Wednesday, February 24, 2010
Saturday, February 20, 2010
- RSI is around 50 level
- long-term (200sma) - UP
- intermediate (89sma) - FLAT
- short-term (10ema) - UP
Friday, February 19, 2010
Getting back to break even level or “Back to Zero” is exactly what I would like to write about today.
Trading and sports (and any other performance discipline) are very closely correlated in terms of skill development. Many hours of learning, back testing, paper trading, keeping journals and statistics - all of that boils down to one trade in a day, month or a year. Same is with professional sportsmen’s training: training day after day and even more training and preparation and hard work, just to run 100 meters race in approximately 10 seconds.
Many years back, country that I’m coming from (Yugoslavia - as of now there are six independent countries, as a result of dissolution of Yugoslavia) had the best female tennis player, who dominated for period of few years. Her name is Monica Seles and she played at the time of Steffi Graf. Her success in tennis arena was recognized because she was number 1 player for many months and because she won Grand Slam tournaments.
What some tennis player from some ex communist country has to do with trading?
It is very simple: Monica Seles, from the beginning of her tennis career was taught not to count points in any of games/sets played. On the contrary, she was taught to play every point like it is the last point in the game, match or her life. This approach might cause some disagreement, but her results proved that those coaching ideas were viable options.
Yes, but what about trading?
If you ask me - “Back to Zero” is something that will hurt anybody’s trading skill. You should execute trades like this is the last trade which will be thousand point winner. (All of this, adhering to your system health analysis, money management, trade management and risk management rules.) You should not look back to locate where we stand on the equity curve and how many points we should make to break even. Bigger picture is what has to be there in front of your eyes.
Equity curves and drawdown have their own space in statistical measurement of system and systems comparison and these statistical measurements are, among other tools, very important. My point is: If you trade thinking about “Back to Zero”, that is probably going to put tremendous pressure on you.
Of course, if one is undercapitalized and must pay his bread and milk from monthly profits, “Back to Zero” becomes massive problem. However, that is the story for next time.
Trade with trend!
Thursday, February 18, 2010
Wednesday, February 17, 2010
Friday, February 12, 2010
I would say: LEARN TO TRADE (One setup and try to trade it every time. Of course, this setup must be with positive expectancy or to put it simple – it must make money. )
First and foremost important task for any trader is to learn to trade. If you look at small baby you can learn a lot about trading and for that matter any other sphere of life. Babies first start to crawl and only when they are very confident in crawling they try to get up and, of course, they fall few times and suddenly, they start to manage to stand on their feet and after trying to make step or two they fall again. After few months, which is in baby’s life probably as much as many years are to us, our baby feels confident to walk and only year or two after it started to crawl it starts to run, climb and jump.
So, for all beginners in this game I have something that might sound harsh: You are babies and don’t try to run before you crawl!
How one can learn to trade and what that exactly means?
I find that answer to be a very simple one: Find setup with positive expectancy and trade it every time. This way you will have privilege of having something that makes money and your account will not be jeopardized. Second, you will become very disciplined and discipline for trader who has setup with positive expectancy is everything. If you follow this you will be able to survive much longer than your friend from the beginning of the story and you will probably make some money over longer period of time. Of course, your results will be very different from the results achieved by other trader who trades very same set up and who is doing that for period of more than few years, simply because of trade execution and experience (less points lost due to slippage), but making money is not prime task now.
After you mastered one setup and discipline (So, now you “know” to trade, mini learning process is finished.) than it is time to try to find set up that completely suits your personality. During first two to three years you are going to try to get your way around trading without losing your shirt. After three years of looking you might end up with better systems - systems producing more points from fewer trades, with better T and F formula stats.
What I see very often is that beginner will start trading one system; then he will find on internet system that makes more points and will jump to that one; then his friend is going to tell him about the new guru on the block, so he will go and pay few thousands for this new system with 99% win rate. At the end of three years period our trader will have absolutely nothing behind him. He would trade twenty or thirty systems with not having clue what is going on with each of them. That is recipe for disaster.
Simply, start trading one system, work on your discipline and don’t worry what will happen tomorrow. As I said many times, this is not sprint - it is marathon.
Always have bigger picture in mind.
Trade with trend!
Thursday, February 11, 2010
If you revisit my post from 21. January 2010. you may find how five different trend-following swing systems (3 different time-frames) performed during lower market volatility periods, which were defined by 5-day & 10-day ATR.
As we did get some volatility recently (5-day ATR was for total of two days above the mean value – on February 5th and February 8th, 2010) and as several systems I follow have started to perform again closer to their historical averages, I’ve decided to post updated version of the table that was shared in original post.
