Time to chat about a topic of the human brain vs the computer in trading. Unfortunately, as I am yet to find mine, I have had to go elsewhere for answers, but let’s not let that stop us
The latest quest to build a custom indicator and a trading system to go with it for you all, has drawn much excitement and applause (and that’s just from me), with people hoping to find that indicator that will result in them being able to roll around naked in pips ………. right? …. oh …….. am I the only one who wants to do that? …..
Now while I have made some good progress in just a couple of days, building an indicator that is able to detect when a lot (not all) of the big moves are approaching, the main problem still remains, which way will it go?
… the markets are as much about emotion as they are about economic conditions or technical analysis, so how can we expect a computer to be able to interpret this …
Remember, it is not a 50/50 proposition in trading like many believe (for a good explanation on that have a look at Trend Trading by Daryl Guppy) as prices not only move up and down but of course can move sideways as well.
So if we can eliminate trading in sideways markets, and get into trades when we know a move is coming, then we have improved our odds already, however, if we pick the wrong direction, a big move can turn into a big loss without good money management.
The quest to find the direction of the move has so far been unsuccessful, and I suspect it will finish that way and here is why:
There are so many automated trading systems out there, a million more custom indicators (of which I am sure some do the same as the one I am building, but anyway), but still there has been no "magic bullet" that can tell you which way a market will move all the time.
The problem as I see it? The Computer. A computer is well .. a computer .. a man-made device with no self-learning capabilities other than those programmed in by a programmer (funny that), no independent thinking skills, and no intuition.
The markets are as much about emotion as they are about economic conditions or technical analysis, so how can we expect a computer to be able to interpret this when it has no idea of what emotion is?
"Aaahh, but what about the vastly greater processing power a computer provides?" I hear you say …. (just pretend you did) … well here is an interesting fact, the average brain has the processing power of approximately a 100,000,000 GHz Pentium computer on last estimates, or as it might be known, the equivalent to the future Pentium GTF (Gee That’s Fast).
Now considering the average desktop computer these days has around a 2-3Ghz Pentium processer, doesn’t it seem a little silly to ask your home computer to process trading charts, emotions, economic conditions, and world events completely by itself, when you have a computer 50,000,000 times more powerful sitting right upstairs? (I mean in your head .. not actually upstairs … well you get the idea).
There are indicators that show trend direction, such as moving averages, now call me cynical, but can’t you just pull up a daily chart, and, if the bars on the left are higher than the ones on the right then we can probably assume the chart is showing a downtrend?
Considering all indicators are lagging (i.e. based on historical data), is there really a purpose to having a 60EMA to show you a lagging indicator of a trend direction that may have ended 60 periods ago, when your 100,000,000 GHz computer can process it in a moment in real-time?
Does this mean all effort on building an indicator for you stops? no … will it show you timing, entry, exit, direction, your eye color, your mood, and the price of fried rice at the local Chinese shop (damn now I am hungry)? … no.
Will it make your trading day easier by getting you in the market at the right time? … let’s hope so and that remains my focus.
So I move forward, if you have ideas on how to detect the direction of the big moves, then give throw me an email at email@example.com or add a comment below this post and much kudos will come your way.
In the meantime I continue on, more updates coming soon.