Some "Bright" strategies...
- Thread starter Don Bright
- Start date
Thanks for all your great posts Don. I'm doing some sample pairs trades right now and my main concern is stops. Unlike other kinds of trades, I know that with this style you want to add to losing positions, as you did in your example.
But how do you determine a stop loss? There must be a point where the pain becomes too great. Where something is fundamentaly changing with one of the companies and the spread might not come back.
Thanks,
Corey
But how do you determine a stop loss? There must be a point where the pain becomes too great. Where something is fundamentaly changing with one of the companies and the spread might not come back.
Thanks,
Corey
Don,
Let me also say that I appreciate you sharing your knowledge with us at Elite Trader. I find pairs trading fascinating and I am eager to learn as much as possible.
Recently I tried a pairs trade, short CREE long RFMD but I got the direction wrong. I bought the spread at 2.77 instead of selling it. I had been under the impression that normally the spread had been up to 5.00. After a while I gave up and covered the loss.
My question to you is when you talk about fair value are you referring to the fair value of the stocks themselves or of the spread which is just a derivative of the stocks prices. Can you give me an idea, if it is not too proprietary, on how fair value is determined. Also what do you mean by premium and how does this relate to the spread trade. Thank you for your help.
Good trading
cocobop
Let me also say that I appreciate you sharing your knowledge with us at Elite Trader. I find pairs trading fascinating and I am eager to learn as much as possible.
Recently I tried a pairs trade, short CREE long RFMD but I got the direction wrong. I bought the spread at 2.77 instead of selling it. I had been under the impression that normally the spread had been up to 5.00. After a while I gave up and covered the loss.
My question to you is when you talk about fair value are you referring to the fair value of the stocks themselves or of the spread which is just a derivative of the stocks prices. Can you give me an idea, if it is not too proprietary, on how fair value is determined. Also what do you mean by premium and how does this relate to the spread trade. Thank you for your help.
Good trading
cocobop
lescor
Member
Registered: Aug 2001
Posts: 50
11-20-01 08:53 PM
stops
Thanks for all your great posts Don. I'm doing some sample pairs trades right now and my
main concern is stops. Unlike other kinds of trades, I know that with this style you want to
add to losing positions, as you did in your example.
But how do you determine a stop loss? There must be a point where the pain becomes too
great. Where something is fundamentaly changing with one of the companies and the spread
might not come back.
Thanks,
Corey
Thanks Corey....what we do with our traders is have them make out a "pair trading review" form, wherein they show us that they have done their homework regarding the pairs that they are beginning to trade. It is a nightmare when someone starts trading a pair just because someone else is doing well with it. Our risk parameters are based on the amount that the trader is willing to go, based on the outside range of where the pair has been over the last couple of years. If a pair has gone from -$2 to a +8, and is trading at +3, then we would assume approximately a +-$5 movement. At this point we employ our "narrowing strategy" - which allows for continued trading but uses a scaled method to still capture profits. The point to remember, is that even though a pair may "go against you" by a few bucks, if you continue to intraday trade it in and out, you may very well offset any market movement losses. This is extremely important.
Member
Registered: Aug 2001
Posts: 50
11-20-01 08:53 PM
stops
Thanks for all your great posts Don. I'm doing some sample pairs trades right now and my
main concern is stops. Unlike other kinds of trades, I know that with this style you want to
add to losing positions, as you did in your example.
But how do you determine a stop loss? There must be a point where the pain becomes too
great. Where something is fundamentaly changing with one of the companies and the spread
might not come back.
Thanks,
Corey
Thanks Corey....what we do with our traders is have them make out a "pair trading review" form, wherein they show us that they have done their homework regarding the pairs that they are beginning to trade. It is a nightmare when someone starts trading a pair just because someone else is doing well with it. Our risk parameters are based on the amount that the trader is willing to go, based on the outside range of where the pair has been over the last couple of years. If a pair has gone from -$2 to a +8, and is trading at +3, then we would assume approximately a +-$5 movement. At this point we employ our "narrowing strategy" - which allows for continued trading but uses a scaled method to still capture profits. The point to remember, is that even though a pair may "go against you" by a few bucks, if you continue to intraday trade it in and out, you may very well offset any market movement losses. This is extremely important.
Don,
Let me also say that I appreciate you sharing your knowledge with us at Elite Trader. I find
pairs trading fascinating and I am eager to learn as much as possible.
Recently I tried a pairs trade, short CREE long RFMD but I got the direction wrong. I bought
the spread at 2.77 instead of selling it. I had been under the impression that normally the
spread had been up to 5.00. After a while I gave up and covered the loss.
My question to you is when you talk about fair value are you referring to the fair value of the
stocks themselves or of the spread which is just a derivative of the stocks prices. Can you
give me an idea, if it is not too proprietary, on how fair value is determined. Also what do you
mean by premium and how does this relate to the spread trade. Thank you for your help.
