The Practical Ambiguity of System Signals

No time to update on this week’s trades thus far at this point; suffice it to say it’s been a lackluster start beginning with some…well, they were patently idiotic decisions in SA1 on the Kiwi and Aussie shorts mentioned a few posts previous. Were all (or even a sufficient number of) method criteria satisfied on those trades? No.

Sadly enough, I even had signals pointing toward longs on both trades. Case in point, I filtered the Kiwi long out of consideration because price was backed up against a descending trendline. The problem is that I did conclude that price wouldn’t breach that line, though there’s was plenty – namely the concrete parameters of a trading method – suggesting otherwise.

This is the danger of a discretionary approach, and snaps the difficulty of strict adherence to a method or system into focus. What do you toss out, what do you leave in; what merits heavier weighting, what condition deserves decisive significance and why? Those are intangibles that a) are situational and b) are learned in the wilds of the market, “nature, red in tooth and claw” as Tennyson wrote. The red here is your account bleeding capital, by the way.

Method adherence still involves intangible discretionary skill, no matter what anyone touting stubbornly plodding, lobotomized maintenance of system rules as the “holy grail” of trading may say. If that descending trendline slashing across the intended path of your method-signaled trade doesn’t jump out at you and seem disconcerting at all, all the better for you as a blind follower of that system. But any chartist worth their weight in water (or salt, if you prefer) ought to catch that line immediately, and that ought to give them pause. The system can be modified with a provision for a clear path free of dissenting chart features as a precursor to pulling the trigger on a trade; but then a system that prohibitive would lock you out of the market.

So how often do features of a chart about which one ought to be cognizant muck up their otherwise pristine, blissfully ignorant, method-dictated appraisal of market direction? In my experience, a fair amount. This is the “practical ambiguity” of method-generated signals to which the title here is referring; and this is where the secret work – exclusive to humans, rather than EAs – of system-following comes into play. Should I have ignored that trendline? Yes, but I attributed enough significance to it to subvert the method. In another scenario could that’ve been the right thing to do? Yes, and I may have won a trade the method would have lost.

The discretionary skills here are simply awareness that ambiguity will present itself, recognition of it when it comes and conscious resolve to follow the method that has been chosen to trade because abidance of a statistically profitable method will yield the desired results. Cognizance and discipline then.

Well, apparently I did have time; but now the time is truly gone. In SA1 back to BE +.5% after a 2.5% aggregate drawdown Sunday to Tuesday intraday, and that despite a 125 pip trade on USD/CAD. Things are going significantly better in SA2, actually; but that will have to wait.