Principles of Market Timing

Principle 14:


Variance reduction appears in two examples in trading:

1. Number of bars you work with.

2. Your gains and returns.

With respect to 1. Go back to the time trading system. You need to make sure that X is at least 20 bars.

If you do not do that, you wins and losses out of X will not help you to decide.

Variance reduction is also and important component in money management, but usually this part is taken care of implicitely is your rule is to make sure you survive in 20 or more trial.

Notice the number 20 in there and its relation to central limit theorem. 20 corresponds to 5% losses. If you used more than 5% loss on a single trade, then you are not controlling variance as you should. Do not use courage in money management by thinking that a higher number applies to you. It has nothing to do with courage but rather numbers.
 
Quote from riskfreetrading:

Traders typically use the 25 and 50 MA. Your can derive the 50 from the 25.

Derivations go upwards. In certain cases downwards, and sideways as well.
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How ? By definition a 50 SMA is calculated from a longer lookback period than a 25 SMA. You cannot derive it from a 25 SMA alone.
 
Quote from dcraig:

How ? By definition a 50 SMA is calculated from a longer lookback period than a 25 SMA. You cannot derive it from a 25 SMA alone.
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M(50, t) = (M(25, t)+M(25, t-25))/2

let me know if notation, explanation is needed.

also test it, and report in your words on your understanding before and after. it would be helpful to know your thinking.
 
Quote from riskfreetrading:

You use the option data consistent with your time horizon.

In case of trading you need the front month. Once you have that, you multiply the range by the square root of ratio of times.
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So in case of estimating the likely range for one trading session, what do I do ? Just triple the sum of ATM Call+Put ?

And let's say for 3 days...multiply the above result by sqrt ( 3/1) ?

Thx.
 
Quote from Marsupilami:

So in case of estimating the likely range for one trading session, what do I do ? Just triple the sum of ATM Call+Put ?

And let's say for 3 days...multiply the above result by sqrt ( 3/1) ?

Thx.
More...

You got the idea, but what is typically available prices for say 30 days (or X days). So to get one day, you divide by SQRT of X. Then you multiple by SQRT of 3.
Overall you are adjusting with SQRT of how many three days there are in X days.

Hope it makes sense.

PS: What do you trade? and thanks for thanking me.
 
Quote from riskfreetrading:

Principle 11:


Trading without stops is a zero sum game.

Trading with stops is worse. It is a negative sum game.
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i find this principle very interesting. but something does not fit.

let's take trend followers. i have to make a disclaimer that i am not a trend follower, so maybe i have the wrong idea about how they do it. my understanding is that they place close stops and hope to catch a rare trend that will compensate for the many small losses.

why do they use stops if they are not beneficial and even toxic? is it due to the limited amount of capital of a typical trader when they can't absorb a large loss before the trend turns into their favor?
in other words, can they achieve a better result by placing many small bets but without using stops?
 
What I wrote is about the overall set of traders, not about a particular set of traders, and a strategy.

An analysis of the reasons of my remark would reveal why trend traders operate the way they do.

If you look at the trend followers, you will likely find that the life of a trade stopped short is much smaller than the life of a trade closed with a win.

This relates to the class of trading systems I referred to earlier as trading time, rather that timing in trading.


Better traders use both timing and time trading. The greatestest traders use even more techniques, such as hedging, scaling, implementation of other stoppage techniques, etc.

What they however have a mental and analytical framework of why they do what they do. The trader who does not know such things, becomes emotional and does not have the right expectation, because he does not know the why and the how's with numbers and proofs at hand.
 
Principle 15

Less can be good--- options sellers use the opposite of this rule. What does all this mean?

Trading rules generally contain IF and AND conditions, staggered in sequence and independent. If each condition has a chance of 50% of success, 2 conditions reduce your chance of success to only 25%, and 4 conditions reduce your chance to only 1 out of 16.

So seek simple one condition systems if you play direction, and no more than 2 conditions. If more seek to have them negatively correlated (which mean they are dependent).

If you have a lot of conditions systems, sell them. How? Decompose them into easily sellable instruments, most likely via puts and calls.

Put and calls sellers do not generally tell that a put/call contains a set of IFs and ANDs for the buyer to make money. It is the "hidden" IFs and ANDs that generally get option buyers not realizing the hidden hoops in the form of IFs and ANDs.

A long chain is weaker than a short chain (even if the long chain looks impressive and can deceive the observer because it contains more stuff).
 
Quote from riskfreetrading:

You got the idea, but what is typically available prices for say 30 days (or X days). So to get one day, you divide by SQRT of X. Then you multiple by SQRT of 3.
Overall you are adjusting with SQRT of how many three days there are in X days.

Hope it makes sense.

PS: What do you trade? and thanks for thanking me.
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Hi RFT,
I concentrate on the ES.

Just to be clear, the X days stand for the remaining life time of the option, correct ? E.g. 14 days until expiry -> divide by SQRT (14) and multiply by SQRT (3) to predict the market's range in a 3 day period.
 
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