BlueHorseshoe

Sorry, Steve, but I'm not going to "take sides" in yours and Predictor's ongoing quarrels. As such, I am likely to agree with anything that either of you says if I think there is some truth in it. Of course, if you start to become rude to me again, then I shall revert to treating you as I did before. What you say is true - a skilled carpenter will select the correct tools for the job. A plane to smooth a surface, say. However, no matter how skilled he may be, and no matter how deftly he planes, he will never entirely eliminate the grain from the surface of the material he works. The wood will always have a grain, no matter how much he smooths it. Price data will always contain series that cannot be 'smoothed away' with statistical procedures, even the 'correct ones', wielded by an adept. As I pointed out to Predictor, I don't think this matters. Your Bollinger Bands, and whatever else you use, only needs to be accurate enough to make you money. The fact that they will never perfectly describe price distributions matters no more than 100th of a millimeter grain in the surface of the table I write at. It's all good enough. That's enough with the extended metaphors! BlueHorseshoe

Hi Predictor, I agree with you. There's a very distinct difference between optimisation and curve-fitting. There's a great quote from William Eckhardt on this topic that I'll have to try and dig out . . . My opening post, however, is directed for the benefit of anyone who thinks that optimisation can be circumvented altogether (I was once one of those people) - perhaps this would just be newer traders. If a system is based on robust concepts and a sound description of market behaviour, it should prove profitable across a broad range of parameters. A more interesting question to ask somone such as yourself might be: once you've optimised your strategy (without curve fitting it), how would you seek to improve its profitability without further optimisation? For me (having already explored money management approaches) the first answer is to look at order execution, but I'd be interested to hear anyone else's thoughts. BlueHorseshoe

Your trading system uses exponential moving averages, a volatility indicator, market profile, and an oscillator to identify profit-taking opportunities. I scoff at you because I know that your strategy is simply the result of over-optimising the parameters of a load of indicators, and that though you may have curve fitted them perfectly to historical data, your results in live trading will not be good. I'm much smarter than you - my system is based on price alone. I simply short the ES at the prior day's high, and buy the market at the prior day's low. I don't care about defining trends with a 76 period EMA, or using Average True Range to trail a stop-loss. No optimisation there, thank you very much! Can you work out why I am a fool, and why I am deceiving myself? I should be asking myself questions such as the following: - Why yesterday's high? Why not yesterday's high plus a bit? Or close? - Why the ES? Why not Gold ETFs? Or Lean Hog futures? - Why not the low two days prior? Or five days? Or thirty? - Why not buy at the high, and sell at the low? Why not be flat the entire time? - Why a daily chart and not a five mintute chart? Or a monthly chart? All of these are examples of parameters that I have selected (pressumably because I believe them to be optimal in some way) - If I think that I have escaped the possibility of curve-fitting then I am just deluding myself. Whenever a trader designs a system/strategy etc, they make decisions which amount to a form of optimisation. The dangers of curve-fitting can be intelligently minimised; they cannot be eliminated entirely. BlueHorseshoe

I think that you're right - most statistical measures can only be applied to the market in a very general way, and we shouldn't be at all suprised when they fail to perform as expected unless we have very conservative expectations. I also probably overstated my case somewhat. If I'd run the same test on something like Orange Juice futures, or even the Euro/Usd currency pair, I wouldn't have got the same results. The ES has shown a pronounced tendency for mean-reversion that is far less reliable in other instruments. My only apology for this is that many traders on TL primarily trade the ES. I also think there's an important difference between each of the following three statements: a) Markets have a known distribution b) Markets don't have a known distribution c) Markets behave as though they have a known distribution most of the time. The third would be my choice of description, and I think it is one that can be useful. BlueHorseshoe

If you can find a function to accurately describe behaviour around the limit, you can wave the magic wand of the statistician and treat the discontinuity as a jump process within a gaussian distibution . . . Should you choose to do this, then you will need to be both very good at maths, and pretty damn stupid! BlueHorseshoe

Hi Steve, I didn't mean to give the impression that I had arrived at any clear conclusion. Nor did I mean to imply that Bollinger Bands were the sole component of your trading system - that's why I brought this discussion over to another thread so as not to confuse whatever concept you're trying to develop on the other thread. I literally intended this thread to be a footnote pointing out that Bollinger Bands can be a useful aid . . . Bollinger Bands could, possibly, be used as the centrepiece for a trading system in a higher timeframe (whether "swing trading" rejections from the bands, or looking for breakouts entries as a trend-follower might). In much lower timeframes though, I think that one would need other tricks up ones sleeve which, given that you never implied that the Bollinger Bands were anything other than visual "training wheels" on your charts, I'm assuming that you have. Cheers, BlueHorseshoe

