Changing Tactics Based on Time

[Predictor 11]

I want to talk about how I'm working to optimize my trade returns by changing my tactics based on the time left until the expiry or the time left in the trade. I trade primarily the SP 500 (and other futures markets) at NADEX, and the contracts expire at 4:15. I've came to a new appreciation in the importance of properly timing trades. This concept equally applies to many E-mini day traders who don't have the capital to hold overnight and the option traders, in general.

 

My trading consist of a mix of about 60% discretionary and 40% trading systems. It is not uncommon for my "market read" to conflict with my trading system. I trust my market read because it has proven reliable over a long time. However, my trading system has also shown strong profits over time.

 

When we are not in agreement then it creates a conflict: what should I do? The most conservative approach would be to only take signals when we are both in agreement. But, this doesn't take into account when I'm already in a system trade. I've thus came up with a quite different approach. I always take every signal. However, I will allow myself discretion in exiting the trade if its not working. At one time, I would find myself always exiting and the market would invariably go higher (and the system would profit more). But later, I found that on some cases the system was right (or completely wrong) and that the market nature changed, and I ended up with a large loss that my discretion would have avoided. I knew that I needed to be more discriminating in order to understand under what conditions it made sense for me to take action, and when it made sense for me to leave the system on autopilot.

 

I found my answer in a concept that has a great power for refining and honing the powers of discrimination. I call this concept "case based reasoning" which simply means that I will change rule sets, that is change tactics, based on a certain variable. In this case the variable is the time left in trade or TLIT. As an aside, I often find thinking in matrice form helpful in illuminating the solutions to problems.

 

I divide the day up into 3 time periods: early game, mid game, and late game. Early game is from 8 AM until 11 AM, mid game 11 AM to 1 PM, and late game is 1 PM until the close. I combine these concepts with a view on how well the trading is working out. In early game, I'm very passive in terms of actions and very aggressive in seeking out risk. I give the trade a lot of room to work out in my favor. Typically, I am seeking to add risk in early game unless the trade just bombs out completely.

 

In the mid game phase then I'm monitoring the trade. If the trade is working out generally in my favor then I will leave the position on. If the position is hugely in my favor such that it represents significant profits then I may seek to reduce total risk by setting targets. But, if the trade isn't working out in my favor then I will be looking to reduce risk or take it off completely.

 

During the late game phase, I am seeking to protect profit profits and limit my downside risk. If the trade hasn't produced a profit then this is a good indication that whatever it called didn't pan out. Again, in early game I'm very reluctant to limit profits because sometimes we do get some huge runs. Yet, when there is limited time left in a trade then using reasonable targets makes sense.

 

 

Hope this helps,

Curtis

http://themarketpredictor.com

[Traduk 10]

In my opinion you trade one system that fits your style and the market and that system must be tailored to the market in question and the time frame of your choice.

 

About 25 years when I started trading options I encountered the factor somewhat unique to options whereby the need to be right both on time and price was somewhat impossible. Your situation is not exactly the same but but within your conflicting methods you have the juggling act between different types of analysis and IMO it never works.

 

I switched to full time futures trading 19 years ago and dropped everything to do with options because of conflicts of analysis. I primarily trade the e-mini S&P and effectively use 2,10 & 30 minute time frames. I work on the principle of lower to higher analysis and the expectation that any trend I may lock into will likely not exceed 10 of the longest periods. Sometimes it does on a one way trend day but they are handled with expansions simple continuation of trends on the highest time frame.

 

Through 2.5 decades of life of hard reality I had to conclude on many occasions that if something doesn't work by basis of conflict, it is useless and must be jettisoned. I note that you take pride in supposedly having a fairly good predictive methodology which in my opinion is useless. I have been through the analysis phase with over 3 dozen books plus years of learning and can give reasonable predictions of where the market may be headed for months or years in advance but if it doesn't make money it is nothing more than a pointless exercise.

