BlueHorseshoe

Take a look at the first image attached below. This shows the results of a strategy traded on a 1 min chart of the ES using a single contract. I have chosen this timeframe because clearly it is not high frequency (and is therefore of relevance to 'retail' daytraders), but quickly generates a large number of trades over which to gauge performance. The test spans five consecutive days. No commissions were deducted, but with the system generating over 100 roundtrips per day, fees would have relatively little impact on the average profit per trade shown below. Net Profit: $5,450 Profit Factor: 3.32 Percentage Winners: 71.03% Maximum Drawdown: $275 Average Trade Profit: $10.19 The important thing that you need to know is how I have instructed the back-testing software to simulate fills. Limit orders have been used for both entries and exits, and the software has filled all orders at the limit price as soon as that price is touched, which is to say, as soon as a single trade occurs at that price. This is not a realistic representation of what would happen in normal trading. Not even remotely so. So, kids, don't try this at home! Whether a limit order is filled depends on how close to the front of the queue (at that price level) it is. If every limit order in the queue at a particular price level is matched with a market order, and at least one order at the subsequent price level is also matched, then the market will move by one tick. In the back-test, one simple way to get an idea of which of the limit orders would actually have been filled is to specify that the software simulate a fill only when the market trades through the limit price. The second image shows the equity curve once this specification is applied. As you no doubt already know, a process of adverse selection is at work here; not all trades that would become winners are executed (and somewhat ironically, the more accurate the strategy is able to pick the market’s turning point, the fewer winning trades will be filled), whereas all losing trades will be filled, as a loser must, by definition, trade through the limit price. This second approach isn’t entirely helpful either, providing a worst-case scenario rather than the best-case scenario of the first approach. In real trading the result would lie somewhere in between. The important point to take away, however, is that towards which of the two approaches the result in real trading would gravitate is dependent on where the limit order is in the queue. Sophisticated market participants know with a reasonable degree of accuracy where their order sits in the queue. When their position is not favourable they can respond accordingly, either by cancelling unfilled orders, by ‘scratching’ trades with market orders, or by entering with market orders instead of limits where their position in the queue is unfavourable. Do you know where in the queue your order is? More on this to follow . . . BlueHorseshoe

This isn't strictly true. BlueHorseshoe

Hi SIUYA, I have no objections whatsoever to this being discussed here - it all seems relevant to me. It's great that the thread is attracting contributions from such a varied range of people, and that people are willing to share their knowledge without trying to belittle anyone else with it. The only objection that I do have is all these links to pdfs - my printer has run out of ink and my eyes are suffering from screen-burn! Thanks, BlueHorseshoe

Hi Joseph, I totally agree with you, contrary to what everyone else on here seems to think (probably because they're all losers!). That's why I have decided to share with you the real specifics of how I trade. Over the past ten years I have averaged an annual return of 87%, which for me has equated to an actual pre-tax profit of around $3.4 million. I trade the ES from a fifteen minute chart. BUY signal for a long entry (for shorts rules are reversed): 1. Gold is trending above its 3sma AND 2. The ES has traded below yesterday's daily pivot AND 3. The 18 period slow stochastic has crossed over its signal line AND 4. T-notes have gapped down on the day AND 5. A 35 period exponential average of the $VIX is higher than at this time yesterday AND 6. Volume in the NQ is greater than 2000 per five minute bar AND 7. The GRAB indicator is above 2 RPM. I use a two point stop and a four point target, giving an excellent risk:reward ratio when you consider that I have averaged a 79% win rate. I hope that was the answer that you were searching for, and good luck trading! BlueHorseshoe

Thanks for the confirmation Paul. I've been focussing more on learning about how orders are handled by the CME, as this is where my own interests lie. If you're able to fill out the picture with a little of how other exchanges deal with icebergs then that would be greatly appreciated. Cheers! BlueHorseshoe

Now then, Mr Predictor . . . You're absolutely correct and, true to you alias, you're a few steps ahead of where I'm trying to get to here. If you can give me a few days to catch up with you (in detail and with examples) for anyone now or in the future who reads this thread and doesn't already know what you're talking about, then that would be greatly appreciated. You're tagged as a vendor, pressumably of educational material, so I'm sure you'll understand my desire to progress through this in a measured manner - the purpose of this thread was to share information as I learn it myself . . . Regards, BlueHorseshoe ps - thanks for the posts on cancellation ratios - sounds incredibly stupid but never having daytraded futures I was completely ignorant of them - reading up now!