That's certainly the way that I view it. I don't know what CTA types do nowadays, as they've supposedly become a little smarter (although most of those quants at the trend-following funds are probably set to work on risk management/money mananagement/diversification/order execution type problems), but thirty years ago a Bollinger Band breakout strategy would have been the height of sophistication. Nor would trend following CTAs have bothered waiting for continuation after a pull back into the bands as you suggest - they would just have bought on the close outside the bands, then weathered the adverse excursion. Breakout systems with Bollinger Bands are described in Curtis Faith's 'Way of the Turtle', and also the Emilio Tomasini book 'Trading Systems'. An example of how the two approaches interact (but with Donchian Channel breakouts rather than Bollinger Bands) would be the 'Turtle Soup' strategy described in 'Street Smarts'. Most trend following entries result in small losses, so for someone taking the other side of the CTA's entry and only looking for a small profit, there is high probability trade. I'll try and run a similar test of trading Bollinger Band breakouts if I get time. BlueHorseshoe

Hi Dude, Thanks for replying. Yes it is. Sorry I can't be more profound I think that markets were less mean-reverting in the past. They tended to produce clean trends with less noise. The fact that markets have become more noisy is one of the reasons that trend following has become more difficult. The more information and more market participants, the less the likelihood of agreement between them. Participants in different time frames considering different mean values would tend to compound this - those in one timeframe may be driving the market one way, while those in another may be driving it in the opposite direction. As MightMouse points out, it doesn't "work" all the time. But you don't need to be correct all the time to make money. And you don't have to be toast if you can take a loss with a stop (of course, if you're LTCM and you can't take a stop or, worse still, start doubling down, then you may well end up toast). Another thing to consider is this: higher timeframes tend to exhibit less noise. So while the markets may be noisy and mean reverting in the short term, in the long term sustained trends can and do persist. As a trader you can, therefore, enhance your edge by trading biased mean reversion systems - fading overextended short term moves back in the direction of the longer term trend. There are endless specific strategies and approaches built around this concept - anyone who talks about "buying pullbacks in trends" is doing just this. BlueHorseshoe

Really? I assume everyone on here does something similar to this. I can't really imagine what it would be like to try and trade without undertaking research like this first, but maybe that's just me. If it helps to illustrate what you're trying to explain in your other thread then that's good - there's not point dismissing Bollinger Bands out of hand. Of course, far more interesting than some curve-fitted return is the fact that no tested parameter produced a negative return. Rather than telling us something trivial about Bollinger Bands, this edges towards telling us something much more fundamental about the general behaviour of this market over the test period. Whether Bollinger Bands are the best tool for exploiting such behaviour is open to debate. As for using this intraday . . . If you exit at the close of the next bar as this test did, then your maximum dollar profit would be limited to the movement within that single bar. If you take a five minute chart then the average range of a bar is somewhere around 5 ticks. This means that your profit per trade is limited to $62.50. You either have to use limit orders and risk not getting filled (happens far more often than most would imagine, and only affects would-be winning trades - losers are always filled), or use market orders and pay the spread. Assume you have a 100% win rate. If you have pay the spread then you can deduct $12.50 in, $12.50 out, a bit more for slippage, and then your commissions, exchange fees . . . Let's call it $30. Now adjust the win rate to something more realistic, and suddenly there's nothing left. To make this work in lower timeframes a trader would either need a much more accurate entry and exit method than the simple one I tested, or superior execution capabilities. BlueHorseshoe

I don't know about battery charges, but "whack a mole" was certainly a very rude thing to say . . . What you say about algorithms is perfectly true. The algorithmic trader operates using a clearly defined algorithm. But surely it’s not true that you or I would necessarily need to know the definition of algorithms to profit from the market behaviour they produce? Every second HFTs zip in and out of the market and do something – they make trading decisions that almost certainly have nothing to do with market direction (pure arb, stat arb, basket arb, volatility arb, latency arb, etc). What is the net result of this kind of direction-divorced sub-second activity on direction within, say, a five minute chart? Chaos. The result is random noise. The five minute chart becomes very similar to a tossed coin . . . ‘how many heads in a row?’ becomes ‘how many down-closes in a row?’* I know nothing about the “clear definition” of these algorithms, but I know their net effect on market behaviour, and I can begin to imagine ways to trade this behaviour. In other words, I for one couldn’t care less whether Steve46 knows the precise definition of the algorithm(s) (or whatever) that produce a market pattern, so long as he can provide sufficient detail to identify and trade it. BlueHorseshoe * In the last ten years there have been 82 instances of 4 consecutive down closing days in the ES. Of those, 51 were then followed by up-closing days – that’s 62%. Glance at the last four weeks of trading on a 5 minute chart and 66% of 4 consecutive down closing bars have resolved themselves with an up closing bar.

