Don't Be fooled by Randomness Part2 - Day Trading Vs Swing Trading - Who Makes More?

[Manihi 10]

I am sorry, I just realized what I forgot to point out...and that is there is no right or wrong way to trade.

 

Trading is a personal endevour that will be successful to you alone once you have developed a strategy, that is consistent to your standards, and you are adequately funded to withstand the times where it is not going your way.

 

In other words, nothing is perfect...and trading IS the perfect example of imperfection.

Edited April 11, 2013 by Manihi

[SunTrader 10]

...... most importantly out of 100 trades, how many of them are profitable?

That is the least important thing - at least to me.

[SunTrader 10]

I'm not naive and oblivious; however, many active traders (especially new ones) end up treating their trading like accounts like a slot machine at the casino.

That is exactly what I did when I first started.

 

But not by day trading - I swing traded for my first couple of years and gambled bigtime.

 

I then gradually moved into and out of day trading, over many more years, then back to predominently swing trading now.

 

In sports there are offensive and defensive players, Stars and niche players. Dumb, athletic types and smart, less physically gifted ones. And the majority somewhere in between.

 

In other words no one way to succeed. Same with trading and any other competitive endeavor.

 

Timeframe matters less so if you have the talent, determination and discipline.

[SunTrader 10]

And one more thing, I boldly stand by what I said earlier that technical analysis has ZERO predictive power when one is applying it to a 1/5/10 min time frame. I stand by that

Sure about that - zero?

 

Citi 5 min chart:

[Everest29 10]

I agree with the above that Win Rate is over empasized. You have to look at Win Rate and Win/Loss. Sometimes (depending on your trading approach) you have to be comfortable with a lower win rate - you have to be willing to let go of being "right" more often to be profitable.

 

To answer the original question, I "day trade" meaning I get out of any postions by US EOD regardless of profit or loss. I also trade fully automated (that's another contentious discussion, but let me assure it's possible). Of course, none of my systems trade every day - some are more active in certain types of markets than others. From Jan '08 through yesterday my numbers are:

 

Win Rate: 53.16%

Win/Loss: 1.01

 

And unless you're trading a fixed number of contracts, all other numbers (including PF, CAGR, Average Trade Return, drawdowns, etc.) come down to position sizing, which is hugely important. I use % risk based on a varying percentage of Kelly for each system.

 

Also, when you're testing for trading on shorter timeframes, you have to be very precise with (or overestimate) slippage and commissions. But they definitely have predictive power.

[Enigmatics 10]

And one more thing, I boldly stand by what I said earlier that technical analysis has ZERO predictive power when one is applying it to a 1/5/10 min time frame. I stand by that

 

That's a cool story bro.

 

Technical analysis represents probabilities btw, not predictions.

[Albnd 10]

I use % risk based on a varying percentage of Kelly for each system.

 

Would you elaborate a bit more?

[Enigmatics 10]

In other words no one way to succeed. Same with trading and any other competitive endeavor.

 

Timeframe matters less so if you have the talent, determination and discipline.

 

Amen to that brother.

[markcrisp 10]

Agree with O.P.

 

Yes you can make profits day trading but anymore than position trading? I haven't seen it. And is the life you really want?

 

The best day traders develope systems to find high probabilty trades and only trade on those days. The newbies trade every day and lose.

 

For me, I prefer a more passive approach to building wealth. In today's world maybe a fully funded retirement is beyond most people now, sadly, but you could position trade for 15% -20% gains until you drop. Position trading can be 90% retired but still creating income.

[Everest29 10]

Sure, Albnd. I first figure the Kelly number for each system (and sometimes for both longs and shorts separately). Kelly was originally developed as a gambling approach for bet size. It tells you the % of your total capital you should risk on each bet (or trade) to maximize your total gain without going bust, assuming you know the Win % and the Win/Loss ratio, and that they do not change going forward (which of course they will in trading).

 

I then take a percentage of that Kelly number (say 15% of what Kelly says I should risk - this is usually determined by modeling a given system and seeing what the drawdowns would be given certain percentages of Kelly). Then I set the maximum risk of my total capital to that amount on every trade that particular system places.

 

For example:

 

1. I first caclulate the Kelly for the system, as shown below. Let's say it works out to be 30.2%.
   
2. Then, I pick a pecentage of that number to test. 15% of 30.2% Kelly would be a 4.53% risk per trade (.15*.302=.0453). I keep testing different percentage of Kelly until I find one that gives me a balance of profitability and drawdowns that I like. (To give you an idea, my total portfolio of systems gives me drawdowns of >40%, but I'm comfortable with that. So choose a drawdown that you can handle and be conservative in this estimate because the drawdown will be larger than in testing or history.)
   