 

Everything I analyse is geared is geared for the sole purpose of making money in the time frame of my choice (day) and is structured for the purpose of operating within that time frame. Market action within any day dictates what I do and anything which may happen tomorrow or any day in the future is an irrelevance. Restricting activity based on time within a day is also illogical as although there are trends of high\low activity times, there are enough variations to make restrictions far too limiting.

 

I lost count of the number of times I came up with methodologies to trade markets only to find the changed characteristics and wouldn't fit my plans. The answer is as simple\difficult as creating something dynamic which is market created\driven and strive to acquire the skills to operate within those methods. In other words you must fit the market as it will never fit you.

 

Sorry, but if a method doesn't work or will not fit the market it is not a method with any merit. Start with the question....what do I need to do in order to fit the varying dynamic of the markets profitably. You will almost certainly find that it is not easy and will require a lot of discretionary decisions.

[Tradewinds 12]

. . . . It is not uncommon for my "market read" to conflict with my trading system. I trust my market read because it has proven reliable over a long time. However, my trading system has also shown strong profits over time.

Curtis

The Market Predictor

 

This is interesting. Your two systems can conflict, and still make money. My first thought is that it's more difficult to program all the subtleties and complexities into the trading system.

[Predictor 11]

@Tradewinds

 

My system is not as able to accurately read the market. But, "he" makes up for it by being tough. The thing is he never loses when he's right and he never over estimates his abilities. Imagine the savvy flashy fighter, which is my discretionary market read, versus just a really dumb knucklehead of a brawler. The brawler isn't flashy or showy, he gets beat up pretty bad, but in the end he wins more often then he loses (hopefully). In a word, he's tough which is a highly beneficial and not often sought after trait for the winning trader. While being tough is admired in others, it is not something most of us aspire too because it implies we will have to weather considerable hardship and pain.

 

This is interesting. Your two systems can conflict, and still make money. My first thought is that it's more difficult to program all the subtleties and complexities into the trading system.

[Tradewinds 12]

@Tradewinds

 

My system is not as able to accurately read the market. But, "he" makes up for it by being tough. The thing is he never loses when he's right and he never over estimates his abilities. Imagine the savvy flashy fighter, which is my discretionary market read, versus just a really dumb knucklehead of a brawler. The brawler isn't flashy or showy, he gets beat up pretty bad, but in the end he wins more often then he loses (hopefully). In a word, he's tough which is a highly beneficial and not often sought after trait for the winning trader. While being tough is admired in others, it is not something most of us aspire too because it implies we will have to weather considerable hardship and pain.

 

Yes, good analogy. I'd like to be "tough" in the sense that I at least define my "absolutes" in discretionary trading. Like, Never take a loss greater than "x". If profit gets to "X", always take it. Trading both a system, and discretionary seems like a good balance. I like that idea.

[Traduk 10]

@Tradewinds

 

My system is not as able to accurately read the market. But, "he" makes up for it by being tough. The thing is he never loses when he's right and he never over estimates his abilities. Imagine the savvy flashy fighter, which is my discretionary market read, versus just a really dumb knucklehead of a brawler. The brawler isn't flashy or showy, he gets beat up pretty bad, but in the end he wins more often then he loses (hopefully). In a word, he's tough which is a highly beneficial and not often sought after trait for the winning trader. While being tough is admired in others, it is not something most of us aspire too because it implies we will have to weather considerable hardship and pain.

 

Being tough with reference to weathering considerable hardship and pain implies the primary way markets apply pain which via either draw downs or long periods under water. Such systems have seen the end of many traders I have known over the years and they all fell to the fact that they ran out of account money before the market relieved the pain by reversing back in their direction.

 

I suspect that an element of having two mutually incompatible methods are proving to be irreconcilable but given time the markets will prove the point but sadly with the pain of loss.

[Tradewinds 12]

Being tough with reference to weathering considerable hardship and pain implies the primary way markets apply pain which via either draw downs or long periods under water.

