PositiveDev's trading journey

[drbubb]

Good trend there !

[Perishabull]

Ok, so here now updated to yesterday's trade;

 

 

The lower chart is a simple moving average measuring the average number winning trades, so if it is 0.5 as it is now, it means that broadly 5 of the previous 10 trades were winners. What's quite interesting about this is that I actually don't think the performance is very good at the moment, it seems quite mixed yet the equity curve runs higher. If this method of measuring performance is effective then what it means is that since the 100th trade up until now the strategy has performed on balance at the midpoint of potential performance yet there were some very nice profits made during that period. I think that is quite interesting.

 

The three month point is coming by end of October, that's what I decided would be a reasonable timeframe for testing the performance and at this point it's a go for the start of November.

 

Last few weeks I've been really busy and that has left little time for this - my trading and analysis which I love. The skills and growth I achieved as a result of the work I put into trading and analysis transferred across into my professional life. I developed a strong work ethic as a result of all the hundreds of hours I put into trading yet there was not one minute I spent on anything related to trading that ever felt like work.

 

[Perishabull]

A great day today, 3 trades, 3 wins

 

E-Mini Dow futures

 

The specific people I'm competing with in the futures market with this strategy are the retail traders active in the market. My strategy aims to find times in the market where they as a group have positioned themselves such that if the market moves against them and the professionals counteract the move I aim to take the side of the professionals when I spot these opportunities. It doesn't always work of course but today it has worked beautifully.

 

I've just set up a Limited company at companies house that I intend to trade through. It's something I've thought about for a while and now is the time. The deeper I've become involved with trading the more serious it's getting and of course the next step after the initial phase is to step out and perhaps look at trading more contracts at some point in the future, in order to do that I need to trade with the safety net of a Limited company since if some highly unexpected market event happened that got me into serious difficulty I don't want my personal assets to be on the line. Trading is a serious business, especially when you are dealing with high value futures contracts. If I approach it in a more professional businesslike way that can only be beneficial.

 

When he is older, I will be telling my son that you can achieve anything you want in life if you put a massive amount of belief and effort into it.

 

In order to do this I need to prove I can do it myself otherwise the message is going to ring very hollow.

[Perishabull]

[Perishabull]

[drbubb]

Looks like more progress is being made.

 

Any comments on Lessons learned ??

[Perishabull]

Looks like more progress is being made.

 

Any comments on Lessons learned ??

Well, that's quite an open question.

 

I think there are 3 factors I changed, 2 of them consciously, that made an important difference.

 

Firstly, my expectations of the potential achievable yield were set too high, certainly for someone like myself with no professional experience like working for a bank or a hedge fund. So I lowered my expectations of what returns I should expect on both an individual trade and a series of trades over time.

 

Second, I decided to only use pure market based information and ignore anything that was a form of indicator, indicators appear to take market based information and distort it, creating inefficiencies that render them ineffective (at least for the sort of trading I do).

 

Third is a subconscious effect and that is that since I'd been trading for 2 and a half years as a break even trader although my drive to continue was still there, my expectations of success were diminished, not in a negative way though. I simply gradually went from being certain of success in the future to being ambivalent. It seems as though that unconscious move has allowed me to think in a more clear and objective way more conducive to success. It's difficult to explain.

 

It almost seems as if there is some sort of paradoxical effect at play. That my desire of success was getting in the way of my success. In fact James Dines in one of his books describes something similar I think, this reminds me as I write this, I'll need to go back and read it again.

 

 

[i spent 30 mins writing this and then clicked add reply on my mobile and the post disappeared so I had to rewrite it all again. Not that I mind, it's been interesting thinking about it]

[drbubb]

"Firstly, my expectations of the potential achievable yield were set too high, certainly for someone like myself with no professional experience like working for a bank or a hedge fund. So I lowered my expectations of what returns I should expect on both an individual trade and a series of trades over time."

 

I think Now is a VERY TOUGH TIME to make money,

since QE has pushed asset prices up to maybe "unrealistic" levels.

 

So signs of a rollover are starting to be seen perhaps

[Perishabull]

Since I've just moved passed the 3 year anniversary of this thread and I feel I'm now moving into a different phase I thought this would be a good moment to to take a look back over the last 3 years and pick out some of the interesting analytical posts from this thread, with some ideas that could be further developed. I'm going to do this in three stages since it's taken a couple of hours to work my way through half of the material I've posted over the last 3 years.

