Steve's Basic System for Retail Traders

[steve46 12]

Okay so I have been working on a "simplified" version of the system that I normally use.

 

This version uses data from the previous 5 and 10 day trading sessions to create a distribution of values where price will tend to move from extremes to the midpoint (or to the opposite extreme).

 

I use two basic charts, a long term (either 90 or 130 min is fine) and the second a 3 min entry chart....

 

I don't use indicators as such, but I because my entries rely on recognition of a specific pattern, I have a way of making it easier to visualize the pattern by placing Bollinger bands on the entry screen so that potential entries can be seen right away...(I call this "training wheels" for those who remember back to learning to ride a bike).

 

I'm not willing to go into all the details of how I create the distributions....I don't have the time nor the inclination to go through a year (or more) of statistics but those who have a background will be able to figure it out I am sure...and the rest of you should go get a basic stat text and start getting a background (if you find it interesting).

 

Here are the basic charts for today

[steve46 12]

I am going to fold my tent for the weekend so I thought I would post this last note

 

The attached charts show the 3 minute entry chart and the red arrow shows the reversal near the top of the profit target range.

 

Next to that chart I show a 1 minute view....and the reason I show this is because on a 1 minute time scale it is easier (I think) to see the algo pattern that I use as a signal to trade

 

for me the important part is not the pattern itself but how it is used...you see once you are in a trade, what you can do is to monitor price action (once you get familiar with it) and as long as price continues to move favorably (and you don't see a pattern emerge on your screen) you can stay with the trade confident that you have a good chance to extend your profits....

 

My general rule is to look for 5 and 10 point moves over periods of time from 30 minutes to several hours...

 

For retail traders the challenges are basically as follows

 

1. You have to find a systematic approach that generates at least 3 high probability entries per session

2. The trader has to be able to anticipate, recognize and take the trades without hesitation

3. When a trader obtains favorable entry, overall success is determined in relation to A. how long the trader can stay in the position B. size of the position and profit taking rules and C. Ability to manage risk.

 

For this market and others (since the markets are exhibiting significant correlation) entry and exits are time dependent....meaning that the trader would do well to notice that entries occur at specific times of the day....Today for example the best entries occurred at 6am PST (pre-position), at 7am PST and at 7:30am (for the first pullback)

 

Good luck

[BlueHorseshoe 10]

  steve46 said:

I am going to fold my tent for the weekend so I thought I would post this last note

 

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

[Predictor 11]

Few observations... not trying to compete but just stating the obvious.

 

1. What is the "specific" pattern? Steve, you mention "specific algo pattern". But you don't even describe a general pattern to any degree -- let alone a specific set of rules for identifying the pattern algorithmic-ally.

 

2. I barely know statistics but I think it is relevant to mention a few important facets for beginners sense you keep mentioning the importance of statistics.

 

First, Bollinger Bands are really just standard deviation bands. I'm not really sure how John Bollinger got credited for such a trivial concept. The meaning/relevance of an X standard deviation is only relevant for normal distributions. The market is said to be both non normal (unknown distribution) and non stationary (mean moves). In essence, this means that an X standard deviation move has no statistical meaning. The 68-95-99.7 rule does not apply to the markets. This is the same reason that one can't rely on a "balanced" market profile distribution (normally distributed) in a statistical/algorithmic sense. The market can generate infinite variety of distributions.

 

Most statistical measures can not be applied to the markets formally because most statistical measures have various underlying assumptions that will not be true in the market. For example, correlation only applies to linear relationships.

 

Of course, I'm sure some traders can apply incorrect statistical measures to the market and make it work for them. But its important when making such errors to be generally aware of them.

 

Steve, as you can imagine.. I don't see any system here at all.

 

--- Wikipedia says it better

http://en.wikipedia.org/wiki/Bollinger_bands#Statistical_properties

 

Security price returns have no known statistical distribution, normal or otherwise; they are known to have fat tails, compared to a normal distribution.[8] The sample size typically used, 20, is too small for conclusions derived from statistical techniques like the central limit theorem to be reliable. Such techniques usually require the sample to be independent and identically distributed which is not the case for a time series like security prices. In point of fact, just the opposite is true; it is well recognized by practitioners that such price series are very commonly serially correlated – that is, it is the case that the next price will be closely related to its ancestor 'most of the time'.

For these three principal reasons, it is incorrect to assume that the percentage of the data that will be observed in the future outside the Bollinger Bands range will always be constrained to a certain amount. Instead of finding about 95% of the data inside the bands, as would be the expectation with the default parameters if the data were normally distributed, studies have found that only about 88% of security prices remain within the bands.[9]

Edited August 24, 2012 by Predictor

[SpideySense 10]

  Predictor said:

.... I barely know statistics but ....