Bollinger Bands are currently being discussed on another thread. This post is not a comment on that thread, but a quick look at "fading the bands" for anyone who might be interested. I am not suggesting that this or similar approaches are either viable or otherwise. The attached chart shows the results of fading any close outside of the Bollinger Bands in the ES over the last 10 years, using a single contract. Entries are on the close, and exits are on the subsequent close after a position has been held for one day (no other exit type or stoploss was used). No slippage or commission has been deducted. These results were obtained by optimising the lookback length for the indicator. A graph is also attached, showing how these results would have varied for different lookback lengths. BlueHorseshoe Bollinger Band Test.pdf Bollinger Band Equity.pdf

I would disagree with that statement. I think it would be better say that markets can remain in a state of reversion to a mean that is different to the one we were betting on, for longer than we can remain solvent. I'll repeat what I said before - a market is always reverting to some mean or another (in whatever timeframe). The only time that there is an exception to this rule is when a market ticks to a new all-time high. You can prove this to yourself with a price chart. Select the a random closing price on any chart in any timeframe. Now add a moving average. If you adjust the lookback period, you will always be able to find a moving average towards which your selected closing price was moving. Because the mean moves (Predictor's second point), but not because price distributions have fat tails (Predictor's first point). If the average in the middle is "wrong", then it matters not whether the number of standard deviations is "right". Indeed, the point of my post was that there isn't necessarily anything wrong with using Bollinger Bands in the way Steve46 describes. There are certainly difficulties - Predictor posed two of these, and I suggested that I felt the one was valid and the other not - but these difficulties don't necessarily mean that Steve46's post should be dismissed out of hand. BlueHorseshoe

Hi Predictor, You have suggested two reasons why Bollinger Bands might be ineffective: If only 88% of prices fall within a 2 standard deviation band, then why not just widen the bands? A 2.6 standard deviation band might, for instance, be sufficient to encompass 95% of prices. All very improper for the statisticians (try saying that word after a few drinks!) - but I certainly wouldn't be too concerned about the gaussian attributes of my bands if they made me lots of money . . . I don't think fat tails are really the problem here. Non-stationarity is much more of an issue, I think. If you could always know the relevant mean to apply (ie the optimum lookback for your Bollinger Bands), then I don't think the non-normal distribution would be too much of an issue. Although I personally wouldn't want to try and use Bollinger Bands for entry or exit signals (and Steve states anyhow that these are simply there as a reference), I can't see that there's too much wrong with the underlying concept that Steve is presenting here. Markets ALWAYS revert to their mean - the difficulty lies in knowing to which mean the market is reverting at any given time. BlueHorseshoe

I'm pretty sure that the CME website gives limit moves in the contract specs. You could write a very simple indicator that counted the number of days when a move off the open was equal to the limit for that particular contract. There may be other instances where trading was halted - one of the exchanges supposedly suffered downtime at one point because a rat had knawed through a cable (that could be pure anecdote though). BlueHorseshoe

What - you live in a tent!?!?! Don't worry tiger (grrrrr), the markets can be tough! I'm sure you'll make it all back . . . one good trade is all it takes How long have you been "in the tent" for? BlueHorseshoe

Hi Colonel, I agree with you about percentage win-rates - it's not a very important evaluation metric. In assessing whether or not to adopt a particular trading strategy it can be useful from a psychological perspective, as many are not comfortable with the concept of "losing" (I include myself - give me a great trend following system with a 30% win-rate and I'd soon get spooked and screw it up!). Beyond that, win rate is not really very informative. "How Much Are You Making?" is a better question, but I don't think that stating the answer in dollar terms is that useful. Wouldn't it be more useful to state this as a percentage return on the account, and assume that this return can then be compounded through effective money management? I for one am certainly not interested in whether I make enough money to live on this year or next; I'm interested in how much money I will have twenty or thirty years down the line . . . BlueHorseshoe

To see if anyone there was stupid enough to believe that they'd stumbled upon such a thing as an actual newpaper from the future . . . BlueHorseshoe

Couldn't we leave the newspaper in the lobby at Goldman Sachs? :rofl: BlueHorseshoe

