three elements they control: Entries, exits, and position size. They are expecting Elliott Wave's 'prediction' to work every time. 

As I stated on the webinar, it's impossible to track EW statistically because it is interpretive. Success may depend on the talent of the analyst, or their read at the time. Hell, it may depend on their mood. I know when I am feeling rush, I tend to not be able to look at a chart from many possible counts before culling it down to the most probable. But let's say we can take an EW analyst and find statistically that a chart goes the direction of their counts 65% of the time. It's known that profitable traders tend to hover in the 45-60% region as far as edge. So, this analyst in question is on top of the heap. If you were to put even dollars on every trade this one called, you'd make an outsize return..maybe. Maybe, because if the first 35 out of a 100 trades were the bad ones, you'd be so crippled financially you couldn't maximize the last 65. You'd come out on top but barely. These statistical concerns are the concerns every trader should dwell on. 

But there is a worse problem in this example. Which new trader, after losing even 10 trades to this analyst's trades would take one more? Few. Probably none. The new followers of this analyst would quit in discussed, while the analyst himself goes on to make wealth in trading, as do the follower's of old, who trust the process and know it was a cold run. 

With Elliott Wave, I readily suggest it is not a predictive tool though I know five waves, as measured by Avi's fib method tends to produce a larger trend. But reading that five waves still has interpretation. However, what cannot be taken from Eliottwave is its read on skew. I don't know any other method in trading that can give solid pivots from which to derive risk to reward calculations. Typically the pure EW based trades I take are 3:1 risk to reward. But the probabilities are stacked against me if any one trade sucks up my capital. So, I risk no more than 1% of my account on scalps. I wander a bit more than that on swing trades, 3% at max. This has kept me in the game. If you've been here long enough, you know, and I freely admit, I'm bad at shorting cryptos. (I'm not bad at shorting the SPX). I still do it to learn but I size down, and try to mix in long scalps in other charts to balance it out. I saw a very small drawdown in my account since the May top taking scalps. It was pay to learn. If you were new to the service and following too heavy despite my open statements, you'd have assumed I was terrible. And, I am not speaking to you, because you are no longer here. Some such members now troll me on Twitter. 

My conclusion is that you have have to trust the EW process even when it is cold. But know that to survive those difficult times, like when a support breaks you have to risk little on any one trade. Crypto offers amazing skew. Risk little to gain a lot. If the trade doesn't go, walk away. You also need to be careful of having a sporadic tradeplan- one that takes a scalp with me when you're in the mood, and one that doesn't when you aren't feeling. You'd put yourself out of statistics of the process into the statistics of your moods. If you are following me, you need a tradeplan that says which of my setups you take and which you don't, and track those trades. If you trust the process, and follow a tight risk plan doing so, you can make it over the long run. If you end up 'feeling' a trade more than another, and risk too much you are a statistical aberration. If it falls into the normal distribution you did well and may want to do it again, unfortunately. But if it falls outside the normal distribution, you blow out, and can barely take another trade. 

Epilogue:

The algos is a different process. We'll have stats. The are just new. After those stats have a long run, they'll yield reasonable position sizes as a matter of process. this is a slightly different process, a jump from 'skew edge' to 'directional edge'. There's no interpretation to analysis like you might see between Zac or I, or JAppel and I, where one of leans another way. (Note when we disagree, often we agree on pivots and invalidation points which is more important). 

Ryan Wilday hosts the Cryptocurrency Trading service on ElliottWaveTrader.net.