Good trading
cocobop
> OK, thanks again! The fair value that I refer to is the premium valuation we use for entries or exits of all trades. Remember, pair trading still involves all the basics required in good trading techniques. We often simply trade in and out of one side of the pair, using the other side as a "crutch" (thus the term "crutch pairs"). The overall methods encompass entry, exit, crutch pairing, and, of course risk evaluation. I will try to get into the other types of pair trading in a few days.
Let me also say that I appreciate you sharing your knowledge with us at Elite Trader. I find
pairs trading fascinating and I am eager to learn as much as possible.
Recently I tried a pairs trade, short CREE long RFMD but I got the direction wrong. I bought
the spread at 2.77 instead of selling it. I had been under the impression that normally the
spread had been up to 5.00. After a while I gave up and covered the loss.
My question to you is when you talk about fair value are you referring to the fair value of the
stocks themselves or of the spread which is just a derivative of the stocks prices. Can you
give me an idea, if it is not too proprietary, on how fair value is determined. Also what do you
mean by premium and how does this relate to the spread trade. Thank you for your help.
Good trading
cocobop
> OK, thanks again! The fair value that I refer to is the premium valuation we use for entries or exits of all trades. Remember, pair trading still involves all the basics required in good trading techniques. We often simply trade in and out of one side of the pair, using the other side as a "crutch" (thus the term "crutch pairs"). The overall methods encompass entry, exit, crutch pairing, and, of course risk evaluation. I will try to get into the other types of pair trading in a few days.
It seems that we get a new thought on programable trading strategies almost daily, and I have found that the people who are trying to develop such things are usually very sharp individuals, and that if they would simply put into practice their ideas rather than try to program something to do it for them, they would probably make money.
There are no "day trading systems" that work...period. If there were, then we
would simply program our computers to implement them. And if you develop one,then the game would be over, since without variable conditions (that cannot be responded to effectively), you have no market.
Many people have tried to develop such systems based on TA, if-thens, trailing
stops, breakouts, breakdowns, closing day overnights, and a plethora of others
not even worth mentioning. Without having a live body connected to respond to market conditions, it won't work simply by definition.
Don't get me wrong, you do need the "cool tools" to make the actual trading
easier and more efficient (hot keys, triggers, warnings, etc.), but don't expect to
find a consistent winning program.
There are no "day trading systems" that work...period. If there were, then we
would simply program our computers to implement them. And if you develop one,then the game would be over, since without variable conditions (that cannot be responded to effectively), you have no market.
Many people have tried to develop such systems based on TA, if-thens, trailing
stops, breakouts, breakdowns, closing day overnights, and a plethora of others
not even worth mentioning. Without having a live body connected to respond to market conditions, it won't work simply by definition.
Don't get me wrong, you do need the "cool tools" to make the actual trading
easier and more efficient (hot keys, triggers, warnings, etc.), but don't expect to
find a consistent winning program.
I think I will post this note on the "strategies post" just to make it seen by more people. Good Luck, and thanks for intelligent comments.
Don, you keep mentioning that stops are foolish (I realize you are using mental stops), however, unless you are trading in lower vol underlyings or do enough size to stand out, placing a stop order vs. using a mental one (assuming you could instantaneously execute) will yield the same or better results for most people.
Now take the eminis for example. Being an electronic exchange my stops won't matter and in fact hurt me if I use mental stops because it is a FIFO exchange.
Also, I believe in using stop orders for profit taking. I want my stops to get hit.
Perhaps you could provide some examples of where stops will hurt, except perhaps the very obvious example of showing a lot of size.
OK, the main reason for not using stops for exits is that you are limiting your profit potential on some pre-determined amount of gain (and "trailing or leading" stops do the same thing).
It comes back to this: If trading is your job, your profession, and your passion, then you are vigilant in your monitoring of market conditions. You go in when it looks right, out when it looks right, you don't know ahead of time when all the basic data will converge. Sometimes the best trade of the day will be a losing trade, and what sense would it make to program losing trades ahead of time? We have traders who use stops for entering trades, but rarely for exiting.
As far as trading futures off-floor (I still don't recommend that), I think it is even more important to be aware of what is going on overall in the marketplace, second by second,than it is to put in orders based on prior movements (even the "numbers" pivots and all of that). On the other side, it does make sense to me to be aware of what the floor traders are using for program triggers and buy/sell programs from the outside firms. I hate to trade without my "squawk box" from the CME floor.
" A little of this, a little of that" as far as an overall strategy is concerned ...and "practice, practice, and practice some more"..
Don, you keep mentioning that stops are foolish (I realize you are using mental stops), however, unless you are trading in lower vol underlyings or do enough size to stand out, placing a stop order vs. using a mental one (assuming you could instantaneously execute) will yield the same or better results for most people.
Now take the eminis for example. Being an electronic exchange my stops won't matter and in fact hurt me if I use mental stops because it is a FIFO exchange.
Also, I believe in using stop orders for profit taking. I want my stops to get hit.
Perhaps you could provide some examples of where stops will hurt, except perhaps the very obvious example of showing a lot of size.
