BlueHorseshoe

Hi MMS, That sounds good to me, thanks. When I say I am not interested in strategies, I mean options-specific approaches such as butterflies and strangles. I already have a trading approach that I am comfortable with, so really I'm more interested in whether using options to implement this could improve profitability. So, on to some questions then . . . Apologies if these are very basic questions, but I don't want to assume that I know anything when I don't . . . My trading approach is to buy/sell pullbacks in long term up/down trends in the ES. The biggest difficulty with this is that if my entry timing is not very accurate, many positions suffer adverse excursion before they can be closed out for a profit. As such, introducing a stop-loss can result in many positions being stopped out before they can return a profit. The alternative, trading without a stop-loss, is never psychologically comfortable, makes the quantification of risk difficult for money management purposes, and results in occassional runaway losses. I detailed a recent entry and exit in the 'Volume' thread, and have attached a chart image below. Following the entry, the market moved against me significantly, before it eventually reverted and I was able to exit for a profit. Am I correct in thinking that I could have purchased a PUT option on the index at the time of my entry to benefit from a declining price? To most closely mimic my futures position, would I have purchased an 'in the money', 'out of the money', or 'at the money' PUT option? Am I correct in thinking that after my purchase, my maximum exposure on the position is limited to the cost of purchasing the option (ie the premium plus commissions)? Am I correct in thinking that I would be able, at any time before the option's expiration, to close out my position if the market traded to a lower price than the strike price, and profit from the difference, net of premium and commission? How can I know, or estimate, what the cost in premium would have been to do this? If my questions are unclear, then please let me know. Thanks, BlueHorseshoe

One approach is just to drown them out with good quality free information. I think that this is what TL does well. If the vendors want to be heard above this then they have to provide a worthwhile contribution. On the one hand, it is not your job or mine to prevent "newbies" from being "fleeced" by "shills". That's their lookout. On the other hand, it is our responsibility to ensure that TL continues to be a community where quality content is shared. I think that it is important to remember the distinction between a vendor who posts things we disagree with, and a vendor who makes posts that are completely devoid of content. BlueHorseshoe

So what are you doing - trading the breakout, or fading the breakout? I think you should edit your post, replacing 'can' with 'could have'. This will then better reflect the reality of the after-the-event approach you seem to be describing. Maybe we could understand this better if you used this thread to call a few of your 'box trades' live? Thanks, BlueHorseshoe

Hello, I’m interested in learning more about options, with a view to incorporating them into my current trading approach. I can no doubt wade through countless books and find out all the information I need to know to decide if and how to do this, but I’m very busy (or, if you prefer, lazy). I’m looking for someone who is knowledgeable about options and is prepared to discuss them with me. I’m not interested in learning about options strategies; instead, this would simply be a case of providing me with the answers to a set of specific questions, mostly relating to pricing. As I know relatively little about options, my questions will be very naïve and basic, so the discussion may be beneficial to others on here starting out in this area. Look forward to hopefully hearing back from someone . . . Cheers, BlueHorseshoe

Hello, I promised that I would report back with how this trade worked out. My exit came with yesterday's close, for a profit of $937.50 per contract (I lost a few ticks on both entry and exit). Not interested in labouring a single success which could of course be pure luck . . . but did want to point out that when the market peaked on 19th it did so on low volume - this supports the suggestion that I was making that index volume is predominantly buy-side, and that indices peak when buyers lose interest, rather than due to active short-selling. BlueHorseshoe

The person who told me this stated that they (the SB firm) were 'only allowed to deal with small funds'. I asked what counted as 'small', and was told 'up to ten million'. Of course, this was someone in institutional sales who told me this, so it could of course be complete nonsense designed to assert the credibility of the firm. BlueHorseshoe

Doing something different is always fun, if you love the markets. Incidentally, have you ever outlined your own trading approach anywhere on here, Gosu? Thanks, BlueHorseshoe

You seem strangely fascinated, for someone who thinks that TA is "a crock"

A majority of the highest performing funds use a rule-based approach. To say that non rule-based trading is possible is entirely reasonable; to claim that rule-based trading doesn't work borders on the ridiculous. Technical analysis isn't dependent on charts. Charts are just a visual way of displaying price data (the same data on the terminals you mention). Technical analysis is about how price data is structured and analysed, and how significant information can be sifted from insignificant information. BlueHorseshoe

Has the identity of the 75K seller been revealed? BlueHorseshoe

Long positions were exited when a short entry signal was given, and visa-versa. In other words, the 'system' was always in the market, either long or short. From memory, the maximum drawdown trading one ES contract was about $6,000. But it doesn't matter - you could just hold positions until the close and you'd witness the same bias. Or exit them at an MA as Gosu suggests above. Or when an RSI crosses its midline. Or following a profitable open. My aim here wasn't to create an entry and exit strategy, but to demonstrate something fundamental about how this particular market behaves. And sorry the pictures are so ludicrously small - I've just tripled the size of the files but they still appear as silly little thumbnails within the post - very frustrating! BlueHorseshoe

