October 22, 2011

100% Profit Target Reached.

When I started this blog in March, my target was 100% annual return. This week I achieved that return in less than 7.75 months. Of course that feels good, but it also offers a chance to reflect.

First I should note that over 95% of the gains came after June 3. Why is that important? That is when I finally gave up on my attempt to develop a completely computerized trading system. Those first three months I had results not much different from the last few years when I was more a hobbyist than a professional trader. When you make that kind of commitment it is really hard to say "I was wrong for the last five year. My grand project was a failure." So I really had to go back 20 years to when I was really good at that, and recapture my inner trader.

The first and biggest obstacle was psychological. One of the main reasons for the 'grand project' was to remove or at least reduce the emotion from trading. Back in the day I had great financial swings coupled with great emotional swings, which is certainly one of the reasons I stopped. The 'grand project' certainly reduced the grand draw downs, but it never really had the grand gains either. Looking back on it I feel I was in an grand emotional grey area for all those years.

While I eventually scrapped the system trading techniques, I did salvage the trading execution platform. One of the biggest problems back in the day was the need to call every time you made a trade or closed a trade. The whole act of analyses and mustering the emotional wherewithal to pick up the phone was actually quite emotionally strenuous for me. Having a good automated execution platform really takes a lot of that out of the equation thus keeping the emotional energy more on the trading where it should be.

 May 7, 2011

Week 9 wrap - changes required

When you go six weeks and the best you can do is roughly break even, you know it's time to reevaluate. So that's what I have been doing the last three weeks. It starts with the prediction of the major trading trend. I had been using the 15 minute chart with a volume/price momentum calculation. My post of April 3 shows this. That was just getting whipped like crazy - I feel lucky to have stayed even. Out of that analysis came the 5 minute price level chart of April 7. Analyzing my trades with respect to key price levels would have greatly improved my performance to that point.

I have always oscillated between the preference for time based charts versus tick (or volume) charts. Neither of them was really satisfying. Time based charts loose their focus in narrow range markets, and tick charts over emphasize high volume events, plus they are notoriously non repeatable. None of those charts work well for after hours trading. I was clearly over compensating for the inherent weaknesses in the charts by creating an excess of indicators to disguise their inherent deficiencies.

So I deliberately went on a search for a better graphic representation to use in my daily trading. I came across 'range' charts. Each bar is a fixed range regardless of time or volume. Here is an example of the 2 point ES range chart.

This together with the 4 point range and the 5 minute chart give a much better and faster indication of what the trading momentum is. The underlying idea is to find momentum extremes counter to the primary trend and look for trend resumption. Not really different from what I was doing, but I think it is clearer using this representation with less reliance on indicators. While it may be a little late in my 3 month experiment, the worst thing you can do is marry an idea that is wrong. I will be working with this the last three weeks and see where that goes.

 April 3, 2011

One month down - results unsatisfying ...

but not unexpected. Transitioning from a trading 'hobbyist' to a 'serious' trader makes you see the natural pitfalls inherent in making trading a hobby. I think it starts with the process. As a hobbyist, I was more focused on system development and trading environment. I probably did a pretty good job of that, but that does not necessarily translate into results. And it is the results that the 'serious' trader needs to focus on.

Looking at the primary systems themselves, they went from two strong months to a mediocre month. In and of itself that is nothing to be concerned about, but you always worry about over optimization. I try to base the systems on just a few factors, but than have many ways to describe those factors, e.g. how do you describe sufficient value? One symptom of possible over optimization is the systems generated 50% more trades this month than average. This is partially due to not picking up the trading trends as well as I would like. A good value in a down trend is likely a terrible value in an up trend. Here is an example that shows what I am looking at for the primary trend.

March 15 Min Trend

You can see that little mini sell off on March 28 led to a sell signal on the 29th. That is all the pink on the indicators at the bottom of the chart. This is the weakest of trend indicators because there is no confirmation after the initial sell off. Most of the indicators turn blue pretty quickly on the 30th. Unfortunately, those are the 'confirming' indicators. The primary trend indicator does not turn up until April 1. That leads to a sequence of chasing shorts on the way up and missing the nice retracement trades on the 31st and 1st. (FWIW, the actual trend changes are channel breakouts with confirming volume using various channel lengths and volume measures. This months trading trends went long -27; short +9; long +14; short -22; long 0) With such poor trend tracking it's not a surprise to have mediocre results - basically flat on -26 trend points. In a way, that shows how strong the system entries themselves are to keep me out of worst trouble in such a poor trading environment. Even at that, a couple of tick changes at the end of bars could have changed some no trades into decent winners.