OK, the main reason for not using stops for exits is that you are limiting your profit potential on some pre-determined amount of gain (and "trailing or leading" stops do the same thing).
It comes back to this: If trading is your job, your profession, and your passion, then you are vigilant in your monitoring of market conditions. You go in when it looks right, out when it looks right, you don't know ahead of time when all the basic data will converge. Sometimes the best trade of the day will be a losing trade, and what sense would it make to program losing trades ahead of time? We have traders who use stops for entering trades, but rarely for exiting.
As far as trading futures off-floor (I still don't recommend that), I think it is even more important to be aware of what is going on overall in the marketplace, second by second,than it is to put in orders based on prior movements (even the "numbers" pivots and all of that). On the other side, it does make sense to me to be aware of what the floor traders are using for program triggers and buy/sell programs from the outside firms. I hate to trade without my "squawk box" from the CME floor.
" A little of this, a little of that" as far as an overall strategy is concerned ...and "practice, practice, and practice some more"..
I must have missed the post a few pages back that asked if the strategies we use require a great deal of capital. The answer is "yes" and "no"...let me explain. For example, the opening strategies may require that you are "eligible" for capital usage (putting in 20-30 orders at one time prior to the opening), but you really don't get filled on all of them, so the actual capital useage and risk are very minimal. We figure that when our traders are using the firm's capital wisely, it benefits them and the firm. So, you really must be able to effectively utilize capital, but you don't need to have that big of an account. Most of our traders simply keep the $25K in their account, which is the minimum now for retail customers. Many of our people have less than that from time to time (hopefully because they have taken out profits).
Don: It seems that we get a new thought on programable trading strategies almost daily, and I have found that the people who are trying to develop such things are usually very sharp individuals, and that if they would simply put into practice their ideas rather than try to program something to do it for them, they would probably make money.
Many such very sharp individuals do trade the markets using existing models that they've developed. The same could be said about good discretionary traders. If only they could model their decision-making process and subject it to scientific analysis, they could improve their results and perhaps discover other behavioral relationships they previously only observed through intuition. Also, you do have some very intelligent individuals who wish to undergo rigorous study of their any trading methodology before committing risk capital.
There are no "day trading systems" that work...period. If there were, then we would simply program our computers to implement them.
As long as you've been in this business I can't believe you still believe this. If you had said "there are no day trading systems that work under all conditions" I would agree. Systems trading will undergo drawdowns as they are not profitable all the time, but if they are profitable in the long run does not make them valid? Do you agree that "end-of-day trading systems" work? If you believe that then it only follows that narrowing your time frame is possible. How can EOD trading work yet intraday system not be possible?
And if you develop one,then the game would be over, since without variable conditions (that cannot be responded to effectively), you have no market.
This would only be true if a "perfect system" or "holy grail" system was developed, and we know that is not physically possible. Daytrading systems look at very specific conditions and execute on those conditions. What do you call the computerized programs that arb between the index, stock, options and futures. These are computerized systems that are executed on an intraday basis. Obviously arb'ing is not recommended for the individual trader, just providing an obvious example.
Many people have tried to develop such systems based on TA, if-thens, trailing stops, breakouts, breakdowns, closing day overnights, and a plethora of others not even worth mentioning. Without having a live body connected to respond to market conditions, it won't work simply by definition.
Are you saying that trading systems do work but you simply need a human to perform the execution to verify that the trade was processed? Or that somehow trading systems could not work without human intervention to filter the signals?
Many such very sharp individuals do trade the markets using existing models that they've developed. The same could be said about good discretionary traders. If only they could model their decision-making process and subject it to scientific analysis, they could improve their results and perhaps discover other behavioral relationships they previously only observed through intuition. Also, you do have some very intelligent individuals who wish to undergo rigorous study of their any trading methodology before committing risk capital.
There are no "day trading systems" that work...period. If there were, then we would simply program our computers to implement them.
As long as you've been in this business I can't believe you still believe this. If you had said "there are no day trading systems that work under all conditions" I would agree. Systems trading will undergo drawdowns as they are not profitable all the time, but if they are profitable in the long run does not make them valid? Do you agree that "end-of-day trading systems" work? If you believe that then it only follows that narrowing your time frame is possible. How can EOD trading work yet intraday system not be possible?
And if you develop one,then the game would be over, since without variable conditions (that cannot be responded to effectively), you have no market.
This would only be true if a "perfect system" or "holy grail" system was developed, and we know that is not physically possible. Daytrading systems look at very specific conditions and execute on those conditions. What do you call the computerized programs that arb between the index, stock, options and futures. These are computerized systems that are executed on an intraday basis. Obviously arb'ing is not recommended for the individual trader, just providing an obvious example.
Many people have tried to develop such systems based on TA, if-thens, trailing stops, breakouts, breakdowns, closing day overnights, and a plethora of others not even worth mentioning. Without having a live body connected to respond to market conditions, it won't work simply by definition.
Are you saying that trading systems do work but you simply need a human to perform the execution to verify that the trade was processed? Or that somehow trading systems could not work without human intervention to filter the signals?