The ACD Method

[Shanb]

Quote from Maverick74:

OK, I'll throw out a bone here. For stocks, the best way to look for good confirmed A ups and A downs is to look for narrow open ranges. You want to program this into a ratio. Take the OR into say a 30 day ATR. Then run the scans during the day to find the tightest ratios, for example all stocks under 20%. From this list, you look for confirmed A ups and A downs. Combine that with stocks with narrow pivots or narrowing pivots, and you will find your breakouts.

To further add to this, you can do the same process with stocks using a 30 min OR and look for late morning breakouts which actually tend to have more follow through then the early morning breakouts or breakdowns.

The problem with the failed A trades is noise. There just are too many of them and you will never find the best ones nor will you have any ability to filter for the nice ones. They will all be random. The breakout trades can be isolated. For example, you can get very very narrow by lowering the OR/ATR ratio to 15% or 12% to really fine tune the breakouts. You can't do this with fade trades. Simply looking for stocks with wide OR is meaningless because some will provide great fades and some will not. That's like saying the market might go up today or might go down. This will become very frustrating over time the sheer randomness of it.

Anyway, just a thought...

With a the A-fades...here is something that has been working for me lately. Choose any volatile and liquid name(aapl, lvs, cat etc.) and just play the ranges. I make sure the stock is ranging and not trending .When price gets extended to the A-value and fails, fade it. The frequency by which these trades work is not random...just buy low and sell high. I'm using a VWAP indicator too as a lot of algos execute based off of it! When they line up, its like a rubber band!

I'll post more an update with this, but busy with studying for the Series exam at the moment!

 

[Maverick74]

Quote from Shanb:

With a the A-fades...here is something that has been working for me lately. Choose any volatile and liquid name(aapl, lvs, cat etc.) and just play the ranges. I make sure the stock is ranging and not trending .When price gets extended to the A-value and fails, fade it. The frequency by which these trades work is not random...just buy low and sell high. I'm using a VWAP indicator too as a lot of algos execute based off of it! When they line up, its like a rubber band!

I'll post more an update with this, but busy with studying for the Series exam at the moment!

The thing with fading is it's synthetically the same as selling option premium. It has a high win rate with small wins but it can get ugly. Right now we are in an environment where stocks are not moving much because they are waiting for this news out of Europe. Fading everything is working right now! I assure you, it gets ugly when it stops working. And I don't mean that you will have one large loss. It's just the environment will change where you will take hit after hit after hit. Mean reversion is the one strategy that never seems to go away yet it is solely responsible for eliminating more trading careers then any other strategy. The trading Gods are cruel like that.

Good luck on the exam!

 

[Shanb]

Quote from Maverick74:

The thing with fading is it's synthetically the same as selling option premium. It has a high win rate with small wins but it can get ugly. Right now we are in an environment where stocks are not moving much because they are waiting for this news out of Europe. Fading everything is working right now! I assure you, it gets ugly when it stops working. And I don't mean that you will have one large loss. It's just the environment will change where you will take hit after hit after hit. Mean reversion is the one strategy that never seems to go away yet it is solely responsible for eliminating more trading careers then any other strategy. The trading Gods are cruel like that.

Good luck on the exam!

So what is the trend trader to do in a market like this? He would get chopped up playing momentum in this environment. Learning to recognize the environment and not fight the tape would probably help.

Yesterday we had some strong moves in many stocks...fading would've been a losing strategy if one is fading momentum. I sat back and did other things while that was going on, looking at a chart and seeing if something is going up, down, or sideways ain't that hard!

For me it is harder to make money when its going up or down for some reason, everyone is different right!

 

[Maverick74]

Quote from Shanb:

So what is the trend trader to do in a market like this? He would get chopped up playing momentum in this environment. Learning to recognize the environment and not fight the tape would probably help.

Yesterday we had some strong moves in many stocks...fading would've been a losing strategy if one is fading momentum. I sat back and did other things while that was going on, looking at a chart and seeing if something is going up, down, or sideways ain't that hard!

