BlueHorseshoe

"Traders performed better on days in which they registered higher morning levels of the hormone testosterone, which is mostly produced in the testes " Reminds me of Christopher Lee in 'The Man with the Golden Gun', and his little routine with Maud Adams . . . On a side note, it's pretty sad that there are no longer any genuine open-outcry floors in London. The LME is the only thing remaining, and it's pretty genteel and sedate for the most part, with lots of twenty year olds in suits worth as much as my car. I would be more interested in a study of how caffeine intake affects trader performance, of course. BlueHorseshoe

If the market is always right, why does it bother moving? Because a minority are wrong. If 50 of 100 traders are bullish, and 50 are bearish, then it only takes one extra trader to become bullish to move the market up. Remember: what moves a market is not buyers or sellers, but the net difference between the two. In this case one trade. 51/49. When the market moves higher in this instance it is not 'because there are more buyers than sellers' (though this is mathematically correct), it is because there is one buyer more than there are sellers. One buyer. Who may be wrong . . . Concern yourself with this one buyer. As traders we need to be concerned with where price is going, not where it is. If the market is going up, and it's because of a small number of buyers who have valued the market incorrectly, then you need to be short, not long. You can always forget about the 50/50 traders - you need to ascertain whether those who constitute the net difference between the two are right or wrong. Sorry if that post reads as rather belligerent - I haven't reviewed it after typing. BlueHorseshoe

I agree with your first sentence for the most part (although trend following funds frequently weigh in and out of positions worth billions). As for the second sentence . . . I'm sure you would agree that to consistently generate 20-25% per month you'd have to be pretty damn smart? Would anyone who was this smart not be able to perceive the advantages of compounding and exercise the foresight to implement it? At the rate of return you describe, someone with a $20,000 could retire as a multi-millionaire within a few years - now why would they be foolish enough to continue with a 'cashed out' monthly return of a few thousand for the rest of their lives? If you really think about it, it just doesn't make sense. And if you're reading this and you're consistently making 20-25% per month and removing it from your account - well then you're both enviably talented as a trader and pretty damn stupid. Don't bother replying - spend the time working out how to compound your gains (and then invite me to the afterparty!). BlueHorseshoe

Hi Db, I do not normally plot volume. I am looking for a way to incorporate volume into my trading approach - so far I haven't found any way that provides a satisfactory compromise between net profitability and improved performance. I don't think that I correctly understood your statement about looking at related instruments to be a suggestion in your previous post (I understood it purely as a commentary). This is helpful, and something that I shall explore. Thanks for your kind wishes - but don't hope too hard for a profitable trade - I couldn't care less so there's no reason for you to do so either I will of course report back with my exit, in 'foresight' if possible . . . BlueHorseshoe

There may be fewer "people" because the compounding of multi-billion dollar sums is done predominantly within funds, not by individuals. There are plenty of funds that record a better rate of return than Buffet, and manage much larger sums of money. They just don't happen to have benefitted any one individual to the extent that Buffet has enjoyed. Netting a 3% monthly return is child's play. In fact, if you diregard risk, netting a 50% return in a day is a coin toss. Doing it month after month, year after year, with carefully limited risk, is very, very difficult indeed. Compounding is great in theory, but in practice it needs to be enacted upon consistent profits over a sustained period - a very tricky endeavour indeed! BlueHorseshoe

I need time to think about this more carefully before I can give a worthwhile response. BlueHorseshoe

Hi Db, Thank you for your reply. Given that the markets closed for the weekend within minutes of my fill, my post could hardly be said to benefit from hindsight, but I'm happy with whatever thread you prefer to discuss this in. As for why my statements may appear somewhat 'vague' - whenever I quote specifics on this forum they generally get a dismissive "oh that will never work" response, even when I know full well that they have worked across countless markets over many decades (not that this guarantees that they will continue to do so in future). Though this doesn't affect my trading, it does irritate me greatly, and I prefer to avoid it. Now to your questions: I consider the trend to be down because prices have fallen, on average, since mid May. Granted, in the long(er) term the S&Ps are trending upwards and the past month may just have been a pullback within this uptrend, and in the shorter term (the price action I am fading) price has also trended higher over the last few weeks. But it is the timeframe between these against which I am interested in anchoring my positions. "Over-extended" (to the upside) simply means that price has closed significantly higher relative to the prior few days. The fact that a particular trendline may have been broken by a day's trading doesn't seem to me to be of importance with the ES - the market is mean-reverting and breakouts are better (on average) to be faded than traded with. I am not suggesting that this is the case with other instruments. And on to volume . . . Volume doesn't currently play any part in my trading decisions (hence why I'm here). My understanding of volume, as described, is based upon quantitative study of volume and the ES. On average, the ES tends to peak on low volume and bottom out on high volume. This isn't always the case, as you point out, but it only needs to be true more often than not to be useful. My reasoning for why this is the case may be flawed, and of course my statement may only coincidentally be true. Can you offer me a different interpretation? Or could you explain why you consider volume in futures to be misleading? Look forward to your reply. BlueHorseshoe