 

 

Its always bad news when someone starts by admitting that they are innumerate and then starts talking about statistics. What follows just displays their ignorance and is best ignored - although you have to love the use of the word "but."

[steve46 12]

Thanks Spidey....I'm reminded of a saying by Mark Twain.......

 

"Better to remain silent and be thought a fool, than to speak and remove all doubt".

[TheDude 10]

  steve46 said:

Okay so I have been working on a "simplified" version of the system that I normally use.

 

This version uses data from the previous 5 and 10 day trading sessions to create a distribution of values where price will tend to move from extremes to the midpoint (or to the opposite extreme).

 

I use two basic charts, a long term (either 90 or 130 min is fine) and the second a 3 min entry chart....

 

I don't use indicators as such, but I because my entries rely on recognition of a specific pattern, I have a way of making it easier to visualize the pattern by placing Bollinger bands on the entry screen so that potential entries can be seen right away...(I call this "training wheels" for those who remember back to learning to ride a bike).

 

I'm not willing to go into all the details of how I create the distributions....I don't have the time nor the inclination to go through a year (or more) of statistics but those who have a background will be able to figure it out I am sure...and the rest of you should go get a basic stat text and start getting a background (if you find it interesting).

 

Here are the basic charts for today

 

Steve - I notice from your screen shots that you have some important MSFT updates to install. Your computer may be at risk if you fail to keep it up to date.

 

[onesmith 10]

  Predictor said:

1. What is the "specific" pattern? Steve, you mention "specific algo pattern". But you don't even describe a general pattern to any degree -- let alone a specific set of rules for identifying the pattern algorithmic-ally.

 

The "specific pattern" is attaching CATCHY PHRASES to the names of hindsight entries ..

.. without defining The_Setup.

[thalestrader 14]

  SpideySense said:

Its always bad news when someone starts by admitting that they are innumerate and then starts talking about statistics. What follows just displays their ignorance and is best ignored - although you have to love the use of the word "but."

 

If all TL readers read as thoughtfully and as carefully as SpideySense, vendors and charlatans would have a much shorter shelf life here than they currently seem to enjoy. Most would have read that line and thought nothing of swallowing what follows whole without a thought to viewing it through a critical lens.

 

Best Wishes,

 

Thales

Edited August 25, 2012 by thalestrader
spelling

[BlueHorseshoe 10]

  Predictor said:

Few observations... The meaning/relevance of an X standard deviation is only relevant for normal distributions. The market is said to be both non normal (unknown distribution) and non stationary (mean moves).

 

Hi Predictor,

 

You have suggested two reasons why Bollinger Bands might be ineffective:

 

1. 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.
    
   
2. 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

[TheDude 10]

  BlueHorseshoe said:

Hi Predictor,

 

You have suggested two reasons why Bollinger Bands might be ineffective:

 

1. 
   [*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.
    
   
2. 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

 

 

Maybe so, but as we all know, the markets can remain irrational (non mean reverting?) longer than a trader can remain solvent!

 

Why wouldnt you use BB's as an entry signal? If they contain 88-95% of price data, surely the BB would offer great opportunity to someone who believes in reversion to the mean? Thats one of the fundamental concepts of the BB.

 

If I were into mechanical TA systems, they'd be right up there for me. But, alas thats very much an off the cuff statement, as Im not into mechanical TA systems.

[BlueHorseshoe 10]

  TheDude said:

Maybe so, but as we all know, the markets can remain irrational (non mean reverting?) longer than a trader can remain solvent!

 

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.

 

  TheDude said:

Why wouldnt you use BB's as an entry signal? If they contain 88-95% of price data, surely the BB would offer great opportunity to someone who believes in reversion to the mean? Thats one of the fundamental concepts of the BB.

 

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".

 

  TheDude said:

If I were into mechanical TA systems, they'd be right up there for me. But, alas thats very much an off the cuff statement, as Im not into mechanical TA systems.

 

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

[steve46 12]

  onesmith said:

The "specific pattern" is attaching CATCHY PHRASES to the names of hindsight entries ..

.. without defining The_Setup.

 

As usual you set yourself up to be batted around like a game of "whack a mole"....

 

"Specific pattern" is simple two (2) words....not "catchy" at all....very descriptive and it means what it says...this "specific pattern" which I have characterized as algorithmic in nature, has been posted again and again here on this site....in Negotiator's thread on trading the ES contract...in fact others have commented on it...if you find the concept interesting I invite you to do your own research by reading that thread...

 

As far as the setup, in my experience it is the "setup" that losing traders are most interested in....believing that it is the only thing they need to find success (it may be that you are a member of that club)...clearly thats not the case...so I leave it until later while I cover more important information...if this doesn't suit you, once again I invite you cordially to point & click somewhere else...

 

hindsight...? yes that is true...and again if you find this thread unsuitable for your purposes I invite you to find a thread you are more interested in...thanks for your very profound comment....and goodbye....