 

Good point. I'm not sure exactly what was being implied, but if it is about big draw downs, then I am very much against draw downs. In fact, my strategy is almost zero tolerance for draw downs. I say almost no draw down because it is almost impossible to have no draw down unless you get a touch fill at exactly the right price. But other than that initial, one time draw down, that's where I "draw the line". If an entry fails, then I assume a continuation in the previous direction. If that doesn't happen, then the market may be sideways for a little while.

[Traduk 10]

Good point. I'm not sure exactly what was being implied, but if it is about big draw downs, then I am very much against draw downs. In fact, my strategy is almost zero tolerance for draw downs. I say almost no draw down because it is almost impossible to have no draw down unless you get a touch fill at exactly the right price. But other than that initial, one time draw down, that's where I "draw the line". If an entry fails, then I assume a continuation in the previous direction. If that doesn't happen, then the market may be sideways for a little while.

 

Markets apply pain by (a) a trader being wrongly positioned until losses wrack up to a large enough degree that they have to take a substantial loss or meet a margin call or (b) a trade goes against the intended direction for both a long time and a large number of points\ticks.

(a) is a Kamikaze approach and the draw downs will bust accounts and (b) is just bad entries within a perhaps otherwise acceptable method.

 

The OP implies two methods which are at odds with each other but is non specific with what they try to do. One implies hit and run which is quick ins and outs whilst the other implies a strategy which has a massive stop loss if in fact any stop loss is applied at all.

 

Draw downs in term of losses are inevitable and are part of money management and being under water in terms of not hitting best entries are also inevitable because hitting best entry is almost as impossible as hitting a high or low.

 

On entries I tend to load up within a window of price with limit orders that are stepped (2,4,6,8) from initial entry towards stop which brings the average price nearer the stop and has the effect of reducing risk against an all in position and also enhances profitability. I see that most people tend to load up into a winning position which moves average entry price away from stop and increases risk whilst also reducing average profitability. The only problem with my method is that part of the intended position are frequently left behind as limit orders but the R\R is often stunning, which suits me.

 

I am interested in what the OP thinks he has because there is limited logic in what he has so far posted. Activity is determined by news whether scheduled or surprise and just lately there has been somewhat more of the latter than usual. IMO time basing is in the domain of quiet non volatile markets and currently markets are volatile enough to discount time basing.

[Tradewinds 12]

On entries I tend to load up within a window of price with limit orders that are stepped (2,4,6,8) from initial entry towards stop which brings the average price nearer the stop and has the effect of reducing risk against an all in position and also enhances profitability.

 

I totally agree with you there. I don't really consider this "scaling" in, since it's all done on the same entry. It's simply a matter of not knowing exactly where the perfect entry is going to be, so play the odds.

 

I see that most people tend to load up into a winning position which moves average entry price away from stop and increases risk whilst also reducing average profitability. The only problem with my method is that part of the intended position are frequently left behind as limit orders but the R\R is often stunning, which suits me.

 

I'm glad to read about your entry strategy, because I've come to the same conclusion. Of course, I'm glad to hear from someone who agrees with me. :rofl: But seriously, you have given the logic to back up your strategy. People often make statements and claims, but never provide anything to back it up.

 

IMO time basing is in the domain of quiet non volatile markets and currently markets are volatile enough to discount time basing.

 

Not sure what you mean by "time basing". I'm not familiar with what that is.

[Traduk 10]

I totally agree with you there. I don't really consider this "scaling" in, since it's all done on the same entry. It's simply a matter of not knowing exactly where the perfect entry is going to be, so play the odds.

 

 

 

I'm glad to read about your entry strategy, because I've come to the same conclusion. Of course, I'm glad to hear from someone who agrees with me. :rofl: But seriously, you have given the logic to back up your strategy. People often make statements and claims, but never provide anything to back it up.