 

 

1st October 2010 to 12th February 2012

 

 

 

"

Some more analysis I did to try and give me a backdrop to the market in general.



Charts are all in log scale on a 1 year time-frame.



Dollar Index


The US dollar index is in a clear downtrend however a Tom DeMark sequential countdown buy signal (green up arrow at current price) has been generated today. A PDF explaining Tom DeMark indicators can be found here. I have found these to be useful in the past but the joke is it picks 10 out of every 7 market tops (or bottoms).

The channel lines are Linear Regression channel trendlines. These section off price action to show extremes in price action. When the price is at the far upper or lower line it can be said to be 3 standard deviations from the mean price covering the last year. What I've also set it to show is the 95% line, 2 standard deviations from the mean price. So if price is at the upper or lower 95% line you can say it's at a price extreme that has only been seen 5% of the time during the past year, two standard deviations from the mean price.

I also show the 68% lines, that's those lines closest to the middle of the channel. The reason for this is because I want to section of the trend channel in the same way as a bell curve distribution, so that I can easily see areas where the price is 1, 2 or 3 standard deviations from the mean price.





Crude oil futures


In the Crude futures chart we can see a Tom Demark countdown sell signal was generated on April 7th, since then the price touched the 3rd standard deviation line, and today has moved inside the 2nd standard deviation line. Standard deviation is based on mean price and is therefore a moving target but it's interesting to note.


Silver futures


This chart shows a Tom Demark sell setup signal (red arrow on current price), not as strong a sell signal as the countdown sell signal but a signal nonetheless. Price is at the 3rd standard deviation line but again it is a moving target.





I also looked at divergences comparing the NYSE composite to the Dow Jones Transports and SPX;



At 1, during April last year, the NYSE composite made a lower high whilst the other two made higher highs, prior to the market drop.

At 2, at the end of May into June, the NYSE again made a lower high contrary to the other two and prior to a brief drop. It also made a higher low early in June, contrary to the other two, prior to a rally.

At 3, again higher highs were made as the SPX traded sideways and the DJT made higher highs.

At 4, resistance was seen, whilst the other two made higher highs. More recently on March 18th the DJT found resistance level whilst SPX bottomed.

The DJT then broke out but the other two appear to have found recent resistance and did not follow through.



So in summary all of the above suggests to me that we may be at a market top right now.

 

Silver futures



The blue bands running across this chart show magnitude of volume for each price level, so the further the blue bands are to the right, the higher the volume traded at that price level. It shows volume plotted in profile across price.

Using the volume shown at the bottom of the chart, since the start of the year it appears to have been generally constant and around the start of April has accelerated higher. It looks very bullish. Contrast this to the volume profile, it's trending lower as the price has accelerated from $37 until $46.

We see the same traits in SLV and SIVR.

SLV


SIVR



This leads me to think that from $37 upwards, the activity in the market may have been from speculators, johnny come latelys seeking to capitalise on the $50 level. I'm a silver bull, but I would prefer to see these late comers shaken out of the market, and a more consistent price appreciation. Silver has gone up more than 250% in 8 months.


A comment I saw on Zerohedge;




And finally;

"$1,000 OUNCE SILVER IS CONSERVATIVE" (Really?)

Only in a hyper-inflationary event.

There seems to be a detachment from reality here, it reminds me of the wild high estimates of oil during the spectacular 2008 rally.

I've been looking at some day session data on the NASDAQ 100 in order to gauge the frequency and range of points moves.

Using data from 1st May 2009 to 27th May 2011 I looked at daily points ranges (for the day session), and the frequency of different ranges during this time period, and charted them.




This shows that there are very few days where the range is 10 points or less, and that there are very few high range days, which is what you would expect to see.

The most common points range is 20 points. 20 point range days occurred on 31 separate trading days for the time period charted.

It's appears from the chart that the bulk of points ranges for the day session appear to be between 14 and 29 points.

Looking at it from the perspective of a bell curve, the most common points ranges are between 12 and 31, these occur 68% of the time. That is one standard deviation using the data shown. Day sessions with ranges above or below that are therefore less common, found only 32% of the time.

