Day-Trading 2.0 for small traders

[IronFist]

Bill,

Quote from bilbod:

The problem is that they do not 'work' really well. What that means is they have big drawdowns because they are inflexible and markets are not, i.e., markets change character over time.

I have no problem changing a system over time; in fact, I would almost expect that I would have to as markets change over the years.

However all that would get taken care of after hours and concrete rules (whether existing or modified) would be in place when the market opens so that there is no discretion.

From what I know, system traders use 3 methods to improve system performance.

1. Trade the Equity Curve (trade when the EC is trending up, don't trade when it is trending down).
2. Trade multiple, uncorrelated systems.
3. Modify system parameters frequently to accommodate changes in the market.

1. That makes sense... but if it's trading down and you don't trade, how will it ever trade back up again? Or would you just paper trade until you're back to being consistent again (meaning either the market has gone back to the way that it works with your system, or your system has been tweaked to work in the new market conditions)?

2. I also like this idea.

3. Yup.

Simple mechanical moving average systems usually don't fare very well.

A moving average is a digital filter, when you choose its look back period you are tuning it to a specific cycle. You can use it to profitable trade when the dominant cycle in the market is approximately equal to the tuned period and longer because it is a low pass filter (i.e., it filters out high frequencies). When the dominant market cycle has a short period (congestion or chop) the MA system becomes unprofitable.

Yeah, chop sucks. Too bad there's not a way to know ahead of time how choppy the market is going to be on a given day, and just take those days off

The dominant cycle in the market varies (albeit slowly) over time. There are in fact many dominant cycles present in the market and the bar sizes you use determine which ones you will see. If you recall, a couple of times people posted charts that did not 'work' with jjrvat's system. What did jjrvat do? He changed the bar size until the chart 'formed up' (BTW, this practice is not uncommon among discretionary traders) and the system 'worked' again. What he did was adjust the dominant cycle until it was in tune with the indicators.

To be profitable wouldn't you need to adjust the parameters (in this case, bar size) before the trading day?

Although I see how what you're saying could work like this: your system stops being as profitable as it was before... so you modify the bar size a little bit until you're getting better results, and then you keep it that way until you need to modify it again, etc.

Also recall that one of jjrvat's rules is only trade 30-60 minutes per day. Why is that rule important? Because in light of the market fractal being traded and the other trading rules, the dominant market cycle is not likely to change enough in such a short time period to adversely affect the system.

I'm struggling with that rule, too. I know that obviously some times are better/worse than others, but with the exception of my rule of not entering any new trades during the last 30 min of normal hours, I haven't seen any times when the majority of my trades are profitable or unprofitable, and for that reason I took every trade from 8:30am CST until 2:30pm CST.

Of course, with some of the small tick charts that were being posted, trading all day would result in 100s of round trips. I don't like doing any more trades than I have to. The way I was doing it before (500 volume charts on the YM) resulted in between 15-30 round trips a day.

Honestly I'd like to develop a system that is much less than that. Maybe 1 or 2 round trips a day with much bigger profit targets. That'd be awesome But I'm still working on that.

Support and Resistance are 2 very important trading concepts that you seem to ignore. I am not talking about calculated numbers like Floor Trader Pivots or Fibonacci retracements but previous Pivot points, previous areas of Congestion and previous Gaps.

You're right, I don't know much about those. Any advice? You're talking about things like dynamic congestion areas and NOT pre-calculated pivot points and stuff, right?

Prices are attracted to these price areas like a magnet. Prices tend to stall and/or reverse at these price zones. It is very important to know where those price zones are so you are prepared to deal with their effects.

Yeah, I would like to learn more about those.

Thanks for the reply.

 

[IronFist]

Quote from TheRumpledOne:

I think it means it's in transition/reversal.

That would actually be really useful for me. I'll have to see if I can come up with something like that for SierraChart.

I've been experimenting with the Adaptive Moving Average (AMA) for similar purposes because during congestion it becomes flat. It's not perfect but it's definitely interesting. It may be useful in knowing when to sit out when there's no trend where a regular MA would be chopping and whipsawing all over.

On your trade the 240WMA chart, are you just entering with bracket orders and a profit target of 5 pips? What's your stop loss? 5 pips as well for stop?

 

[Xuanxue]

Quote from IronFist:

Re: Not trading drawdowns:

1. That makes sense... but if it's trading down and you don't trade, how will it ever trade back up again? Or would you just paper trade until you're back to being consistent again (meaning either the market has gone back to the way that it works with your system, or your system has been tweaked to work in the new market conditions)?

That's an alternative but then what's being guaged isn't by definition an equity curve. Drawdowns are expected losses compared to expected returns. It's a ratio of a fully tested system. The appeal of mechanical systems lay in trading highly leveraged accounts. When more losses appear than expected, trades are still executed, only you're risking less of your buying power and equity.

If you're trading for an example a system that delivers 4:1 wins over losses, you can trade a 20 contract account as an 80 contract account. If suddenly the expected return drops by 50% you would scale back trading maybe 10 contracts until you can replicate original system parameters.

By going sim in drawdowns you can't rightfully say you've all required data sets in forward testing the rate at which drawdowns rise over expected returns.