 

 

 

Not sure what you mean by "time basing". I'm not familiar with what that is.

 

Time basing is extracted from the OP's opening post in this thread which is apparently something he uses which appears to divide the day into segments during which activity is governed by time frame entered and time left in the day. It is not something that I use at all and something that I think is without merit.

 

I hope he (Predictor) responds as I think that the only possible logic behind the use of time allocation is his use of Nadex which bears some resemblance to spread betting such as we have in the UK but appears to be time based which IMO is a seriously hard way to emulate trades. I am fascinated by what appear to be 2 hour time based bull spreads which mean nothing to me but perhaps he can expand on what they are.

 

I am pleased that you see the logic of the entry by steps. As I said before most people add to a winning position which of course dilutes the average entry and reduces gearing but is more psychologically comfortable.

 

I must admit that even after all the years it still gives me a little knot in the stomach when I am going long and the final position goes in on the Ask when the sellers are battering the Bid on the support, 2 ticks under which I am out. Fortunately the e-mini S&P frequently holds those supports so 40% of the position going in at near optimum gives good risk\reward. To be honest I have never found another way of getting a decent R\R in my favour on the S&P because it will not run enough in any direction.

 

Other markets that I have traded in the past offered better all in\all out strategies as runs are often large with smaller proportionate congestion areas.

[SIUYA 11]

To be honest I have never found another way of getting a decent R\R in my favour on the S&P because it will not run enough in any direction.

 

Other markets that I have traded in the past offered better all in\all out strategies as runs are often large with smaller proportionate congestion areas.

 

Hi Traduk, I think this is the important element in your approach......it works best in those mean reverting type markets such as the equity indexes. For the other instruments whereby larger, longer term trends are trying to be captured then scaling in with existing open positions can definitely work....it really becomes more an order of finese and the difference between time frames being traded.

plus when you say "I see that most people tend to load up into a winning position which moves average entry price away from stop and increases risk whilst also reducing average profitability. "......not always. You can move the stop up for each additional entry, which means you can keep a similar risk profile whilst improving average profitability for those bigger trends (probably no so applicable to day trading where you need to be out at the end of the day.)

[Predictor 11]

Traduk:

The concept is rather simple. Let's say I anticipate a 10 point rally or maybe just a big up day, i.e I'm bullish.. If by say 2 PM the market is down 5 points then the probability we will get a 10 point rally is a much lower probability then at the start of the day. So, what I will do is change strategies. I change my expectation based on the probability. We can see that this true by looking at option pricing models or just by imagining it at the extreme, i.e at 4:14 PM if the market is down 5 points there is about a 100% probability that I'm wrong. It is observable the market has a wave-like structure, if I knew say at 3:00 PM that I would be wrong then I could try to exit on the swing peaks and start to limit my risk. A good example is at RIGHT NOW we can estimate the price with a very high probability about 100% within 1 or 2 ticks. The concept is about using time and current price to consider reasonable future developments. It helps to keep our expectations in check.

 

It is very true that I learned this importance due to the NADEX contracts. The ones I trade expire at 4:15 PM. But, the concept equally applies someone trading E-mini futures who only has day trading margin. Last Friday, the concept didn't work out too well because we had a rare price jump in the last few minutes of the day (jump characteristics).

[Tradewinds 12]

I divide the day up into 3 time periods: early game, mid game, and late game. Early game is from 8 AM until 11 AM, mid game 11 AM to 1 PM, and late game is 1 PM until the close

Hope this helps,

Curtis

The Market Predictor

 

I agree that those are 3 distinct periods with their own characteristics. I have noticed many times that the trend patterns change dramatically after 11 AM. The trends tend to take longer to cycle through a phase after trading slows down. Sometimes the second phase begins earlier than 11 AM. If it's Friday, and/or there is not much news, the market will slow down earlier.

