Osteryx, I am no longer monitoring this thread -- only reason here was I received notice of your quoted message. You have taken this out of context as it was part of an answer to another question. Yes, Pairs Trading is not necessarily part of the non-directional trading system that I use. If you read carefully I never said this pair trade was part of a Delta Neutral strategy. However, it is balanced as far as reducing risk -- the 2 markets are highly correlated and using the ratio of 5 to 2 (5 X $20 per point for the NQ = $100 then 2 X $50 per point for the ES is also $100 so by doing this trade you are only neutral in the sense that you are Long a position of $100 and Short a position of $100 in a correlated market pairs trade. BTW. please note the post I made here informing that I am now in a similar thread which I had posted above in this thread. If you would like to pursue this further please go to that thread https://www.elitetrader.com/et/threads/fibonacci-trading-without-noise.311073/
Am I ready to go live?
- Thread starter DougStewart
- Start date
Apologies if I took it out of context (did I?). Not only are ES and NQ highly correlated, with a correlation of daily returns above 0.9, their respective notional sizes are very similar (about 120k a contract), and their respective daily dollarized realized volatility is usually very similar (last few weeks have been an oddity). Hence, saying that a long of 2 ES against a short of 5 NQ is neutral in any way is an aberration ... the relative tick size is irrelevant. No thank you, I do not want to pursue this any further, if you want to believe that such position would be neutral given their respective tick sizes, please do go ahead.
Let's do some math.
Notional value of 2 long ES contracts = 2 * 50 * 2455 = +$245,500
Notional value of 5 short NQ contracts = -(5 * 20 * 5829) = -$582,900
That's not even remotely "balanced". What it is, assuming a perfect correlation between ES and NQ, is a net short NQ position with the notional value of $337,400.
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Hello Nakachalet, I've been doing well. Fortunately, I am not in any of the groups in the video. BTW, you did not respond to my reply earlier in this thread for screenshots of my trades, etc. Anyway, I will post some updates here for y'all's comments:
I am happy to report I have been improving my stats and my equity.
I'm not even sure if this is the correct way to calculate it. I watch NQ and ES very closely, and what I like about them is that for the most part, they move in lock step together. Today of course is a perfect example of when they don't because 2 mins after the open, ES put it in the low of day, and NQ didn't until 37 minutes after the open.
But I think if we wanted to talk balanced, we have to look at the daily range. It is true that when 2 ES contracts move 1 point each, this equals $100, and when 5 NQ contracts move 1 point each, this is also $100. But we have to consider the average daily range.
If I consider a 30 day average, just during RTH, I've got a figure of 66 points for NQ, and 14 points for ES. If I bump this up to 100 days, the ES is still at around 14, and NQ drops to 45. But still, looking at the graph, there is a high-low of 45-32 for NQ and ES is 16-13, so taking a guess at what the range for the day will be is difficult.
Suppose we were able to catch the exact high and low during RTH. Using just the 30 day average, this means 5 NQ contracts for 66 points is $6,600 (profit or loss), whereas for ES, 2 ES contracts for 14 points is $1,400. This is quite a bit different isn't it. So if we're going to be long 2 of ES, and short 5 of NQ, the NQ bias is very very heavy.
Using the above numbers for the value of each contract from @nonlinear5 , the ratio of ES to NQ is 0.42, but using the money gained or lost with my moving average daily RTH range, the ratio is 1400/6600 = 0.21.
Its of course impossible to know which days the NQ will have a huge range, and which the ES will, but to be somewhat neutral, it seems like the amount of ES contracts that are needed are at the very least double since the NQ tends to have very wide ranges.
Worst of all, like today, you could have gotten long NQ and short ES, assuming you're somehow "hedged", and both would end up being losers until later in the day since there was that initial divergence. Eventually they did start to move together, but patience and timing is critical.
Excellent of you to provide such interesting stats. Two things jump out.Hello Nakachalet, I've been doing well. Fortunately, I am not in any of the groups in the video. BTW, you did not respond to my reply earlier in this thread for screenshots of my trades, etc. Anyway, I will post some updates here for y'all's comments:
I am happy to report I have been improving my stats and my equity.
1. From May 18 to today, you have made over $7000. Not bad for less than 2 months of work.
2. From about trade 150, you were going nowhere in terms of PnL until about trade 300. You obviously hit a drawdown, and yet you continued to trade through it. Congrats! Were you changing the way you were trading during this time? (ie. is the eventual recovery due to you changing how you trade, or was it just that now you hit a winning streak after a losing streak?)
Thanks for the comments! I had one day in mid-June where I kept on trading when I should have just stopped. I lost, I think, 13 points. Reflected on that day and basically reminded myself to let the market tell me when to place trades & not the other way around. Also, that I should never take more than a 4 point loss in a day. My strategy is compounding wins, not being a great trader. Being a net winner, even if small, everyday, compounds MUCH faster than trying to recover from big loss days.
The main reasons for the recent increases are that I started trading 3 contracts/ trade on July 1st, and being consistent.