Well, as I said before, if one is going to trade equities, your long term success will be almost entirely dependent on your ability to select the right stocks. Not an easy task, but then, trading is not easy. After you have been doing this for a while, you will develop a feel for what's going to move and what's not and what will have follow through. The problem is once you set your mind to looking for fades, all the momentum moves disappear from your sight. It's funny how that works. It's all about how your train your mind to look for opportunity.

 

[Shanb]

If I'm not mistaken...selling option premium entails unlimited risk, if your naked! Buying low and selling high with a stop is surely different right?

 

[Maverick74]

Quote from Shanb:

If I'm not mistaken...selling option premium entails unlimited risk, if your naked! Buying low and selling high with a stop is surely different right?

No, same thing. P&L distribution looks the same. I know it's hard to grasp this concept but I could show you two different equity curves where the account takes a 50% hit and you would not be able to discern the equity fader from the premium seller when their p&l turns south.

 

[Shanb]

Quote from Maverick74:

Well, as I said before, if one is going to trade equities, your long term success will be almost entirely dependent on your ability to select the right stocks. Not an easy task, but then, trading is not easy. After you have been doing this for a while, you will develop a feel for what's going to move and what's not and what will have follow through. The problem is once you set your mind to looking for fades, all the momentum moves disappear from your sight. It's funny how that works. It's all about how your train your mind to look for opportunity.

If your a trend trader, all of the mean reversion plays also disappear from sight. It's a circular discussion, different strokes for different folks. There's a guy who runs a group in my office who trades exclusively in pair trades. He's had like one losing month in the past 5 years and has made a killing this year. He misses alot of directional moves, but makes his bread and butter in the spread. I think alot of the difficulty in trading is trying to find something that you can make work and will mesh with the way your brain works. You've pointed this out many times before

 

[Maverick74]

Quote from Shanb:

If your a trend trader, all of the mean reversion plays also disappear from sight. It's a circular discussion, different strokes for different folks. There's a guy who runs a group in my office who trades exclusively in pair trades. He's had like one losing month in the past 5 years and has made a killing this year. He misses alot of directional moves, but makes his bread and butter in the spread. I think alot of the difficulty in trading is trying to find something that you can make work and will mesh with the way your brain works. You've pointed this out many times before

Absolutely. I'm just playing devil's advocate with you because I use to sit in your chair 10 years ago and know what you are going through. Trading is very very hard. Once a guy gives up on trading direction he usually turns to selling premium or fading moves. This is why you see a preponderance of faders on ET of which less then 1% of those guys make money.

Look, there are a million ways to make money. I'm just forewarning you that frustration often leads one to look for easy outs and fading is a very easy out for most traders. As is selling options. Don't give in to easy temptation. Fight through it. But yes, at the end of the day, you will have to find your own unique path. But that is years from now. Not this week. LOL.

 

[Shanb]

Quote from Shanb:

If your a trend trader, all of the mean reversion plays also disappear from sight. It's a circular discussion, different strokes for different folks. There's a guy who runs a group in my office who trades exclusively in pair trades. He's had like one losing month in the past 5 years and has made a killing this year. He misses alot of directional moves, but makes his bread and butter in the spread. I think alot of the difficulty in trading is trying to find something that you can make work and will mesh with the way your brain works. You've pointed this out many times before

Mind you, the approach involves purely mean reversion...with a regular adding to losing positions etc.

Common trading advice would say that there is no way would not lead to some type of blow-out. Hes been trading this way for 10 years, pretty long track record.

 

[Maverick74]

Quote from Shanb:

Mind you, the approach involves purely mean reversion...with a regular adding to losing positions etc.

Common trading advice would say that there is no way would not lead to some type of blow-out. Hes been trading this way for 10 years, pretty long track record.

If you get some time, PM Bone on here. Ask him how many futures prop firms have blown out the last 5 years trading mean reversion. These firms made money, printed money I should say, for a decade then one by one blew out. Shoot him a PM. The guy knows every prop firm in Chicago.