Trade with trend.
Here we have ALSI 30min chart from around 19. January 2010.
There is down slopping channel which started around the same time. Top of that channel was tested at least five times, while bottom was tested three times.
Yesterday ALSI tried to break to upside, spending almost 3 hours just bellow trend line and at the end when ALSI failed to do that, it just dropped some 600 points.
What are the possible scenarios from here:
- Bearish one will take us down to bellow 23000 and as I am seeing that MACD just rolled over and is breaking 0 line, this scenario is more likely one.
- Bullish one will take us to test upper trend line with stochastic being low (Don't forget stochastic can stay low or high during prolonged trends.).
Trade with trend!
Wednesday, February 10, 2010
Market movement from 8:30am (ALSI open) to 9:00am (Top40 open) is very slow, with low volume and very often with very small range and, of course, gap. All those are pushed by “tape-readers” or traders who check US and Asian markets and then decided what to do. Probably more often than not they are wrong, trading without any kind of plan, basing their decisions on observations.
From 9:00-9:30am volatility increases with shares being traded and same process is repeated, this time with new observations when it comes to behavior of major indices on JSE. Traders and investors are keen to dump their shares or buy everything available because US last night was in red on green. Again, we have bunch of people making their decision based on emotions/observations, not on solid trading plan. In addition, during winter months in
So, I hope this explains why my system is not trading before 9:30am.
However, after 5:00pm all is completely different: US markets are open; volumes are high - so why not trade then?
I would refer you to two charts on the top. Those are equity curves for exactly same system based on end of the day data.
First equity curve represents system when signals are taken from ALSI chart and system is executed on ALSI. Trades are taken at 5:29pm if signals are given.
Second equity curve represents system when signals are taken from J200 chart and system is executed on ALSI. Trades are taken at 5:05pm if signals are given.
Just to remind all - Systems are exactly the same!
You can see vast difference between these equity curves. That is simply because trading ALSI after 5:00-5:05pm brings extra volatility to our market. Cash market is closed, so ALSI does not have to follow anything and big boys are moving contracts, pushing market up or down.
For swing systems this is no go zone and one can simply switch data feed off after 5:00pm if one does not have nerves to watch his positions.
However, I want to add that after 5:00pm conditions are ideal for scalping, because movements are usually very sharp, but that is not part of my trading tools, so I will leave scalping as subject to more proficient traders in that environment.
Trade with trend!
Tuesday, February 9, 2010
I’ve received several questions about previous post (J200 and Normal distribution) from my trading friends on Skype and on one of the forums where I am active (www.page88.co.za), so I have decided to respond here on blog.
If we assume that we have ideal trend following end-of-the-day (EOD) trading system (100% win rate), then that system is going to mirror market and will produce results that are not normally distributed, as our market is not normally distributed when it comes to difference of daily price changes at market close.
However, as our trading system is not perfect I’ve decided to test distribution of trades for that particular system and for additional eleven trend following trading systems that I trade and/or paper-trade (5min-15min-30min-EOD). For all of them it was more than clear that trade distribution is not normally distributed, with systems successfully relying on market extremes and successfully catching market events during which market reaches extremes several standard deviations from the mean. Of course, this kind of distribution catches some big fat-tail losers too, but as long as these systems continue to catch more positive fat-tail events, they are going to continue to perform. (Please note that these fat-tail events can result from daily returns and/or follow through or can be result of massive one-directional short-term burst in volatility.)
One of the items on my to-do list is to look at normally distributed trend following systems with 60%+ win rate, just in order to have few different machines when compared to these twelve systems I follow, as for all of them win rate is somewhere between 30 & 45%, with average win/average loss ratio being between 2 & 3.
When it comes to mean-reverting strategies and their distribution – I am not actively exploring anything in regards to mean-reversion and I am not willing to comment on this, as I haven’t done homework yet.
Finally, all of this gives me nice platform to come to the point that I wanted to make since I started with original post:
If one’s system has proven (with enough data sample; over many market conditions; with enough out of sample data, etc.) to be able to provide trade entries that over time yield positive results through fat-tails, then trader has to be extremely disciplined in letting profits run, as over time system will lead to positive results. All of this, of course, until system breaks down and that is something that I will be writing more on in the future.
Proper money & risk management are to be employed, as almost always trading great system(s) with too little capital will lead to ruin of one’s trading account.
Trade with trend!
Attached graph shows trade distribution for one of the variations of our 30min system for period: 19.12.2007 – 03.02.2010.