Of course there are many variables here such as the selection of data used. I used from 1st May 2009 to remove the volatility from the tail end of the crash, that bottomed in March 2009 (the volatility would skew the data). Periods like that are exceptional. Another factor is that clearly as markets rise in value their day session range would tend to extend also, and as some of the dataset was from when the NASDAQ 100 was several hundred point lower, this is likely to have skewed the end result to a degree. This is likely to mean that the 0 to 1 standard deviation range of 12 to 31 may actually be around 14 - 33, based on the present valuation.

Volatility is also something that needs to be examined, and the impact that has on day session ranges. That is something else that can be looked at, at some point.


For the trades I take I also keep stats afterwards of what could have been achieved over the whole move without using a trailing stop, to see the maximum points available from each trade. This is so that over time I can gauge what a reasonable expectation of points might be, for the trades that do particularly well. Looking at the data from the trades I initiated, there were only 4 trades with a possible yield of over 30 points (and that's nearly 100 trades). So that's certainly in line with what I've shown here.

There is an argument to be made for a different approach to stop-loss management here, and that is, if a trades get above a certain number of points, eg towards the 31 figure, the stop should be moved closer to the price, since at that time the case for a larger move is diminished. I may also look at a more dynamic approach such as reducing my trailing stop as a trade gets over 20 points, and gradually reducing it further as it gains more, to keep the trade in line with the bell curve distribution of day session points ranges.

This is with a nod to Niederhoffer - Quantify Quantify Quanfity

I also looked at points gained on trades over time;



The trend is up. This is good and means my performance trading the system is improving. There are proportionally more trades during March, as I took March off work to trade full time.



I also had a look at the performance of the system as a whole, that is all of the signals generated up until now;



The trend is flat, this is also good, confirming that so far, the system is consistent.

~Some quotes;

"With self-discipline anything is possible"
-TR

"Energy and persistence conquer all things."
-Benjamin Franklin

"You can have anything you want - if you want it badly enough. You can be anything you want to be, do anything you set out to accomplish if you hold to that desire with singleness of purpose."
-Abraham Lincoln

Currency divergence with E-Mini NASDAQ, EUR/USD, AUD/USD and AUD/JPY (19th Aug to 15th November);


This shows clear divergence between the NASDAQ and key currencies between 7th and 21st September, NASDAQ trending up whilst currencies are trending down, this tends to lead into corrections in the NASDAQ. More recently the Euro is diverging away from the pack.



Currency divergence with E-Mini NASDAQ, EUR/USD, AUD/USD and AUD/JPY (21st Oct to 16th November);


Looking more closely, recently there is clear divergence of the type that leads into a correction, similar in nature to the first chart between 15th and 21st of September, but not as pronounced. I understand EUR/USD is now at a 5 week low.

"

[Perishabull]

 

 

Since I've just moved passed the 3 year anniversary of this thread and I feel I'm now moving into a different phase I thought this would be a good moment to to take a look back over the last 3 years and pick out some of the interesting analytical posts from this thread, with some ideas that could be further developed. I'm going to do this in three stages since it's taken a couple of hours to work my way through half of the material I've posted over the last 3 years.

 

12th February 2012 to 23rd July 2012

 

 

 

"

 

Further divergence set up;

Performance of Crude oil futures compared to GDX over 3 years


They were reasonably well correlated for a time.



A look at the Crude Oil - GDX spread (Crude Futures minus GDX) over 3 years;


Could nearing the top of the channel signal an impending low in GDX?



Crude Oil - GDX spread with GDX


Lows along the channel were good points to sell GDX, highs were good points to buy, with the exception of the end of April last year, but that was an obvious period of excess in the precious metals sector.




GLD and GDX performance over 3 years

 

Natural Gas is $2.093 per MMBtu (1 MMBtu = 1 million British Thermal Units)

Crude oil is 5.6 MMBtu per barrel (from http://www.physics.uci.edu/~silverma/units.html)

Crude oil is currently at $103.25 per barrel therefore;



Cost of 1 MMBtu from oil = $18.4375

Cost of 1 MMBtu from Natural Gas = $2.093


Prices are at a ratio of 8.809 : 1 (based on actual energy content)

The ratio of Crude Oil (cost per MMBtu) to Natural Gas (cost per MMBtu);

[Chart using Dow Jones sub-Indexes - DJUBSCL and DJUBNTRG]

 

Looks like my observations were accurate, there was a bubble in relative cost of energy. The Crude : NatGas MMBtu cost ratio ;



The ratio is now 6.88 : 1

 

I've shifted the trendline lower as it's come down slightly over the last few days;

GLD-SPY (Weekly)



GLD-SPY (Daily)


Maybe something clearer will emerge over the next few days.

