Chabah on Automated Trading

Quote from Chabah:

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Please post any questions or comments. Thanks,

Chabah
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You need to start looking into other brokerages (Interactive Brokers?) which will you the fills you need for your Shorts OR you need to work on a programming/system add-on which deals only with the futures markets (where shorting is never a problem).

The latter would also require an additional third party-addon for other brokerage(s) as well, as from what I hear, TradeStation isn't the greatest house for e-mini futures trading.

If you don't, when (not if) this market turns around, your performance is going to be seriously hurt.

Good trading,

Jimmy Jam
 
April was a pretty good month, and the first where I would consider the results "typical" for what I expect. With the average R at about $75, we made about 20R to get the account to about $38300.

I mention "average R" because one thing I have done is start to disperse my risk differently across stocks based on how strong they have performed (measured through backtesting to get 1 year of data). For example, stocks like NYX, CME and NTRI have really killed in my system - in backtesting they report profits from $6k-$8k with a risk per trade under $100. Contrast with other issues such as FMD that might earn about $3k with the same amount of risk. I use this information to lengthen the leash - FMD only gets to risk $70, while CME and NYX get to risk $100.

Note that even $100 is still just about .25% of equity in an almost $40k account. Again, the $100 is average and not a limit - some bad trades could be -10R or so, and I don't want to get dinged too badly. I do plan to lengthen the leashes further as the account grows and the system has more history. April was a pretty active month so we have more trade data.

I am reading the newest edition of Trade Your Way to Financial Freedom - it is really great so far. I am considering moving to trading "full time", i.e. discretionary trading throughout the day, once I get my account to $200k or so (I have some major inflows planned aside from the trading gains), so I have to keep learning.

In the last month I also coded a new system to test a theory regarding stocks that gap down and then bounce back. It didn't seem to work so well, but I may play with it some more. I definitely to plan to write a couple systems over the summer and fall - I like my current system being very selective (not taking so many trades), which means my capital is often available for alternate systems or ideas.

One last thing - I am willing to entertain offers to write and test automated systems. If you want to collaborate or outright hire me, please let me know via PM. Otherwise I'll continue enjoying my multi-pronged income strategy and entertaining my daughters in the beautiful spring weather.

Chabah
 
Chabah,

Are you only trading stocks that are TradeStation's Easy to Borrow list? I have been frustrated by how often the list changes. Yesterday, spy, dia, qqqq, and iwm were not even on the list. Have you ever encountered a day when your system wanted to go short but TradeStation couldn't find you shares? Or is your strategy long-only?

Not being able to short easily is a major reason to move to futures.

5talents
 
5talents,

Yes, I trade short, and yes, I sometimes have my orders rejected. By sometimes, I mean probably 30%-40% of the time they are rejected. I still get plenty of short trades through though - my system has only generated about 300 trades so far this year (trading 8-14 stocks) so we are not talking about tons of trades being rejected.

Now of course sometimes I am saved a $300 loss because I didn't get filled, and sometimes I miss out on an opportunity. For now I consider missing some trades to be an aspect of the system, just like commissions or slippage. With a $39k account it's not like fortunes are being made or lost - many people would consider this a test account.

Moving to futures is something I will eventually do, but there is still a lot of learning to take care of on the pure equity side first. Contracts are for 100 units and several of the stocks I trade are high priced so they wouldn't work anyway. Here I am really thinking of CME, which is one of the worst offenders when it comes to getting short.

Thanks for writing,

Chabah
 
Oh, one more point. My system is very stock specific - I have to backtest and optimize and do a bunch of analysis before I can add a stock. Once I add it, I keep trading it until it stops looking good. Therefore, I don't ever check the Easy to Borrow list or any other lists. Maybe in the future if I ever start manually trading.

In case you missed it, my system trades automatically all day while I am at work - I have no control during market hours.

Chabah
 
I assume you are using the same system for every stock. Otherwise, seems like you would be subject to overfitting.

