The ACD Method

[Maverick74]

I'll contribute something useful but likely obvious to most here...

Using ACD intraday trading 30-year ultrabond futures (futures symbol /UB) has been a steady money maker over the last 6 weeks. To the tune of $8,000 per contract traded.

Also, I've noticed buying/selling breakouts of the 5 day high/low at the beginning of each month and holding til end of month is profitable about 60% of the time in markets like silver, nat gas, etc.

Personally, I've gotten a ton out of Mav and others postings here; however, something extremely disheartening was Mav's post where he said:

"ACD is just to be used to build upon, anyone who just trades it outright as laid out in Fisher's book will get killed, Mark told me himself."

As a small retail futures trader trying to become a disciplined profitable trader, I was hoping that I can start tracking how ACD is performing in various markets, start trading those "hot" markets, and make a small fortune.

To be honest, in reading Mr. Fisher's book/watching his lectures, he does make it appear that this is possible, to which he told Mav off the record it is not. Just feels a bit disheartening, that's all. Maybe I want things to be "too easy" though.

Thanks Steve. Let me expand on that. Anyone (including Fisher) who has traded for a long time (more then 10 years) knows full well that markets are fluid and ever changing. There are no magical indicators or lines you can draw that will produce a long term expected profit above and beyond the market return divided by it's given variance. This is actually fundamental to understanding finance and the pricing of financial assets. Fisher never meant the book to be a red light/green light method where one could close their eyes and wait for the profits to roll in. ACD is a model like any other model. A model's purpose is NOT to predict. It's purpose is to be useful. To provide information. Hopefully that information is insightful, unique, and has some degree of clarity and hopefully you are discovering it before everyone else. But the model is NOT to predict.

There are two roadblocks to prediction that make things really really messy. The first is variance ("a funny thing happened on the way to the forum") and the second is time. These two variables have a way of spoiling the best of parties. Because of these variables, they prohibit prediction. Because without these variables in the model, you are nothing more then the random drunk leaving the bar stumbling with no particular place to go. We have to accept this. There is no way around it. So what ACD does, or at least in my ACD playland, I incorporated them into my model. If you can't beat them, join them right? So I did something funny on my way to the forum, I said the hell with price, let me predict variance and time and I'll invite price along for desert later. The result was a much greater understanding of the market then staring at price moving up and down the way a cat's eyes follow the ball on the end of a string shocked as it moves around in space.

Once you understand the limitations of your model, you can move forward in peace. All is well with the world. The biggest part in building a model or a methodology is understanding everything that it is and everything that it is not. The model if built correctly should explain the market as it is, not as you want it to be. It should help bring clarity, instill discipline, minimize emotion and provide an objective path forward that ultimately will determine value.

 

[justrading]

Mav,it's the weekend.

Variance of what from what?

 

[wow12]

Mav , when you talking about variance are you talking about dislocation of price from actual value or with regards to market return relative to the amount of risk required to produce to those returns i.e you would want least amount of risk required with addition to least amount of time relative to market returns which can then help develop where value is to some degree.

I see Mav got his casino business running

 

[wow12]

I have to admit, it's a little disappointing there is not more discussion on this thread when I am not posting. There is close to 1000 pages of content here for you guys to share, discuss and improve upon. One of my goals of this thread was to use this thread to show you guys a way to look at the world and the markets through a different lens and ultimately to share that vision with others on that thread. In other words, communal research. For some odd reason that is not happening.

I'm going to open the floor here and ask for feedback. You can be as honest and straightforward (it would really be helpful if you were) as you wish. Is it that most of you guys simply are not active traders in the market and this thread is just recreational reading? Are you long term investors and feel that while this thread is fun to read, it does not offer anything for long term investors? Is it too complicated? Too simple? I'm really curious. I understand posting content on ET in general is down across the board. Hell, even P&R appears to be in a bear market. Please chime in. Thanks!

i forgot you wanted some feedback , the only reason why i don't post often on the thread is ironically because I don't really have the time to due to the markets and also other external stuff, another factor which is also my fault I'm primarily asking question from my perspective of ACD which i don't think a lot of posters understand (alot of posters see ACD in different light) adding to this is I'm very poor at explaining concepts to individuals , this is why i usually ask leading question to you Mav as you can explain concepts much more easier than me and add to the fact my experience with regards to trading is much less than other posters.

 

[eurusdzn]

Great post, as usual.
Damn, the implication i take from that is if price , at times, looks to move all willy nilly, the model is incomplete, missing something. Thats an eye opener.

 

[Maverick74]

Mav , when you talking about variance are you talking about dislocation of price from actual value or with regards to market return relative to the amount of risk required to produce to those returns i.e you would want least amount of risk required with addition to least amount of time relative to market returns which can then help develop where value is to some degree.