Staying with the ES . . . When an iceberg order reloads on Globex, it goes to the back of the queue. The value of this information is that, though the size of the iceberg is unknown (unless you deploy an algorithm capable of re-generating it), an iceberg has no special impact on judging one's own position in the order queue. BlueHorseshoe

Probably the best post I've read on here in a while. BlueHorseshoe

You'd probably enjoy either of the following two excellent books by John Gray: 'Heresies: Against Progress and Other Illusions'. 'Straw Dogs - Thoughts on Humans and Other Animals' BlueHorseshoe

What I hoped would emerge from the thread is not so much a fear of specific effects of HFTs (the thread isn't HFT specific, by the way!), as much as a healthy respect for the capabilities of other market participants operating in this timeframe. Maybe this is just a symptom of a lack of sense of self-worth in my own capabilities as a daytrader? Many buy-and-hold investors are very well aware that their research capabilities are dwarfed to many magnitudes by those of, say, Berkshire Hathaway. Reading the forum I suspect that few daytraders ever pause to consider that they might be seriously 'out-gunned' by other intraday participants. There will always be someone much, much better (capitalised/networked/tech'd-to-the-eyeballs) - this doesn't necessarily leave you at the bottom of the food chain, but surely it makes sense to have some understanding of where you are in the food chain? BlueHorseshoe

Forget about "expert advisors". If it were that simple, we'd all just go out and buy an expert advisor and we'd all be rich . . . To trade successfully you will need to find a way to understand the general behaviour of the market you want to trade, and then find a specific way to exploit that behaviour which you can apply with consistency. The very first question you need to be asking is "does the market I want to trade display mean-reverting behaviour?" This needs to be the case in a very general way (the more general the better) before any specific mean-reversion strategy will be viable. Another thing that may help to focus your research is to understand that the terms are essentially used in two different (though closely related) ways: 1) The way that I think SIUYA is using the term applies to the quantitative statistical arbitrage strategies which involve trading a cointegrated pair long and short on the assumption that the difference will decay over time. This was most commonly practiced in stocks - a great book to read would be Ernie P Chan's - you can find his very informative blog here: Quantitative Trading 2) The other way in which the term is used is to refer to a single instrument reverting to its own mean. Pretty much all price movement is the reversion of an instrument towards some mean - the problem is always knowing to which mean it is reverting at any given time. By definition, large price moves involve reversion to longer term means, and small price moves to shorter term means. Strategies to exploit this often involve identifying a 'target' mean and then fading price movement away from it at 'extreme' levels. I think that the best insight that I can offer here is that reversion to a short term mean is most predictable following reversion to a longer term mean. Hope that's all of some help to you! BlueHorseshoe

Please can you explain this? BlueHorseshoe

Thanks. So in other words, HFT can take co credit for narrowing the spread of the ES because it has always been as narrow as it can be . . . 30 contracts is nothing to an institution nowadays - was the instrument originally created more with smaller traders in mind? I know plenty about the history of commodity futures, but almost nothing about the origins of the e-minis. BlueHorseshoe

Although thinking about trading in terms of probabilities can be extremely helpful, I also feel that it can at times be misleading. To make your coin flip analogy more accurate you need to do two things: 1) Play with a £1 coin. Each time you play, regardless of the outcome, you must also put 10p into a pot. This is representative of commissions. How long does it take you to loose all your money? 2) Each time you play, you can then choose to go 'double or quits', except that to do so you must automatically put 50p in the pot, regardless of outcome. This is representative of paying the spread when you trade with a market order or a stop. Hope that's helpful, and apologies if the UK currency confused the point - you can't toss a $1 bill! BlueHorseshoe

I don't really know anything about stocks, but HFTs are clearly a presence in the ES (for whatever purpose) - does anyone ever remember this contract consistently trading with anything more than a 1 tick spread during normal volatility? BlueHorseshoe

A wonder drug that dramaticallly improves intelligence, giving the user the ability to perceive complex and obscure relationships. The film's protagonist initially uses the drug to 'beat' the stock market, although I think by the end of the film he's running for president or something silly . . . Not especially recommended unless you have a few hours to kill. BlueHorseshoe