Certainly trading a fixed basket of stocks makes things easier and eliminates the need for using a stock scanning service such as stockfetcher or trade-ideas.

If you are holding overnight and don't have any short positions (and can't go short), seems like you could be subject to a large loss if the entire market gaps.

I'm also a TradeStation user, but am still working out the mechanics of hooking up TradeStation to a dll, since my trading strategy is in C++.

I see that you live in the DC area. I do as well. If you are interested, there is a TradeStation users's group that meets in Potomac, MD once a month. PM me if you want the details.

5talents
 
My system is the same for each stock, but the variables are optimized. When I say I do a lot of analysis I am referring to doing optimizations and then comparing and contrasting the results across a bunch of variable combinations. I don't just take the highest net profit and run with it - I have certain characteristics I look for such as a smooth equity curve and a minimum average profit per trade.

I only optimize 2 variables so the curves are not overfit - the optimization is mostly based on the stock price and the strength of moves - it's more of a convenience than a mining tool.

At the end of any given day I usually only have 1 or 2 positions, and often 1 short and 1 long or some variation. A market gap could hurt but not across my entire portfolio.

I think I will contact you about the user group - sounds interesting. Thanks for mentioning.

Chabah
 
I read some of the other threads, and it seems some people doubt if you can have a successful automated trading system. That's a pretty funny thought to me, but it got me thinking about some of the factors involved.

If you read The New Market Wizards by Schwager there is at least one automated system in there, so that should answer the question of "Is it possible?" definitely.

There are a lot of misconceptions about automated systems. This is by no means an exhaustive list:

* Win rate > than 50% of trades (none I have heard of do)

* No maintenance (system is solid, but variables require monitoring)

* How much? Most traders don't understand position sizing, and if you don't then it is virtually impossible to code a decent system.

* Win rate - you can't just print 100% per month or year in the markets. If you can do 20% annual consistently with small drawdowns there are literally billions of dollars awaiting your management skills. (I aim higher but that is with a small account - small numbers are easier to grow - read Market Wizards for many examples of earning over 100% in the first year or two and then settling down to more reasonable returns)

* Ease of implementation - you need good software writing and testing methodology to write a solid system. You need to really embrace back testing and trade analysis to make sure it does what you think it does. Be a pro or hire a pro.

* Biases - Just as a system incorporates your intentions, it also incorporates your biases. If your edge is not truly profitable you'll have problems.

Trade Your Way To Financial Freedom is an excellent resource for dealing with most of these problems. Mark Conway's book will help with the rest.

Chabah
 
May was an OK month - I updated most strategies to have an average loss of about $100 per losing trade (R). We ended at $37,800, or -5R for the month. We were pretty close on a few big trades, but unlucky stop outs (damn volatility) robbed at least 5R or so. When we catch a big move it pays off.

By the way, open P/L this morning is $811, so there is a lot on the table (8R) that is unrealized. In terms of realized losses I suppose that makes May -13R, or a bad month.

It seems when the whole market is up my system doesn't do that stellar. For the year, all my profits, about $4500, are short. Interesting.

Chabah
 
I am now working on my Trading System 2.0, which will be a new system that builds on some of the tools and learning that we went through over the last year. My aim is to develop an automated swing trading system and a semi-automated long-term trading system.

Likely additions to Chabah Trading System 2 (CTS2) include scaled entries and more sophisticated, scaled exits (both stop losses and profit target). Some of these ideas were considered in my 1.0 plan but were not implemented in my previous systems.

We'll continue development in EasyLanguage (TradeStation), and to a large degree I'll be able to post my code since it will be almost entirely original.

I've been trading a lot during this last quiet period, but mostly discretionary trades. I have developed a couple tools that make managing trades easier, and I'll share them as I have time to post.

I recognize there are very few (or zero) readers, and so these writings will be largely self-centered. If you have any comments or requests, please feel free to post.

Chabah
 
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