I see Mav got his casino business running

Variance is a measure of distribution. It's usually synonymous with risk and denoted as "sigma^2" or it's little brother sigma "standard deviation". One way to think about it is, it's working counter to what you are trying to do. You are trying to buy X at 100 and sell it at 110 and you prefer the optimal path to get there which is a smooth slow moving straight line. Sigma is there to make sure it doesn't happen. It's going to make the ride bumpy and violent in hopes of getting you off the bus before it arrives at its destination.

Example: You decide to buy X at 100. You think it will go to 110 and put in a stop at 98. What if X goes to 95 first and then goes to 110. Was your "prediction" right? It went to 110 right? Well no, it went to 95 first, you lose 2 pts...you lose...variance wins.

Round 2: You say the hell with stops then, stops are for suckers (or so you read on ET). So you buy X at 100 with a target of 110. No stop this time. X goes down to 90....rebounds back to 100....then continues on to 110....hits your target. Did you win? No. All you did was bet on variance. You bought X at 100 and it went 10 pts below and 10 pts above....in other words, completely random. You don't win anything. Although I'm sure 100 posts of bragging will follow. LOL.

Round 3: You buy X at 100...no stop. This time it goes no where for 6 months but finally hits 110. You sell. Did you win? Again...no. Let's say over that same time period the index was up 20%, X was up 10% and the index exhibited half the volatility as X. The index in this case represents your opportunity cost which in economics, we count as a real expense.

So you can see there is a lot of ways to randomly capture this trade and scream out winner winner chicken dinner! The key to this trade is to be able to capture that 10 pt move...with controlled risk that does not get triggered in a meaningful time frame and at the same time exceeding your opportunity cost. And there in lies the rub. If you irresponsibly ignore variance and time, you might give someone the impression you are a better trader then you really are. But include those variables and suddenly gravity takes hold. Nobody said pimpin was easy.

 

[Maverick74]

BTW, I've spent a great deal of time on this topic on this very thread buried somewhere deep in this thread. This volatility dynamic is why daytraders in general have a tougher hill to climb. Time is a constraint for them. Their stop is fixed and their upside is proportionally smaller then what would normally be the case given the same level of stop for a macro trade. Daytraders are in a way getting robbed of upside because of this time constraint and therefore their long run expected profits get discounted by a factor of time. Or another way to put it, their marginal return per unit of risk is less on an intra-day basis vs a longer time frame.

 

[SteveM]

Mav,

Based on what you just said, would it be safe to say that when you buy/sell A ups/downs that you use:

"enter trade and hold for xx days, but close position if trade is not profitable x days after entry"

rather than the more common

"enter trade at hold til fixed profit target is met, but exit if fixed stop is triggered"?

 

[Maverick74]

Mav,

Based on what you just said, would it be safe to say that when you buy/sell A ups/downs that you use:

"enter trade and hold for xx days, but close position if trade is not profitable x days after entry"

rather than the more common

"enter trade at hold til fixed profit target is met, but exit if fixed stop is triggered"?

Yes, time stops are more effective then price stops. As I mentioned earlier, time and variance are more important then price. And btw, I'm assuming most of you know this but I'll say it again just in case, our A levels and our ATR take into account volatility. I don't want you guys thinking I snuck something new in there. LOL. ACD is a VOLATILITY based methodology. That is what we are using. That has ALWAYS been the case. Just covering the bases here...

 

[logicaltrader]

I have to admit, it's a little disappointing there is not more discussion on this thread when I am not posting. There is close to 1000 pages of content here for you guys to share, discuss and improve upon. One of my goals of this thread was to use this thread to show you guys a way to look at the world and the markets through a different lens and ultimately to share that vision with others on that thread. In other words, communal research. For some odd reason that is not happening.

I'm going to open the floor here and ask for feedback. You can be as honest and straightforward (it would really be helpful if you were) as you wish. Is it that most of you guys simply are not active traders in the market and this thread is just recreational reading? Are you long term investors and feel that while this thread is fun to read, it does not offer anything for long term investors? Is it too complicated? Too simple? I'm really curious. I understand posting content on ET in general is down across the board. Hell, even P&R appears to be in a bear market. Please chime in. Thanks!

First off, you have no idea how much you have influenced my career. I know I have said this before several times but thank you once again.

I guess I dont write much because I feel I am behind the curve than most here and I may not have much to contribute. Previously, I was tracking 4 markets while building my model and even that was too much for me so I scaled back towards the end of last year and now I am trading just petroleum flat price - heat and rbob, tracking cracks and calendars to assist. Thats my world and I am happy with it. I still have much to improve upon but I like having this niche and until I become very comfortable with this market, I dont see myself moving on to anything bigger.

I see you and others here discuss markets in a much broader sense and I dont understand much of what is being discussed - especially currencies. But I read everything because some day I hope to understand it.

In summary, my trading career is mostly built upon what I learnt here and while I read everything that is said here, I feel the markets I participate in at this time and the way I participate in them is too narrow for it to be of any value to anyone here. I take very specific trades based on intra-day, weekly and monthly ACD. I have wanted to share some specific observations, both purely technical and market specific and I have started writing them here many times but always scratched because of this reason.