Edited August 25, 2012 by steve46

[steve46 12]

Friday's price action on a 30 minute basis...

[onesmith 10]

  steve46 said:

on a 1 minute time scale it is easier (I think) to see the algo pattern that I use as a signal to trade

 

Algorithms are precisely defined setups. Theres never a question whether an algorithm is present (or not present). The uncertainty you are conveying (where thinking enters the equation) is characteristic of discretionary (or loosely defined vague and uncertain) requirements. Not algorithmic patterns.

[onesmith 10]

Also (fyi while on the subject of the precise meaning of words) .. It is imperative to understand there are real penalties associated with threatening battery.

 

  steve46 said:

As usual you set yourself up to be batted around like a game of "whack a mole"....

[goodoboy 10]

  steve46 said:

Okay so I have been working on a "simplified" version of the system that I normally use.

 

This version uses data from the previous 5 and 10 day trading sessions to create a distribution of values where price will tend to move from extremes to the midpoint (or to the opposite extreme).

 

I use two basic charts, a long term (either 90 or 130 min is fine) and the second a 3 min entry chart....

 

I don't use indicators as such, but I because my entries rely on recognition of a specific pattern, I have a way of making it easier to visualize the pattern by placing Bollinger bands on the entry screen so that potential entries can be seen right away...(I call this "training wheels" for those who remember back to learning to ride a bike).

 

I'm not willing to go into all the details of how I create the distributions....I don't have the time nor the inclination to go through a year (or more) of statistics but those who have a background will be able to figure it out I am sure...and the rest of you should go get a basic stat text and start getting a background (if you find it interesting).

 

Here are the basic charts for today

 

Thanks Steve,

 

Your experience is always thankful.

 

When i woke up yesterday, my view of the market was downward for the moment and choppy. Market going up was not on my mind, lesson learned to be ready at all times to go either way. Cause once the move went up, I had to quickly get on board. I saw 1398 break out, but missed back test. Got in on the first pull back.

 

Good analysis.

[MightyMouse 12]

  onesmith said:

Also (fyi while on the subject of the precise meaning of words) .. It is imperative to understand there are real penalties associated with threatening battery.

 

I don't think you could find someone to litigate Steve on battery charges for his suggesting that you are setting yourself up to be batted around like a game of "whack a mole".

 

If you really feel like he is slapping you, then slap him back.

[goodoboy 10]

  steve46 said:

 

As far as the setup, in my experience it is the "setup" that losing traders are most interested in....believing that it is the only thing they need to find success (it may be that you are a member of that club)..

 

You are correct on this part. I think the setup depends on the trader personality and what fits their thinking.

[onesmith 10]

MightyMouse, .. professional qualifications determine who can offer an opinion as fact or provide expert testimony. Otherwise only the facts are considered regardless of conscious or unconscious intent. Was there a written threat of physical violence? Did steve46 threaten bodily injury (with a bat)?

 

18 U.S.C. 875© .. tis a Federal Crime, punishable by 5 yrs in prison, to transmit in interstate communications,

any threat to injure another person.

[steve46 12]

I am moving right ahead with my commentary...

 

Here is tomorrow's distribution for the ES

[BlueHorseshoe 10]

  onesmith said:

Algorithms are precisely defined setups. Theres never a question whether an algorithm is present (or not present). The uncertainty you are conveying (where thinking enters the equation) is characteristic of discretionary (or loosely defined vague and uncertain) requirements. Not algorithmic patterns.

 

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.

[onesmith 10]

It's relatively simple for a coder to see algos. Non-discretionary traders that think like robots but don't code might see repetitive bits but they rarely if ever talk.

 

The vocalist embrace discretion and lump all hindsight into the same profitable setup.

 

It's unnecessary to understand unknowns from someone elses pov.

but you must clearly define AND OWN .. specific rules that mimic the unknown rules.

Edited August 26, 2012 by onesmith

[TheDude 10]

  BlueHorseshoe said:

...

 

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. [1]

 

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. [2]

 

....

 

BlueHorseshoe

 

1 - What about before it ticks to an all time high/low? Or, by my understanding of your statement, between the last high and the old all time high? If it had been trending up for 3 weeks before making the new high, then was it still mean reverting during those 3 weeks?

 

2. Thats just a complicated way of saying the market moves up and down.

 

Markets may have been more mean reverting 10-20 years ago before the information explosion, but these days ideas of value (mean) are changing more quickly, with different time frames considering different mean values. You may think the mean is at x. Mathematically, on your time frame, you may be correct. However if the herd disagrees and thinks it's at y (for them), you are probably toast.

 

How does mean reversion therefore help one make money?

[MightyMouse 12]

  TheDude said:

 

How does mean reversion therefore help one make money?

 

Expect it not to work from time to time and you will make money.