After seeing @volpri 's post and being reminded that you are still in SIM, I kind of have to take back what I said about nice job with regards to the equity curve. Don't get me wrong, its great that you're in SIM, but this equity curve and going to 3 contracts is now quite deceiving. Every tick while trading live matters a lot, unlike in SIM where its easy to just focus on the finish line and not be obsessed with every twist and turn. There really is no benefit to trading 3 contracts in SIM over just trading 1, unless maybe you're practicing scaling out and all that jazz.
With 42% losers to date, do you realize how many you can have in a row and this still be within the statistical parameters of a winning strategy? I ran a monte carlo simulation of your stats. 58% win rate, since since I saw the average win vs. ave loss was 1.2, i use 1$20 for an average win and $100 for an average loss. I think this is true to your stats, even though on second look it might seem that you risking $200 per trade, so $200 would be your average loss, but the ratio would at least me the same.
Anyway, as you can see, you can fall anywhere within the green and red lines. Yes the midpoint PnL is nicely positive, but if we look at how many losers you can have in a row, the max was 13 for the worst simulation, and the average was 5.67 across all 200 simulations. That means you can expect having 6 losers in a row. If you're trading 3 contracts, and lets say your stop is $200, this means you're down $600 on this trade, and by having to expect 6 losers in a row, you'd be down $3,600. Of course the winning streak is even better, but when going live and starting with a losing streak, I wonder if psychologically you will be able to keep trading as you should.
My personal feeling is that you should test live with one contract as soon as possible. You might have a winning system, but you might find your emotions cannot actually handle the parameters of your system. You might see that you don't actually want to risk $200 per trade cause you start getting itchy once it goes against you $100. You might also find that after being down, you might not be able to actually hold for full profit because you just want to get back to break even and get out. Any of these "adjustments" will completely mess with your stats. So its best to find out how you will react, not just how the system reacts to the market.
With 42% losers to date, do you realize how many you can have in a row and this still be within the statistical parameters of a winning strategy? I ran a monte carlo simulation of your stats. 58% win rate, since since I saw the average win vs. ave loss was 1.2, i use 1$20 for an average win and $100 for an average loss. I think this is true to your stats, even though on second look it might seem that you risking $200 per trade, so $200 would be your average loss, but the ratio would at least me the same.
Anyway, as you can see, you can fall anywhere within the green and red lines. Yes the midpoint PnL is nicely positive, but if we look at how many losers you can have in a row, the max was 13 for the worst simulation, and the average was 5.67 across all 200 simulations. That means you can expect having 6 losers in a row. If you're trading 3 contracts, and lets say your stop is $200, this means you're down $600 on this trade, and by having to expect 6 losers in a row, you'd be down $3,600. Of course the winning streak is even better, but when going live and starting with a losing streak, I wonder if psychologically you will be able to keep trading as you should.
My personal feeling is that you should test live with one contract as soon as possible. You might have a winning system, but you might find your emotions cannot actually handle the parameters of your system. You might see that you don't actually want to risk $200 per trade cause you start getting itchy once it goes against you $100. You might also find that after being down, you might not be able to actually hold for full profit because you just want to get back to break even and get out. Any of these "adjustments" will completely mess with your stats. So its best to find out how you will react, not just how the system reacts to the market.
Backtesting paints a rosey picture when your generating a lot of trades because the true cost in short term, which is significant, is not baked in. Your backtest is not factoring in the bid-ask spread that we all have to pay at least one-way, and often round-trip. Your backtest is acting like you are a big market maker like Goldman or JP Morgan - you are simply not going to get fills like the backtest will have you believe. It also does not factor the effect of your orders & fills on the market.
'You can lead a horse to water' - I pointed you to your platforms (Tradestation) recommendations on baking in the bid-ask spread. They advocate to use 1 tick $12.50 for the ES, a seasoned pro will often bake in up to double of that since you will eat plenty of RT spreads ($25).
I was on the Tradestion forum for years - without fail some novice always had some backtest like yours - the group pounded it down with the reality of the overlooked bid-ask spread, that trader got it and moved on. It seems like you are falling in love with this program trading system you are paying for. Novice trades have expectations on the opposite extremes of the more seasoned traders as what they can accomplish out of the gate. It always takes a lot longer and costs a lot more than most aspiring traders can stomach to round the learning curve. Best of luck to you.
http://www.customizedtrading.com/resources/slippage
'You can lead a horse to water' - I pointed you to your platforms (Tradestation) recommendations on baking in the bid-ask spread. They advocate to use 1 tick $12.50 for the ES, a seasoned pro will often bake in up to double of that since you will eat plenty of RT spreads ($25).
I was on the Tradestion forum for years - without fail some novice always had some backtest like yours - the group pounded it down with the reality of the overlooked bid-ask spread, that trader got it and moved on. It seems like you are falling in love with this program trading system you are paying for. Novice trades have expectations on the opposite extremes of the more seasoned traders as what they can accomplish out of the gate. It always takes a lot longer and costs a lot more than most aspiring traders can stomach to round the learning curve. Best of luck to you.
http://www.customizedtrading.com/resources/slippage
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