3. So, then I take total capital times percent risk to get my total $ risk per trade. Say, $100,000 total capital * 4.53% = $4,530 total risk per trade.
   
4. Then I find my stop loss per contract on the next trade. I always make my stop loss dynamic, rather than a set amount, by setting my stops a certain percentage of recent volatility away from my entry. ATR (or higher timeframe ATR) works well. Let's say in this example that it's $500 per contact.
   
5. Then I just divide total capital risked by stop per contract and round down: $4,530/$500 = 9 contracts.
   

 

So, what happens is you continue to risk the same amount of your capital on your system on every trade. If you make profits, i.e. - more capital, then your quanitity will rise; if you lose money then it goes down. I try to always think of profits and losses as percentages rather than dollar amounts. That makes all trades (regardless of equtiy) comparable. Hope that helps.

 

From Investopedia:

There are two basic components to the Kelly Criterion:

• Win probability - The probability that any given trade you make will return a positive amount.

• Win/loss ratio - The total positive trade amounts divided by the total negative trade amounts.

 

These two factors are then put into Kelly's equation:

Kelly % = W – [(1 – W) / R]

 

Where:

W = Winning probability

R = Win/loss ratio

[Seeker 11]

Cory,

 

When i initially posted, I was somewhat ranting but let me clarify. Day trading/intraday trading is a shorter time frame than one who swing trades with EOD data. Many will argue with me that there is no differnce (all good). Intraday trading has way more noise than swing trading and I can back that up to anyone who wants to disagree with that statement. I posted this thread to generate discussion to those who have had success trading intraday (consistently).

 

The fact of the matter is day trading/intraday trading is a lot harder than swing trading in my opinion atleast and I'm curious to hear some of the methods that the community deploys to take advantage of these anomalies. Am I saying that market is random...? no. Due to the market structure (specifically in the equities space) theres a lot more noise in intraday trading as i;ve said a million times before. With that being said... Take a stock the Citibank ©. Take its OHLC prices for its previous days, and closely watch what happens when it hits these levels. You can thank me later for the free ATM

 

Please define what you mean by 'noise', and then please do back it up as you said you would.

[DbPhoenix 42]

Originally Posted by suby »

And one more thing, I boldly stand by what I said earlier that technical analysis has ZERO predictive power . . .

That's a cool story bro.

 

Technical analysis represents probabilities btw, not predictions.

 

Probably a "trick" statement, since nothing has "predictive power", whether technical analysis or fundamental analysis, except perhaps that the market will always rise. Probabilities, on the other hand . . .

[suby 10]

Thanks to Steve as my experience shows. One must research (e.g. an offer) at least 3 levels deep to verify. Takes time but not as much as when I lose.

 

3 different time frames?

[suby 10]

Sure about that - zero?

 

Citi 5 min chart:

 

I'm not sure if the red dot on the first bar is the opening price but as i said in my post about citi look at the OHLC as they'll give a lot of clues into trading it. under that graph its clear that price consolidates and bounces off of that bar all throughout the day. I'd argue the reason being is 2 reasons. 1) citis correlation to the broad markets behaviour and 2) the specific range that citi trades in is due to etf repurchases or sales. If you want to watch madness. Watch Citi/BAC or any major etf that has to rebalance at 2:30 everyday

[suby 10]

Sure about that - zero?

 

Citi 5 min chart:

 

I still stand by that claim but I am open to be proven/told otherwise. Can you explain to me TA's predictive power on that chart of citi and how it would help someone?

[suby 10]

That's a cool story bro.

 

Technical analysis represents probabilities btw, not predictions.

 

Last I checked, Technical analysis represents the pyschology of market participants. Yes trendlines/ma/and all the indicators can help someone determine where are market is in its regime but thats hindsight. How does it represent probabilities in your eyes?

[SunTrader 10]

I still stand by that claim but I am open to be proven/told otherwise. Can you explain to me TA's predictive power on that chart of citi and how it would help someone?

Thought it was obvious. Blue/long red/short.

 

First bar with red dot is yesterday's opening bar. Not much of a downmove next five minute period but I wait for opening ranges to be established before I trade anyway.

 

But since I don't trade equities C is not something I'd be looking at and note also I don't use the showme indicator by itself. Other factors add confidence.

 

It is very predictable to me though like anything else not 100%.