"

[Perishabull]

Since I've just moved passed the 3 year anniversary of this thread and I feel I'm now moving into a different phase I thought this would be a good moment to to take a look back over the last 3 years and pick out some of the interesting analytical posts from this thread, with some ideas that could be further developed. I'm going to do this in three stages since it's taken a couple of hours to work my way through half of the material I've posted over the last 3 years.

 

 

24th July 2012 - 27th October 2013

 

"

One short at 13:08, filled at 2576.75;

 

 

Stopped out in fairly short order for a 2.5 point loss, got skinned half a point of slippage on the exit. The Richmond Fed Manufacturing Index for July came in at -17 against expectations of 0.

 

A big drop to a low not seen since 23rd September 2008, 8 days after the collapse of Lehman brothers...;

 

Richmond Fed Manufacturing Index

 

Doesn't bode well, this should sharpen the market's acuity and focus on upcoming data in the coming days/weeks.

 

 

What is interesting is how markets seem to "pull together" sometimes at turns, almost as if the correlations between the markets peak out closer to 1 then fall off following the turn...;

 

The turn here is 2 mins after the open.

 

Found an interesting website www.absolutereturns.com;

 

"Absolute Returns, founded in 2007, is an independent managed futures and alternative investment performance database for both individual investors and brokers. Managers report to our database directly.

 

You can look at various funds, CTA's etc, it's quite interesting looking at their historic equity curve and their disclosure docs that details the strategy employed.

 

 

 

Here's one that stands out;

 

 

 

The background of the manager also stands out;

 

"Sanford J. Grossman earned his B.A. in 1973, M.A. in 1974 and PhD in 1975, all in Economics, from the University of Chicago. Since receiving his doctorate, he has held academic appointments at Stanford University, the University of Chicago, Princeton University (as the John L. Weinberg Professor of Economics, 1985-89) and at the University of Pennsylvania's Wharton School of Business. At Wharton, Dr. Grossman held the position of Steinberg Trustee Professor of Finance from 1989 to 1999 (a title now held in Emeritus) and also served as the Director of the Wharton Center for Quantitative Finance (1994 - 1999).

 

In addition, Dr. Grossman was an Economist with the Board of Governors of the Federal Reserve System (1977-78), and was a Public Director of the Chicago Board of Trade (1992-96). In 1988, he was elected a Director, in 1992 served as Vice President, and in 1994 was President of the American Finance Association.

 

Dr. Grossman's research has spanned the analysis of information in securities markets, corporate structure, property rights, and optimal dynamic risk management. He has published widely in leading economic and business journals, including American Economic Review, Journal of Econometrics, Econometrica and Journal of Finance. His papers include "The Existence of Futures Markets, Noisy Rational Expectations and Information Externalities"; "On the Efficiency of Competitive Stock Markets Where Traders Have Diverse Information"; "On the Impossibility of Informationally Efficient Markets," with Joseph Stiglitz; "An Introduction to the Theory of Rational Expectations Under Asymmetric Information"; and "The Costs and Benefits of Ownership: A Theory of Vertical Integration," with Oliver Hart. Dr. Grossman's original contributions to economic research received official recognition when he was awarded the John Bates Clark Medal by the American Economic Association at its December 1987 annual meeting. The Q-Group awarded him first prize in The Roger F. Murray Prize competition for the paper "An Analysis of the Implications for Stock and Futures Price Volatility of Program Trading and Dynamic Hedging Strategies." The Editorial Board of the Financial Analysts Journal awarded him the 1988 Graham and Dodd Scroll for "Program Trading and Market Volatility: A Report on Interday Relationships." Dr. Grossman received a Mathematical Finance 1993 Best Paper Award for his article "Optimal Investment Strategies for Controlling Drawdowns." Dr. Grossman received the 1996 Leo Melamed Prize by the University of Chicago Graduate School of Business for outstanding scholarship by a professor. In 2002, Dr. Grossman was recognized by the University of Chicago with its Professional Achievement Citation. Most recently, he was awarded the 2009 CME Group-MSRI Prize in Innovative Quantitative Applications.