I take it you've seen the film 'Limitless'? BlueHorseshoe

Thanks for another interesting thread. In addition to OneSmith's comments regarding std/volatility, I would add that std is not a valid indication of probable price distribution around an entry that has a positive expectancy (note: this is not the same as the strategy's expectancy.). One would expect a skewed bell-curve. I tried to start a discussion on this topic when r:r ratios were brought up in the daytrading the e-mini thread, but it was deemed off-topic, so good to see people willing to discuss it here. BlueHorseshoe

None taken. The sensationalist title is just a way to get people reading . . . I think one vital aspect of the comparison with traditional human market makers is the capacity for error. A human can make errors in the sense that they can make an invalid assessment of various inputs. A simple algorithm cannot; it will always process the information it is presented with according to the parameters of its functions. Whether or not the parameters are appropriate is, of course, dependent on the human who creates the algorithm. So far so simple. But the algorithms that are supposedly so rampant in modern markets (in all timeframes) are not so simple. They have the capacity to adjust their own parameters, and in many cases decide their own inputs and functions. As they crawl the terrain of the error space they may find themselves trapped in ravines from which they are not able to escape to areas of lower error, unable to make the leap over surrounding 'high ground'. They can be empowered to do this by giving them sufficient 'momentum', but then the algorithm that controls this is subject to the same caveats of local minima in its own error space . . . In other words, an algorithm can be 'correctly' programmed with appropriate parameters and still get it wrong, exactly like a human market maker who makes poor decisions based on the information he has available. BlueHorseshoe

Well, time or money . . . I have said this many times elsewhere on TL, but I think one of the most important things someone can do to accelerate this process in terms of time, and decelerate it in terms of financial loss, is to learn to test ideas properly across large data sets. In other words - learn to program. This does not neccessarily imply an automated trading approach, it doesn't mean trying to devise 'holy grail' indicators, and it certainly doesn't suggest optimising the hell out of a set of parameters until they're curve fit to historical data. I'm getting a bit off-topic, but there we go! BlueHorseshoe

Not even slightly off topic, and an interesting article - thanks! The piece mentions the NYSE's 'Retail Liquidity Program', introduced on the day of Knight's misfortune. For anyone interested, then Nanex uncovered a similar algorithm operating on the Nasdaq which transpired to be that exchange's equivalent liquidity program. BlueHorseshoe

I'll happily take the other side of that bet! However, I have been spending a lot of time recently exploring mechanical approaches to analysing order flow. A number of the inputs are known, as are the outcomes at a time t[-1], so assuming that some kind of non-random relationship exists then it should be possible to model it. As with all such problems, it's a lot easier said than done. BlueHorseshoe

I never more than glance at the financial press and just knew they'd been 'rescued', so assumed they'd been bailed out with a cash injection. What the WP describes is clearly not such a favourable outcome for them, not to mention their investors. Thanks for the correction. I have also wondered about "red buttons". Literally pulling the plug isn't a solution unless you're flat the market or have zero risk, and then I suppose there are situations where unwinding a complicated series of interconnected positions without moving the market and worsening the situation is impossible. There's also the possibility that the "red button" function was entrusted to an algorithm, of course! BlueHorseshoe

Yep - the chart on the second post came from an article about Nanex at TheAtlantic.com. The Nanex site itself is great if you get kicks from looking at endless examples of this sort of stuff. By the way, I'm not bothering listing sources as I assume it's pretty much obvious that none of this is my own research (would that I were that smart!!!). That's not technically correct - breakeven trading for rebates, latency arbitrage etc - but I do take your point. SIUYA made a similar remark, and I think it's perfectly valid. I think that it is good to have a general knwledge about all aspects of the markets you operate in, but I would also agree that if you're making money without worrying about this stuff then there's no need to start worrying about it. Despite the sensationalist title, this thread is mostly for curiosity. BlueHorseshoe

Likewise - the 'Nanex Daily Crop Circles', a handful of other blogs and sites, and three or four books. The charts on this second post came from an article about Nanex, incidentally. The idea behind the thread was to post things I felt might be of interest as I came across them myself, and hopefully help others who are trying to think about how other market participants may impact upon their own daytrading. There's definitely a dearth of information about HFT in futures, and the only info I have found has related to the role it plays in arbitrage against baskets/ETFs, exactly as you suggest. Participants with longer term outlooks sitting at limit as you describe is certainly something that would fit with my expectations. One thing that I find interesting is that although such firms can complete a round trip in the time it would take you or I to move our hand to the mouse, a trader can still potentially recognise their activity in the order book and make use of this information. Although, I hasten to add, I couldn't read the tape to save my life . . . ! BlueHorseshoe