I think if you consider an algorithm to be any set of rules for completing a task, then most successful floor traders will use simplistic algorithms in their trading. So I don't think the technology has opened up the possibility for algorithmic trading, so much as opened up the possibility for more complex algorithms. Hence, as you say, it's a case of "keep up with the technology or suffer". BlueHorseshoe

Hi Roger Spread Betting has pros and cons, like anything else. If you want to advise your customers without needing to know the ins and outs, then I would steer them away from spreadbetting for daytrading - there are simple mathematical reasons why they are unlikely to overcome their execution costs, regardless of how good your tuition is. For longer term trading, spreadbetting is perfectly viable, though still carries similar risks to DMA forms of derivative trading like futures. Finally, because of how the spread affects trade entry (and assuming you train traders using futures), your students need to know to factor in the SB spread when emulating your positions (ie if you enter with a ten tick stop in the YM, and they're trading via a spreadbetting firm quoting a two tick spread, their stop loss needs to be 12 and their target needs to be 8, in order for their position to reflect yours accurately). Hope that's helpful, BlueHorseshoe

Something is very clear throughout this thread: people think that spread-betting firms are 'taking the other side of their trades'. This isn't true. A spread-betting firm takes the same trade as you in the underlying market***. This is hedging, and is how they lock in their profit from the spread - taking the other side of your bet wouldn't be - it would be gambling. Here are two simple examples: 1) You buy at 100 and pay a 3 pip spread. 2) The spread betting firm buys at 100 and pays a 1 pip spread. 3) The market rallies and you exit at 110. 4) The spread betting firm also exits at 110. 5) The spread betting firm uses their 10 pip profit to pay you your 10 pip profit, leaving them with a 2 pip profit from the spread. 1) You buy at 100 and pay a 3 pip spread. 2) The spread betting firm buys at 100 and pays a 1 pip spread. 3) The market sells off and you exit at 90. 4) The spread betting firm also exits at 90. 5) The spread betting firm has a 10 pip loss, but this is covered by the 10 pip loss from your account, leaving them with a 2 pip profit from the spread. They are hedging to lock in numerous small, secure profits from the spread. It is this steady stream of guaranteed (while ever they have customers) profits that has made them wealthy and successful, not gambling against you. Spread-betting companies don't care whether you win or lose - they get their money either way - just like a normal broker who gets their commission regardless. *** A spreadbetting firm doesn't actually take the same trade as you. They don't look at individual positions and hedge them because the SB position size is at the discretion of the customer, whereas the contract size for the underlying market is fixed by the exchange. Spreadbetting firms simply have a risk management desk that looks at net exposure across all their customer's accounts (I know this for a fact; I have sat at that desk). Hope that's helpful. BlueHorseshoe

Frankly, I can 't understand why the US hasn't embraced it. The whole reason that it is tax free in the UK is because most traders lose money, and it's better for the Inland Revenue to forego taxation on a handful of successful accounts rather than allow deductions for thousands of unsuccessful accounts. Surely that would also be a preferable scenario in the US? BlueHorseshoe

Roger, My sincere apologies for any personal offence the topic of my jokes may have caused - the intended target was not those afflicted with illness. Take care, BlueHorseshoe

Hi DB, Taking you up on your offer of help with volume analysis from the CouldaWouldaShoulda thread . . . I shorted the ES into the close today. Although this decision was made systematically, here are the general 'reasons' behind it: 1) The long term trend appears to be down. 2) The market has become over-extended to the upside in the short term. And here are the additional factors that encourage me to think that this is a sound decision, even though these factors form no actual part in my trading: 3) The market has traded to the top of a downward-trending channel. 4) Volume was lower today, despite the move higher. I currently tend to regard all volume in the indices as buy-side volume, and assume that the market is not actively traded short (obviously it is, and so this is a crude generalisation, but it seems to be statistically valid). I therefore expect high volume at market bottoms (as buyers step in at new 'bargain' low prices), and low volume at market tops (as buyers refuse to buy at unreasonably high prices). I'd love to here your thoughts on any of the above, or any questions you have that you think may help me to better understand the significance of volume within this structure. Many thanks, BlueHorseshoe