 

Currently, Dr. Grossman applies his rigorous scientific approach to improving and developing systematic investment strategies and risk controls for QFS."

 

 

 

$811 Mill assets under managemnt, minimum investment $250K. Counts me out.

 

Yesterday I started looking at a different type of analysis work that gives structure and context to a market, its called median line and involves using Andrews pitchforks and looks very interesting indeed. Indeed I noted what looked like a good position to short, 6 am yesterday then had other plans for the day and later saw it was an excellent point to have shorted equity markets.

 

 

NASDAQ futures

 

Interestingly it meshes well with another type of analysis I do that compares equity markets to currency markets.

 

Highly intriguing for the positively deviant.

 

Thinking back to this trade I had last Friday, the analysis was great, but the execution was poor. I have previously traded futures spreads and I realised I could not only trade the spreads themselves but also open a spread as a prelude to a straight long or short position.

 

In the above case my analysis suggested the market moving in a particular direction and I was right, but I got stopped out. In the future if a similar scenario developed the correct action would be to go short Dow Jones futures and hedge immediately by going long S&P 500 futures. The two are very closely correlated, here's a chart showing the correlation between proxies for the two - the SPY ETF and the DIA ETF.

 

 

The correlation is 97.32%, they are the most correlated indexes, among the main ones that are actively traded. Clearly this strong correlation isn't likely to be quite so consistent as you shorten the timeframe but it's a good general indication of the correlation.

 

 

The strong correlation is also visually clear, as shown on one of the analysis charts;

The grey and black lines are Dow and S&P

 

NASDAQ, DOW, S&P 500 and RUSSELL 2000 (late Feb to present)

 

This next charts shows Dow Jones futures at the bottom, and you can see where I went short and got stopped out. The chart at the top in the S&P 500 futures, and the black line in the middle is the spread between the two;

 

 

 

So for this type of trade, I should go short Dow Jones futures and take a long position in S&P 500 futures at the same time (green arrow in the upper section of above chart refers). Then I only keep emergency stops well wide of the market for each position just in case something very dramatic happens. Once it is clear that the Dow Jones is headed in the direction my analysis suggests and starts a downtrend, that is where I then close the long in the S&P 500 position (red arrow on upper section chart refers), and then put a stop above the market for the Dow Jones position.

 

Another way to look at this is that I am initially going long the S&P500 - Dow Jones spread, prior

 

The advantages of this type of entry;

• Initial timing is less critical
• Trade far less likely to get stopped out whilst waiting for market to go in direction of analysis (since the opposing position is taken as an initial hedge in a closely correlated instrument)
• Non-significant market moves are cancelled out by the initial hedge
• It's possible yield could be generated from the spread initiated before the full long or short position is taken.

The disadvantages of this type of entry;

• Despite the high correlation the spread could widen/narrow opposite to the spread initiated
• A loss could be generated prior to the full long/short position being intiated.
• Higher commission cost.

 

 

 

S&P 500

 

This just looks wrong , it's just going higher at too steep an angle. Nothing that a vicious correction won't sort out though.

 

And the 1 year chart;

 

[AND ORDER FLOW EXAMPLE OVER LONGER TIMESCALE TO FOLLOW]

 

"

[Perishabull]

My focus is on the Dow 30 - it's E-Mini Dow Jones Industrial Average futures I'm trading.

 

[Perishabull]

Interesting day today, in the Dow Jones Industrial Average the retail traders were bearish almost all day whereas the market itself actually closed higher although for the first half of regular trading hours it did paint a slightly bearish picture.

Trade 31st October

A difficult market to navigate today and unusual too - 7 trades and I ended the day only up by a small margin.


I am now at the 3 month point with this strategy and here is where I stand.




This is the sort of performance I am looking for. The Dow Jones Industrial Average has a low number of constituent components (30) with the main publically owned large cap businesses in the US. I think that and the large cap nature of the index combine to provide less long term volatility and perhaps that explains why my strategy and trading matches well with that market.