Hi ARTjoMS, There's nothing wrong with being curious about new approaches - my post wasn't intended to discourage you in any way Unless you have huge amounts of time to devote to developing ideas though, it pays to go about it in an efficient way. Personally, I find that is usually best to start with a concept or a goal, and then try and work out which of the many derivations of price and other data would be the most useful in implementing it. As for VWAP . . . Your understanding of how this is calculated is spot on. Sometimes 'bar open + bar close + bar high + bar low' divided by four is referred to as 'Average Price', and VWAP stands for "Volume-Weighted Average Price". VWAP is calculated by multiplying the Average Price by the Volume each bar, adding this to the total from the previous bar so that it becomes cummulative, and then dividing this by a cummulative total of all the volume from that session. The difference between VWAP and an MA is that the former is weighted by volume. This is a bit like having an MA that 'remembers' prices at which higher volumes were traded better than those where lower volumes were traded. Depending on how you view market behaviour, high volumes traded in a particular price area can be regarded as indicating that a large number of market particpants (both buyers and sellers) considered this price to be "fair". An MA is calculated purely from price. So, if you consider a session in which price declines significantly on decreasing volume, then the VWAP would increasingly 'lag' price, as the lower prices of the falling market would assume less importance in the calcution due to the low volumes traded there. An MA, on the other hand, would simply follow the price down. I've attached a chart which clearly shows this. I hope that helps. BlueHorseshoe

I wonder whether I am a "head-banger"? The problem is that "successful" isn't really a measured outcome. If you mean being able to turn a very modest but consistenet profit trading a limited number of markets in a limited style, then I am not a head-banger. If you mean having drawdowns and a risk profile that I am not really comfortable with, and then constantly searching for ways to improve these, then I most certainly am a head-banger. And it's been two-and-a-half years now . . . Please can someone tell me whether I should continue or quit? Rather than just saying "successful", mightn't it be more helpful to have in mind a specific goal? Also, could a learning goal be more helpful than a profit goal? What if you reached the end of six months and hadn't made any money, but towards the end you felt you had gained several specific insights that would enable you to make great progress in your trading if you were to continue? At the end of six months I would be more interested in knowing what definite progress you have made than what your P&L shows. I did a bit of a double-take myself when I first read 40Draws posts. More than just etiquette, there's a manifest lack of ego at play - this is always very refreshing on TL! As far as trading psychology goes, it will probably be of great service to 40Draws. BlueHorseshoe

You'll find something like that here: http://www.traderslaboratory.com/forums/day-trading-scalping/13811-daytraders-do-you-know-your-enemy.html I don't pretend to be any kind of an expert on these things - I'm just slowly trying to piece together a picture of how they operate within this thread. BlueHorseshoe

Hi DAVT, As an avid user of TradeStation, and having had a quick scan through this thread, I wanted to suggest that there is something that you have not yet figured out about how the platform conducts backtests/logs live automated trades. TradeStation is an absolutely amazing piece of software, but there are still many pitfalls that lurk within its strategy implementation if one doesn't know how to circumnavigate them. I say all this because I suspect, though I don't know, that I have been precisely where you are now. I hope that's helpful, and I look forward to seeing you around the forum! Regards, BlueHorseshoe

I have created VWAPs that do what you describe, and VWAPs with standard deviation bands, donchian channel deltas, and loads of other mumbo-jumbo variations . . . It all boils down to this though, in my opinion - like an MA or anything else you put on your chart, it will tell you something specific about the data - but unless you have a clear way to exploit what it is that it tells you, then it won't be much help. It's usually better to have in mind what is you want to achieve, and then build an appropriate tool to achieve it. What is it that you hope a VWAP with a fixed window of time reference will tell you? How would you use it? BlueHorseshoe

Hi Suby, Glad my reply was helpful - if it only gets you thinking then that's a great start because like pretty much anything in trading, backtesting can be both a massive help and a huge hindrance. Nowadays I do everything in TradeStation, and this is also where my data comes from. I think TradeStation is absolutely fantastic, but I have very limited experience with other platforms, so that's by no means an objective recommendation. I think that it might be worth posting this as a seperate thread question and seeing what response you get. I have never used TradingBlox, but it certainly used to be very highly regarded, as it offered portfolio analysis capabilities before most other retail platforms (TradingRecipes was another MSDOS pioneer in this area). I know nothing about the costs associated with TradingBlox, or the extent of your requirements, but you may possibly get all that you actually need for free from elsewhere, especially if you have no need of portfolio analysis. As a recommendation of a platform that I do have substantial backtesting experience with, is completely streamed (no download or software install), offers great end of day charting for free, and allows you to sign up for a free trial of intraday data, try http://www.prorealtime.com. It doesn't seem well known in the US, but I think it's pretty damn good as far as free stuff goes. Overall though, I'd recommend you ask around - I just stumbled upon something I liked and stuck with it, so can't really offer an objective viewpoint. Pretty much the classic guide for backtesting and optimisation, I think, is Thomas Stridsman's 'Trading Strategies that Work' - this gives a pretty balanced view of exactly what you can and can't expect to achieve with backtests. Regards, BlueHorseshoe

Hi Obsidian, If you feel like sharing . . . How long ago was "after"? Have you ever felt any inclination to return to "before"? And is that an Ichimoku Cloud on the right hand chart? BlueHorseshoe