 

Even though I agree that there are 3 distinct phases in the market, and they line up very closely with time periods, I would personally stay away from rules based on time. I'd rather use other standards to define the beginning and end of those 3 phases. For example, when the range on each bar is smaller, there are more gaps from the close to open on each bar, and the range of the trend gets much tighter, that's when I determine that the market has shifted into phase 2.

 

In phase 3, the market tends to open up a little more, and cycle more cleanly. I think that phase two can often go past 1 PM, and start earlier. It depends on the news, earnings reports, day of the week and maybe some other factors.

 

I'm not trying to give you a hard time or somehow discount your contribution. I appreciate what you are saying.

[Traduk 10]

Hi Traduk, I think this is the important element in your approach......it works best in those mean reverting type markets such as the equity indexes. For the other instruments whereby larger, longer term trends are trying to be captured then scaling in with existing open positions can definitely work....it really becomes more an order of finese and the difference between time frames being traded.

plus when you say "I see that most people tend to load up into a winning position which moves average entry price away from stop and increases risk whilst also reducing average profitability. "......not always. You can move the stop up for each additional entry, which means you can keep a similar risk profile whilst improving average profitability for those bigger trends (probably no so applicable to day trading where you need to be out at the end of the day.)

 

You are correct. The e-mini is, for me, effectively a series of single runs which require the entry be finessed to minimise risk in order to maximise reward. Failure to do so tends to provide an unacceptable R\R and with enough contracts loaded into a winning position can run straight into the area of a pull back and leave any profit determined by a second or subsequent run.

 

Larger trending markets do give the facility for the methods you describe but if I were to trade them I would look to use the same techniques because at the end of each day my interest is in profit\loss divided by total contracts traded and I measure my own performance by trying to maintain as high a return per contract as possible. I guess I will always look to skew towards biggest bang per buck.

[Traduk 10]

Traduk:

The concept is rather simple. Let's say I anticipate a 10 point rally or maybe just a big up day, i.e I'm bullish.. If by say 2 PM the market is down 5 points then the probability we will get a 10 point rally is a much lower probability then at the start of the day. So, what I will do is change strategies. I change my expectation based on the probability. We can see that this true by looking at option pricing models or just by imagining it at the extreme, i.e at 4:14 PM if the market is down 5 points there is about a 100% probability that I'm wrong. It is observable the market has a wave-like structure, if I knew say at 3:00 PM that I would be wrong then I could try to exit on the swing peaks and start to limit my risk. A good example is at RIGHT NOW we can estimate the price with a very high probability about 100% within 1 or 2 ticks. The concept is about using time and current price to consider reasonable future developments. It helps to keep our expectations in check.

 

It is very true that I learned this importance due to the NADEX contracts. The ones I trade expire at 4:15 PM. But, the concept equally applies someone trading E-mini futures who only has day trading margin. Last Friday, the concept didn't work out too well because we had a rare price jump in the last few minutes of the day (jump characteristics).

 

I do not think that trying to predict based on time is rewarding simply because the drivers are sometimes known news inputs but often generated by unknowns such as the current round of European news.

 

I have sat on positions that have gone sideways for up to 4 hours with the almost certain belief that my position is correctly placed. Just when I have almost given up it has done the business and headed South at a rate of knots and given good rewards.

 

I day trade because in the early days I used to trade options and before 1992 day trading never paid as there was not enough daily movement. After spending years with perpetual positions in the markets I do not want to spend a weekend or over night with a position on as the relief from not being always in was liberating.

 

Although I have the facility to use day trade margin I always use full margin and more because my money management dictates so. I rarely exit during the 15 minutes to close mad panic as invariably there are thousands sitting limits on the Bid\Ask to try and lock the price. I sometimes run into the after hours but always out on Fridays.

 

The strangest thing about your time based view is that often the real meat of a day's move is now happening way before the US markets open at all. I haven't got the stamina to trade 13 hours a day but there is a lot of action when Europe\London is leading.