[Albnd 10]

Sure, Albnd. I first figure the Kelly number for each system (and sometimes for both longs and shorts separately). Kelly was originally developed as a gambling approach for bet size. It tells you the % of your total capital you should risk on each bet (or trade) to maximize your total gain without going bust, assuming you know the Win % and the Win/Loss ratio, and that they do not change going forward (which of course they will in trading).

 

I then take a percentage of that Kelly number (say 15% of what Kelly says I should risk - this is usually determined by modeling a given system and seeing what the drawdowns would be given certain percentages of Kelly). Then I set the maximum risk of my total capital to that amount on every trade that particular system places.

 

For example:

 

1. I first caclulate the Kelly for the system, as shown below. Let's say it works out to be 30.2%.
   
2. Then, I pick a pecentage of that number to test. 15% of 30.2% Kelly would be a 4.53% risk per trade (.15*.302=.0453). I keep testing different percentage of Kelly until I find one that gives me a balance of profitability and drawdowns that I like. (To give you an idea, my total portfolio of systems gives me drawdowns of >40%, but I'm comfortable with that. So choose a drawdown that you can handle and be conservative in this estimate because the drawdown will be larger than in testing or history.)
   
3. So, then I take total capital times percent risk to get my total $ risk per trade. Say, $100,000 total capital * 4.53% = $4,530 total risk per trade.
   
4. Then I find my stop loss per contract on the next trade. I always make my stop loss dynamic, rather than a set amount, by setting my stops a certain percentage of recent volatility away from my entry. ATR (or higher timeframe ATR) works well. Let's say in this example that it's $500 per contact.
   
5. Then I just divide total capital risked by stop per contract and round down: $4,530/$500 = 9 contracts.
   

 

So, what happens is you continue to risk the same amount of your capital on your system on every trade. If you make profits, i.e. - more capital, then your quanitity will rise; if you lose money then it goes down. I try to always think of profits and losses as percentages rather than dollar amounts. That makes all trades (regardless of equtiy) comparable. Hope that helps.

 

From Investopedia:

There are two basic components to the Kelly Criterion:

• Win probability - The probability that any given trade you make will return a positive amount.

• Win/loss ratio - The total positive trade amounts divided by the total negative trade amounts.

 

These two factors are then put into Kelly's equation:

Kelly % = W – [(1 – W) / R]

 

Where:

W = Winning probability

R = Win/loss ratio

 

Thanks for your clarification. The Kelly formula I was aware of suggests to discard part of the porftolio according to some specific equity conditions. As far as I understand, this is not your case. Am I missing something?

[suby 10]

Thought it was obvious. Blue/long red/short.

 

First bar with red dot is yesterday's opening bar. Not much of a downmove next five minute period but I wait for opening ranges to be established before I trade anyway.

 

But since I don't trade equities C is not something I'd be looking at and note also I don't use the showme indicator by itself. Other factors add confidence.

 

It is very predictable to me though like anything else not 100%.

 

It's obvious but its also very subjective in my personal opinion. I realize that in trading there is no gaurenttee. But the reason i started this discussion was to get a feel for who is doing really well day trading and what kind of objective methods they are using. The core of that Citibank price range defiantly defines a lot of high probability entries; however, this is hindsight right.

 

Suntrader what is the showme indicator and what others factors would you use to give you a strong buy or sell signal?

[BlueHorseshoe 10]

Sure, Albnd. I first figure the Kelly number for each system (and sometimes for both longs and shorts separately). Kelly was originally developed as a gambling approach for bet size. It tells you the % of your total capital you should risk on each bet (or trade) to maximize your total gain without going bust, assuming you know the Win % and the Win/Loss ratio, and that they do not change going forward (which of course they will in trading).

 

I then take a percentage of that Kelly number (say 15% of what Kelly says I should risk - this is usually determined by modeling a given system and seeing what the drawdowns would be given certain percentages of Kelly). Then I set the maximum risk of my total capital to that amount on every trade that particular system places.

 

For example:

 

1. I first caclulate the Kelly for the system, as shown below. Let's say it works out to be 30.2%.
   
2. Then, I pick a pecentage of that number to test. 15% of 30.2% Kelly would be a 4.53% risk per trade (.15*.302=.0453). I keep testing different percentage of Kelly until I find one that gives me a balance of profitability and drawdowns that I like. (To give you an idea, my total portfolio of systems gives me drawdowns of >40%, but I'm comfortable with that. So choose a drawdown that you can handle and be conservative in this estimate because the drawdown will be larger than in testing or history.)
   
3. So, then I take total capital times percent risk to get my total $ risk per trade. Say, $100,000 total capital * 4.53% = $4,530 total risk per trade.
   