This goes to the root of what I started to say ... hobbyists can be too enamored with their systems. As a trader I could see the low risk buying opportunity on the 29th, but I was unwilling to go outside the system box. When I finally went outside the system on the obvious trading double bottom on the 31st, I had some success. The thing to like about systems is they help take the emotion out of trading. But I don't think they can react as fast as a good trader, and most importantly, they don't provide a good risk analysis of trades that are outside of the system box. All I need to do is look back to my first go at trading and see that my success came from evaluating risk and hitting those high risk/reward points hard as much as picking the right direction.

Developing systems for me is about taking the emotional roller coaster out of trading. For optimal results, I may need to find a balance that puts a little of that back in.

 March 17, 2011

The power of positive slippage; S&P futures key levels 1275 1262 ▼

I started this blog with a particularly bad string of trades. Looking back on it you can say my systems did not handle the triangle particularly well. That makes sense as they are trend continuation based. Triangles are the antithesis of that, killing all trends until they finally break out. Than the break was so powerful that it was hard finding retracements to play.

Finally today, the power of positive slippage dug me out of the hole I created. What is positive slippage you might ask? My systems are all based on limit entries, meaning they are not counted unless prices are exceeded. In this case, the system entry was the 15 minute channel +1 pt. The channel was 1273.25. The swing high was 1274.25, exactly +1, so no system trade. However, my trade placement was sufficiently timely, and there was sufficient volume so that I was filled at 1274.25. The purpose behind my trading platform is to minimize slippage, so that in fact over time you have greater positive slippage than negative slippage. I think most systems should add 1/8 - 1/4 point for slippage. My goal is to make that 0+. Of course, if that is the case, I should look at systems that trade more like the one mentioned in my previous post.

 March 17, 2011

System testing, waiting for opportunities; S&P futures key levels 1261.5 1249 ▼

With the trading opportunities being sparse, I did some system testing Wednesday. First trade was a short at 7:48. Of course the SPes dropped 20 pts in the next 20 minutes. That is the perfect conflation of trend continuation with unexpected external events. That second part makes the trade an outlier in that very few trades are driven so immediately and forcefully by the news.

The system I was testing is based on reversing support / resistance levels. In the above case, I was looking at the preopen swing high at 1276.5. Hitting 1276.25 set up the potential trade. Than when it did not breakout after 5 minutes, the trade is to retest down.

Otherwise, when the primary systems rely on decent retracements which just have not set up the last few days, there won't be a lot of trading. There is always a trade off between more trades and higher winning percentages. One of thing that needs to be weighed is in the 'boredom' factor. That is something I struggle with - usually being bored for too long than finally taking the wrong trade. :oops:   That's why knowing your plan and sticking to it is so important.

 March 15, 2011

Vagaries of system trading; Japan blows up; key levels 1297 1284 ▼

Yesterday was one of those days where systems trading can be frustrating. At 6:57 am the system was one tick off a sell signal for a big trade, than at 7:02 we are still a tick off. I feel like I was waiting for that signal, and I know I can take it, but trying to stick to the system for now, especially with the weak start the system had in March.

Now I see the market tanking overnight on Japan fears. This is setup for a big rally, but I doubt I'll be able to trade it before the close.

 March 8, 2011

Triangle unbroken to my chagrin

First I looked for the preopen trade to go long and nothing materialized. Than the open did not set up quite right. System trading kept me out of some bad trades yesterday, today they kept me out of the big opening buy. Than to add insult to injury, my closing buy which looked to set up for a possible break out, ended up a dud on the close. These are times that try a traders patience. It does no good to lament, just move on to the next trade. But sometimes it does good to blow off a little steam, especially with how the start of this blog experiment is going.

Add to that the order server seems to have changed it's order response sequence so my live trading twitter feed was down. That also screwed up the position tracker, which is just annoying. Now I need to dig into the software and fix it.

 March 7, 2011

Sometimes you see it in time

Long side looks shot today, not quite enough to change the trading trend though, probably one more move down will do it. The extreme momentum makes going long unlikely. There was a long side system trade off 1307.25, but with the first leg out after this kind of collapse decided it was way outside my risk reward comfort zone. There was also no meaningful support from 1311 to 1305. I was lucky nothing set up off of 1311, there was a certain enthusiasm at that level, quickly dissipated.

Now all systems are shut down until there is some kind of stabilization in the market, or possibly short side trend confirmation. There is a slight possibility of a late trade, but even that would be hard to take.

UPDATE: Sure enough, the 1307.25 support became the 1307.25 mini resistance if you like to scalp that kind of thing.

 March 6, 2011

Neutral Momentum

I use the 15 minute chart for determing the primary trading momentum. Many times a momentum change gets touched at the extreme and reverses. So I added a neutral momentum category, basically the momentum change needs 2 confirmations, otherwise trading is neutral, which means you can go both directions. Than I went back to my models and saw what would happen if neutrals were included. You get about 10% more trades with a reasonable expected outcome.