I looked at the long term volatility of;

the Dow Jones Industrial Average using VXD

the S&P 500 using VIX

the NASDAQ 100 using VXN

the Russell 2000 index RVX

Over the last 8 years

The Dow Jones Industrial Average is typically less volatile than the S&P 500, at least using this measure. I was surprised to see that the NASDAQ 100 volatility in grey has typically been lower than the S&P 500 and Dow Jones Industrial Average. Most of the time the Russell 2000 appears to have been the least volatile from this perspective.

I'll need to assess the possibility of using these same techniques on perhaps the NASDAQ 100 futures and/or the Russell 2000 futures. The S&P 500 is one to avoid, it seems overladen with ultracompetitives colliding with each other.

Volumes of the different futures markets;

There ought to be better opportunities in the lower volume markets relative to the high volume markets - less competition - and on that basis the Russell 2000 is more attractive than the NASDAQ 100.

[Perishabull]

18 trades this week

 

 

Looking at the overall position in terms of numbers of trades the win/loss ratio is a fairly consistent. It fluctuates over time around the 1 : 1 mark, it's 0.95 : 1 right now. Consistency is the most important factor since trading futures is a scalable business, if you have consistency then you can develop the size over time. The question is what condition you set for an increase, I think it has to be based on consistency, capital available and expected draw down periods.

 

The strategy that I'm using is one that I can only see being impacted if there were some sudden and dramatic changes in the make up of the participants in the futures markets and I can't see that happening unless there were some regulatory changes limiting market access.

[Perishabull]

Yesterday's trades (4).

 

 

3 wins with 1 loss. I'm sure it's self explanatory however a red arrow indicates a sell and a green arrow indicates a buy. So the first arrow is red indicating an entry into a short trade, the next green arrow indicates the trade exit point. The next green arrow following that is an entry into a long, that was the trade that got stopped out.

[Perishabull]

Good results today;

[/url]

 

4 wins, 2 losses and one closed early near breakeven.

 

As previously mentioned, for this strategy, my historic ratio of wins to losses is typically 1 : 1, with some movement. Days like yesterday and today push the ratio in the right direction.

 

I'm doing some research to see whether this type of strategy could be used trading NASDAQ 100 futures, I'm aiming to get most of it complete at the weekend, it's time consuming work to do it properly.

[Perishabull]

3 trades today;

 

A win, a loss and a break-even

[Perishabull]

When I looked back over the last three years of this trading journal I realised that there are really three distinct types of trading available to me based on my analysis work over the last 3 years;

 

1. Trading an edge on an intra-day basis.

2. Trading divergences between currency and equity index markets and divergences between individual equity index markets.

3. Special situations identified where a large opportunity develops in a specific market.

 

 

1. Refers to my day to day trading that I regularly write about on these pages.

2. Relates to scenarios such as the following;

Stock index future divergence from currency markets;

and

Divergence between stock index futures

3. Relates to special situations such as the following;

On 7th April 2012 I identified a bubble in the relative cost of energy per MMBtu when comparing Crude Oil to Natural Gas, the point where the trend in the ratio broke signalled the low in Natural Gas

The ratio in log of Crude Oil (cost per MMBtu) to Natural Gas (cost per MMBtu) shown in comparison to Natural Gas;

[Perishabull]

4 trades today;

 

1 win and 3 losses

[Perishabull]

After this week's trade

 

This week was bookended by losses on Monday and today

[Perishabull]

 

I'm doing some research to see whether this type of strategy could be used trading NASDAQ 100 futures, I'm aiming to get most of it complete at the weekend, it's time consuming work to do it properly.

 

 

I've looked at nearly two months data for NASDAQ 100 futures over the weekend with a view to seeing if the current strategy I'm trading using Dow Jones futures would also work on that market. It doesn't seem too encouraging so far, I think I'll need to make some adaptations to it, or perhaps I'll do some research on Russell 2000 futures instead, when I have more time.

[Perishabull]

3 trades today;



1 win and 2 losses

[Perishabull]

5 trades yesterday

 

 

2 wins and 3 losses

[Perishabull]

3 trades today

 

3 wins

Unusual day in terms of order flow, possibly similar situation to previous intermediate top in US equity markets but since I'm away from home I'm trading remotely so unable to do proper analysis until Friday when I'm back home.

[Perishabull]

3 trades today:

 

 

2 wins and 1 loss