4. Then I find my stop loss per contract on the next trade. I always make my stop loss dynamic, rather than a set amount, by setting my stops a certain percentage of recent volatility away from my entry. ATR (or higher timeframe ATR) works well. Let's say in this example that it's $500 per contact.
   
5. Then I just divide total capital risked by stop per contract and round down: $4,530/$500 = 9 contracts.
   

 

So, what happens is you continue to risk the same amount of your capital on your system on every trade. If you make profits, i.e. - more capital, then your quanitity will rise; if you lose money then it goes down. I try to always think of profits and losses as percentages rather than dollar amounts. That makes all trades (regardless of equtiy) comparable. Hope that helps.

 

From Investopedia:

There are two basic components to the Kelly Criterion:

• Win probability - The probability that any given trade you make will return a positive amount.

• Win/loss ratio - The total positive trade amounts divided by the total negative trade amounts.

 

These two factors are then put into Kelly's equation:

Kelly % = W – [(1 – W) / R]

 

Where:

W = Winning probability

R = Win/loss ratio

 

It's worth noting that the two components, win probability and win:loss ratio, must each be calculated over a large enough sample size to be statistically significant - this means lots of trade data, and not simply minimal trade data derived from lots of price data.

 

Kelly is supposedly what Larry Williams used.

 

BlueHorseshoe

[BlueHorseshoe 10]

But the reason i started this discussion was to get a feel for who is doing really well day trading

 

Jim Simmons.

 

and what kind of objective methods they are using.

 

Hidden Markov Models, allegedly.

 

But that's not a great deal of use to you or me. Nor is knowing whether anyone posting here uses TA successfully (the answer is "yes" - law of large numbers!).

 

Here is a possible alternative question - 'Day Trading vs Swing Trading - Who Expends Least Effort for Proportionally Maximal Gain?' Just a thought . . .

 

BlueHorseshoe

[Albnd 10]

 

Kelly is supposedly what Larry Williams used.

 

 

The Kelly I had in mind was the "revised" formula proposed by this guy:

 

Quantitative Trading

Quantitative Trading: How to Build Your Own Algorithmic Trading Business (Wiley Trading): Ernie Chan: 9780470284889: Amazon.com: Books

 

[ame=http://www.youtube.com/watch?v=LJIwxiMxbaw]Ernest Chan - Capital Allocation and Risk Management (Kelly) - YouTube[/ame]

[SunTrader 10]

.....

 

Suntrader what is the showme indicator and what others factors would you use to give you a strong buy or sell signal?

 

Nothing fancy. Just something mentioned on many topics here in TL, something that I picked up years back from Larry Connors - RSI (Close, 2).

 

Here is a trade example from yesterday evening in EURUSD a buy signal, within an uptrend, confirmed by bar closing higher than previous close. Also see 2nd chart it was within a wave 4 pivot low zone - price and time coming together (note 16 bars for wave 1 and wave 4 as well).

 

As I mentioned in another forum in elliott terms wave 3 is a bit iffy since it is shorter than wave 1 and much less impulsive.

 

Be that as it may trade worked.

 

HTH

[Everest29 10]

Albnd, not sure what you mean by "discard part of the portfolio". I haven't had a chance to watch the presentation you posted yet, but looks interesting - definitely will.

 

As far as my portfolio, the process I described is what I do for each system individually. I then test the portfolio as a whole and make sure that the correlation of the systems' results combined with the position sizings don't give me any extreme historical drawdowns. I run about 15+ system/market combinations, and don't really assess the Kelly of the entire portfolio. I only really reassess the Kelly of a system if I re-optimize for some reason (which changes the Win% and Win/Loss) or if I see a single system or correlation of systems that gives me an unexpected or sharp drawdown (then I might reduce the percent of Kelly).

 

As for BlueHorseshoe's comment earlier, I totally agree that you have to have a large enough sample size and, I would add, as few variables as possible. I like to keep it simple. I test with 7-15 years of data (whatever is available) on 2-60 minute bars, so each system will have at least a thousand plus trades in testing. And all my systems (in Easy Language) will fit on less than 1.5 pages.

 

I'll take a look at that video. Thanks for the link.

[Albnd 10]

Albnd, not sure what you mean by "discard part of the portfolio". I haven't had a chance to watch the presentation you posted yet, but looks interesting - definitely will.

 

I mean, dropping (selling) part of the portfolio in case of a major drawdown, so to restore the original Kelly ratio. It may look counterintuitive (and scary), but makes sense.