A Data Mining Exercise At the risk of completely monopolising this thread, I have tried to put together a simple demonstration of the inherently mean-reverting nature of the ES. Looking at daily bars, here's what would have happened over the last ten years selling at the prior day's high and buying at the prior day's low (ie fading any break outside of the prior day's range): Here's the equity curve if we take the same approach, but only initiate new long positions when the 100SMA is sloping upwards, and short positions when it is sloping downwards: Finally, only entering short positions following an down day, and long positions following an up day: This tendency runs through all timeframes in the ES - here is the same effect on a 5min chart, using only the simplest of the three rule sets above: With only $13 profit per trade this would never make money in a 5min timeframe, but I'm not suggesting this as a viable strategy - I'm just trying to expose an underlying tendency in the way this market behaves. Hope that helps. BlueHorseshoe

I do get your point, WRBTrader. Although personally I can't quite understand why anyone would choose to put themselves in the position you describe. In answer to your question: Single = true. No family = true. Not primary wage earner = false. But I have a dayjob so I'm in no way dependent upon my trading profits. There's almost no point discussing it on here though - everybody has their own unique set of circumstances and priorities to work through. And everybody makes choices. If those choices are to put other people around them before themselves, then there are always consequences to doing so. And if those choices are always to benefit their own wellbeing, then there are consequences to that as well . . . BlueHorseshoe

Perhaps you should trade mechanically Gosu - pretty much any variation on what you suggest would have worked very well in the ES/SPY over the last decade. What would possibly suprise you would be when you came to examine bar volatility as you suggest above - the more volatile the move (away from the average price), the better the probabilities for mean reversion - completely counter to many trader's instincts, and the reason why 'volatility breakout' type strategies aren't really viable for trading these instruments. Cheers for your post - it got me thinking about a few things. Bluehorseshoe

Hi Tim, Thanks for your reply. I think for day-traders, especially of more trending markets such as currencies, then your solution is as good as any I've come across. It's certainly a more adaptive approach for short term trading. The only advantage of MAs is that they can be programmed and tested easily. Is there anything unique about how you would identify a swing high/low pattern? Thanks, BlueHorseshoe

For anyone interested in the lengths to which good fundamental analysts go, I recommend "Evil's Good - Book of Boasts and Other Investments" by the famed bear-raider Simon Cawkwell. Highly anecdotal but very entertaining. BlueHorseshoe

Hi SIUYA, I'm perfectly comfortable with your re-definition. I haven't read the Soros book - I'll go and look for it. 'Reflexivity' is a concept I know only from literary theory, but the idea of a 'tipping point' at which market fundamentals become distorted immediately reminds me of Taleb's theory of stochastic distributions interrupted by 'jump processes'. Thanks, BlueHorseshoe

Hi Josh, Maybe I'm overstating my case somewhat, and giving rather extreme examples. To say that all prices will be revisited is very extreme, but most price will be (and indeed are) revisited. Otherwise the market would exhibit a far greater degree of "trendiness" than it does. In the case of the S&Ps - well of course they'll see 100 again - one day they won't be there at all anymore, and nor will America as we know it (in my case, through lots of great HBO shows). If you wanted to make bets on where the S&Ps will be trading at a century from now, 100 doesn't seem an especially unrealistic estimate, in the same way that 6 ticks away from where it is now doesn't seem an unrealistic estimate of where it will be in ten minutes time; the magnitude of the price change is scaleable through time. " You talk about a "significantly" higher or lower value ... that's the key isn't it, and very subjective. " Yes, that is both key and very subjective. If it wasn't subjective then I would be very rich, and I'm not. But I only need to be right slightly more than I am wrong (after costs), and it's worth all worthwhile - I don't make it my livelihood, so if I'm breakeven in ten years then I'll have had far more fun and spent far less money than I would have on, say, a hobby such as golfing (no offence, golfers!). Your thoughts aren't incoherent, Josh, and mine aren't worth dwelling on any more than you feel benefits you. I think far more important than any of the specifics we've discussed is the need for a broad, general framework in which to structure market behaviour and inform trading practices. A trend follower would make precisely the opposite argument to the one I have made - there are plenty of trend followers who have made excellent returns for decades. BlueHorseshoe

Hi Roger, I maybe didn't explain the trading approach I was hypothesizing about very well . . . I didn't mean to say "if you were able to pick the high or the low of the current bar before it occurs", which is how I think you've maybe interpreted it? I meant that if you were to place a buy limit at the low of the previous bar (a price which is obviously known by the current bar), and a sell limit at the high of the previous bar. For example, if today's high was 200, and today's low was 180, then tomorrow you would sell short at 200 and buy at 180. I hope that my other post makes a bit more sense now? As for how all of the conceptualising above can be applied in real trading . . . I am also a massive fan of simplicity. I like to keep things very simple indeed. Bluehorsehoe

Hi David, I was intrigued by your statement: "investing is about buying good companies at good prices." Would you ever sell a bad company at a not-so-good price? Would you sooner buy a good company at a better price than just "good"? If a company seized to be good, and you were then holding it at a not-so-good price, would you then sell your holding? In spite of Josh's points, your realisation that active traders have to be very successful just to overcome costs puts you leagues ahead of most active traders. BlueHorseshoe

Unless they are trading iliquid instruments then I am farily dubious about this; there are countless short term market participants who trade with high frequency on a scale that dwarfs anything that could be achieved with a million dollar account. There are very few limits on scale-ability in liquid markets nowadays - you could flip a few thousand ES contracts back and forth all day with no problems (someone please correct me if I am wrong about this). Of course, if the people you're referring to are, say, market makers in single stocks, then I understand what you're saying. BlueHorseshoe.