I'd misunderstood you, then. I think that there are probably other reasons why many traders go broke besides, including, obviously, strategies with negative expectancies. I also think that there is a reason why many traders trading strategies with neutral expectancies go broke faster than they would through commissions, slippage, etc alone, but I don't know that I can be bothered trying to formulate why I think this is. BlueHorseshoe

Thanks for your reply. Targeting recurring features is difficult. This is because (except on a tick-by-tick basis) the data we have to work with is essentially continuous rather than discrete. If it were a simple binary bet - will tomorrow's close be higher or lower - then it would be easy. But recurring patterns often require the recognition of connectedness between countless data points. The logical bounding of any recurring pattern is ill-defined, and yet algorithms can only deal with the specific. At what point does the recurring feature cease to be such? Here is a quote from Wittgenstein that better explains this: “A rope is made of a huge number of fibres, but not a single fibre goes through the ropes entire length, it’s the way they overlap that creates the strength.” How do you teach an algorithm to recognise family semblances in patterns of market data? I wasn't suggesting that you could gain something by being less cryptic, I was suggesting that I could gain something by you being less cryptic. BlueHorseshoe

Trading oil and peeing at the same time - I guess that's why they call it "Crude"? By the way, can you get back to me with some info on how many litres you normally urinate in a cash session - I've got a deal cooking on the colostomy bags with the boys over at TTM, and they're real sticklers for detail . . . Thanks, BlueHorseshoe

Unfortunately this isn't quite true. If you have a 'coin-flip' entry system and use an identical stop-loss and profit target, given an even distribution of wins and losses over time, a trader will still wipe out their account. This is due to factors like slippage, spread, commissions, and account size. All things being truly equal, it's a mathematical certainty. The classic explanation of this is given in Thorp's 'Beat the Dealer' with a discussion of red and black in a casino, where the house is still able to maintain an edge by imposing limits. Having said all that, one of my favourite tests is to see whether a strategy is profitable when traded with an identical stop and target - it tells me something about whether the entry in isolation is better than a coin flip. Hope that's helpful and, erm . . . good luck! BlueHorseshoe

Unfortunately, unless a system contains zero data inputs, then the elimination of the possibility of curve fitting is impossible. Can you explain to me how I could even begin to distinguish a bad strategy from a good strategy without either back testing, or forward testing? Ultimately a strategy's viability must be measured against the ruler that is the market, whether historically in sim, or in live trading with real money. There's no escaping that, I'm afraid . . . I always welcome advice Onesmith, so if you'd like to provide some that is neither cryptically obtuse nor dismissively facetious, then I would love to hear it. BlueHorseshoe

The results are never dramatically better with what I'm suggesting, just consistently slightly better across dozens of strategies and markets that I have tested. Also, using a single MA in this way means only one variable (MA length). It could be argued (and I would be very interested to hear anybody else's thoughts on this) that using a price MA cross involves two variables, where price is simply a 1 period MA, and might therefore be curve-fit across a data set. That might seem a perverse and even slightly paranoid way of understanding things, however . . . Anyway, as I said, it's always worth investigating. BlueHorseshoe

Well, I mean "as" I take a position . . . Things are much less frantic when trading off the daily close, so there will be plenty of time for you to respond without gaining the benefit of hindsight. And questions are always good. Thanks, BlueHorseshoe

I see what you mean. This would of course be far more beneficial to me as well, so the next time I take a position I'll post in that thread and hopefully get your thoughts. Cheers, BlueHorseshoe

Hi MM, I realise that 90% is an arbitrary figure (as were the others I invented) - I was just making the mildly pedantic point that yours and Mohsinqureshii's statements aren't mutually exclusive. BlueHorseshoe

If you were referring to specific code then I had misunderstood your post. And I perhaps don't fully understand what you mean by 'market context'. There are very simple ways of determining current trend, for example, none of which are effective all the time and none of which will adapt to market context in the way that a great 'intuitive' trader might, but are nevertheless better than nothing. Most mechanical trading is about finding acceptable compromises. I do agree that there is undoubtedly a big difference in the most part between what retail traders and institutions can achieve. BlueHorseshoe

Db, my last reply wasn't sarcastic or antagonistic - it was a genuine request. I'm not really interested in whether something is branded 'Wyckoff' or not, but I am interested in developing a better understanding of volume and how it could assist me. Sorry you weren't prepared to help. BlueHorseshoe

Erm, actually I did! I was stopped out within ten minutes of the gap opening on Sunday night, one tick from the 1342 high before the ES sold of into the trading day of 11th. Without the hard stop, I only entered or exited positions on the close, but now a hard stop is sitting there whenever the market is open. BlueHorseshoe