 

[cashmoney69]

hey Iron, hows the trading coming along?

 

[TheRumpledOne]

Quote from IronFist:

That would actually be really useful for me. I'll have to see if I can come up with something like that for SierraChart.

I've been experimenting with the Adaptive Moving Average (AMA) for similar purposes because during congestion it becomes flat. It's not perfect but it's definitely interesting. It may be useful in knowing when to sit out when there's no trend where a regular MA would be chopping and whipsawing all over.

On your trade the 240WMA chart, are you just entering with bracket orders and a profit target of 5 pips? What's your stop loss? 5 pips as well for stop?

I enter with a LIMIT order.

Remember this:

If a trade goes against me, I add to the position and adjust my TP. WARNING - DO NOT ATTEMPT THIS - THIS CAN BE HAZARDOUS TO YOUR PORTFOLIO.

I am using rules based on casino gaming NOT trading when I do this. Funny thing is, I make more when I exit a trade that went against me because I have more money at risk. DO NOT ATTEMPT THIS - THIS CAN BE HAZARDOUS TO YOUR PORTFOLIO.

 

[bilbod]

In a previous post, I already mentioned Lance Beggs essay (I think the title is something like Top Down Trading) and website. He trades between support and resistance using candlestick formations (no indicators). There is a lot of useful free trading info on his site.

Toni Hansen wrote several articles about S/R trading. She includes Fibonacci and whole number S/R which I don't use. She also uses some indicators.

Linda Bradford Raschke has written articles about price action and Support/Resistance (I think she calls it Tape Reading which is a misnomer, it should be called Chart Reading). She uses indicators in her trading.

Judy MacKeigan (a.k.a. Buffy) wrote an article on price action that discusses trend analysis and S/R that has useful info. She uses indicators in her trading.

Bill

 

[TheRumpledOne]

Quote from IronFist:
I have no problem changing a system over time; in fact, I would almost expect that I would have to as markets change over the years.

IMHO, this is a BIG MISTAKE!

People say "markets change". That's an ILLUSION!

What really changes? There are buyers and sellers in all markets. The price goes up and down in all markets. The only thing that changes is PRICE and VOLUME. That's what makes it a market. It's really the RATE OF CHANGE that you see over the time frame you are viewing that matters. When THAT changes, you say the market has changed.

From page 1, post #3:

1. Markets are always going in a direction even if your timeframe is showing choppy action. The problem arises because the analysis of direction MUST be consistent with what, where and when are u trading. I used to make the mistake of ploting trendlines in a 5 sec chart that corresponded to 5 min S/R level (without knowing), there are even people that use hourly and even daily trendlines for scalping 5 secs charts. And you wonder why you aren’t consistent!!! - jjrvat

To me, this is key.

Every trading day is the same to me. So long as the price is going up and down, I can make money.

People ask me about the market. I always tell the market is the same going up and down all day long. I DON'T CARE ABOUT THE MARKET! I am focused on what I am trading.

If the market is going up but what I am trading is going down, I better be short, selling or flat, right?

If the market is going down but what I am trading is going up, I better be long, buying or flat, right?

Is there a reason that jjrvat's PBP should change if the "market changes"?

I don't think so. The market will still move in waves. Some waves will be higher/lower than others. Price will either be above or below the WMA(240). ETC...

jjrvat, if you are reading, please comment. Thank you.

 

[toucan]

TRO... I think what ironfist meant was that his system might have to change over time as conditions change.... perhaps his word "markets" is what you responded to.

a couple of examples of conditions changing... but there are many more...

1. change from fraction pricing to penny pricing
2. change from nyse market makers to hybrid of pit/electronic

each of these examples changed existing trading systems in effect prior to the change.

Cheers

Toucan

 

[Dr.N]

To me, this is key.

Every trading day is the same to me. So long as the price is going up and down, I can make money.

People ask me about the market. I always tell the market is the same going up and down all day long. I DON'T CARE ABOUT THE MARKET! I am focused on what I am trading.

If the market is going up but what I am trading is going down, I better be short, selling or flat, right?

If the market is going down but what I am trading is going up, I better be long, buying or flat, right?

Is there a reason that jjrvat's PBP should change if the "market changes"?

I don't think so. The market will still move in waves. Some waves will be higher/lower than others. Price will either be above or below the WMA(240). ETC...



+1

 

[IronFist]

Quote from TheRumpledOne:

IMHO, this is a BIG MISTAKE!

People say "markets change". That's an ILLUSION!

Nah. Say you're using a system that uses x constant volume bars. In a couple years, say the total daily volume on the instrument you trade doubles. Maybe not to compensate you have to use 2x constant volume bars to get the same signals you were getting before.

What really changes? There are buyers and sellers in all markets. The price goes up and down in all markets. The only thing that changes is PRICE and VOLUME. That's what makes it a market. It's really the RATE OF CHANGE that you see over the time frame you are viewing that matters. When THAT changes, you say the market has changed.

I don't disagree with any of that, but PRICE, VOLUME and RATE OF CHANGE changing could all possibly require system modification.

Cheers.