Hi Josh, Thanks for your helpful comments. I have to call it a night now, but will respond on Wednesday. Cheers, BlueHorseshoe.

Hi Josh, Thanks for your reply. I'm struggling to work out a satisfactory response. Traders who blame their losses on the market being 'wrong' is something slightly different, I think. I think this is an important distinction: whether the specifics of my model or I are wrong says nothing about the validity of the concept from which they are derived. If a position proves to be a losing one, then this will be because the way in which the market has been modelled is wrong, or inapplicable. This would be the trader's fault, not the market's. The underlying concept from which the model is derived ( a concept which states "sooner or later this market will cease rising and begin to fall, or visa-versa") is still valid. The more that a market exhibits sustained directional movement, the more wrong it becomes. Prior to the 2008 collapse, the market was very wrong indeed, and the crash corrected this (in fact, over-corrected it). Of course, the market could conceivably have continued higher for several more years and then crashed. But it couldn't have continued higher indefinitely - no market ever seems to do that - it's one of those eternal truths that is blatantly obvious but incredibly difficult to harness! That's not very clear. Let's try it another way . . . Price has been closing higher for the past few days. Now you must place a bet about whether it will continue to do this every day for the next two years, or whether it won't. I am sure you would choose to bet on the second option. If you place that bet today, and the market continues to close higher for the next three days, then this may equate to a losing position. Now, did you place the wrong bet? Of course not. You placed the right bet, but the timing was wrong. This says nothing about the validity of the underlying concept (ie. "markets do not rise indefinitely without pause for two years"). Another concept is that markets exhibit sustained trending moves. If you get stopped out a dozen times trying to catch such a trend, does this invalidate the underlying concept? I believe that you trade the ES on an intraday basis. Consider this: if you were to buy at the low of the prior 5min bar, and sell short at the high of the prior 5min bar, so that you were always in the market, either long or short, and you could always get a fill at your limit price or better and paid no commissions . . . then you'd make a tremendous amount of money very quickly. In reality you wouldn't be able to overcome commissions and wouldn't always be filled, but as an exercise in data mining this still provides us with some very useful information: The ES is mean reverting. On average, whenever it tries to move away from it's present value, it will revert back to it. The present value of the market is on average the best estimation of its future value. Statistically speaking, any signigicantly higher or lower value is an abberration, and is unlikely to endure. Statistically, it is mis-priced, or 'wrong'. It is acceptable to me to say that 'the market should never have done x'. The market should never really do anything. Encouragingly, over the long run, it never really does do anything. It just goes up and down lots, and seldom seems to get anywhere. I wasn't very clear in my original post when talking about buyers and sellers. There is no net difference between actual buyers and sellers, as they have to be matched. I was meaning interested potential buyers and sellers. There is usually a net difference between these. I don't mean to imply that simple numbers of buyers and sellers are the sole cause of price movement either; obviously it is a question of how desperate each party is to trade. Hope that I didn't labour the point too much, and look forward to hearing your thoughts. BlueHorseshoe

Hi Roger, Sadly I am not able to predict the market on a tick by tick basis, and didn't mean to imply that I could. I was stating the identification of under and over priced markets more as a generic trading goal than listing it as an accomplishment. Here is the logic process that I use to try and identify a mispriced market - I've tried to make this as conceptualised and non-specific as possible: 1. Short term price movement is random. 2. Sustained directional movement is an anomaly and cannot be expected to continue. 3. Long term price movement is not random, and market trends can and do persist. 4. Long term trends hold within them a (changing) average price (it changes in the direction of the trend). 5. When a sustained short term price movement occurs counter to the longer term trend, then the market has become mis-priced, and can be expected to revert in the direction of the longer term trend. Determining what constitutes a long term trend, and how sustained short term price movement can be identified, are the challenges that need to be overcome to try and implement this logic. All of the above is, of course, just one way of viewing market behaviour, and says nothing about the validity of other ways, nor does anything to provide its own justification. I hope that's useful in explaining what I meant a bit more clearly. BlueHorseshoe

Hi Banksy, Glad you found the posts useful. I've never traded stocks or spread-bet them, but I am aware that the pricing structure is a little more complicated (I think they adjust price quotes for dividends and things, don't they?). I believe the fee structure (spread) is based on the liquidity of the underlying market which, for exotic instruments and thinly traded stocks may be low. This reflects the difficulties they may encounter in mimicing your position in the underlying. Though I have seen absolutely no firm evidence for this, I have been told that a number of smaller UK hedge funds use spread-betting. As I can't imagine that this is their primary method of trading (it would hardly be credible for a hedge fund), then I think that they maybe use spreadbetting as a means to hedge positions, as you suggest. BlueHorseshoe