On Indicators Everyone has their favorite indicators that for a while (this is the key word) worked wonders for them. A n-period ema crossing an m-period ema gave me a great signal! And wait, I just did a double ema and it works even better in my backtests. Especially if I throw in VWAP. Wait - how about Fibs? I mean, the golden ratio and all applies to sea shells so why not futures time series?! At that point it is probably best to sell the version of indicators instead of using them. Why? Because no matter how you combine them they WILL stop working. Guaranteed. Of course might say all I need to do is fiddle with some parameter … and yes! Now it would have worked during my recent down period. Holy grail indeed! Illusion, delusion. Indicators don’t predict, they summarize, Sure, they might seem to predict for a short time as predictors of future price movement given that they are simply "clever" summaries of past behavior that could repeat for a time. Trading is about finding patterns and hoping they'll repeat. Humans, unfortunately for trading, see patterns when they aren't actually there (this is apophenia, well established). Using indicators can serve to confirm and perhaps remove some pattern 'biases' people might inadvertently see. To that extent, they can be useful. Also as self-fulfilling prophecies - if enough people believe seeing X because of Y will lead to Z then Z it may often be. Witness VWAP crossings and my favorite (being sarcastic) Fibonacci series (why not Leonardo numbers? or Pell-Lucas? or …). In physics there are underlying physical laws that govern the behavior of, well, the universe. In finance what are we modeling? Is there an underlying priniciple, a “law” like the law of gravity? No, price movements represent the net “force” (trying to use a physics term) resulting from the interaction of many traders, of the psychology of many traders. Mass psychology, that’s what is drive the markets. And you can actually model group behavior - it’s been done for ants and bees and humans can be modeled in the same way. Agent simulations, with some chaos theory thrown in. Fractals for those that zoom in/out of time scales. So what, as traders, are we to do? From my view, it is all about risk control, about controlling your personal psychology. Market up or down? Sure, one or the other will be correct, make a bet. Going against you? Don’t hope you’ll be right. Going for you? Fear not, it may keep going. Hold. An estimate of an asset’s volatility is key to risk control, to deciding if continued movement in one direction might be sustained. Of course, it can be computed on multiple time-scales and that’s why trading is so challenging. More on this at a future date.

You don’t need a big win… You need control. You need patience. You need to stop chasing more. You stay consistent. And the account finally grows.