Friday, September 30, 2011

Money Management

"Money Management, also called risk management, position sizing and bet sizing is crucial. It is like sex: Everyone does it, one way or another, but most do not want to talk about it, and some do it better than others."

-Michael Covel

Thursday, September 22, 2011

Peter Campbell

Why isn't this guy on Bloomberg everyday?

If I had some serious money I would want it in a hedge fund like this guy runs. He uses all the same terminology as all the other talking heads but he actually comes up with a remarkbly useful conclusion. His returns, which are seen in videos 2 and 3 are incredible. 1 million to more than 5 million without compounding in only 5 years.

Sunday, September 18, 2011

Donchian Channels Intraday

Really delving into this trend trading genre I thought why not check the intraday range bar charts. With a slight view it seems that an automated system could be created with always in method.

Important considerations for entry and reversal (or exit):

Price bars should close in the direction of the signal, not flat or in the opposite direction. This is a subtle difference. It goes along with the realization that although prices often test levels and appear to be going that direction, on a closing basis they have left no footprint on the market and so momentum has not changed, it has only paused causing smaller traders to stop out in fear of trend reversals.

Results are filtered most effectively by taking an ORB and only trading the breakouts in the same direction. This greatly reduces the amount of trades but it seems to really get the big boys trading--which is where the big moves come in. We should never forget that.

Things are even more robust if you do not take the first breakout of the day but wait for the second pop outside the ORB.

Another minor note to be aware of. If the second breakout fails to realize any gains, it's probably best to start looking for trades dipping back into the ORB. This will probably result in a winner 2-3 times bigger than the two failures. See below:

Saturday, September 17, 2011

Ed Seykota

Has the answer I was searching for in my trading. For so many years I have been composing a landscape of the market in which I could pull out a few pips. But the truth is there are no landscapes to mold on the market, the trick is to actually flow with the market. Don't stand in it's way, don't hide in the sand when it steam rolls you, don't fight it and refuse to bend to it's metamorphosis. I have been doing that for a few years now, just trying to buy reversals because of some obsession with the direction always reverting to the mean. Mean reversion, sure it exists but why trap yourself in that thinking of only phase of the markets movements? Be like water, like waves in the ocean. I read this today in Covel's book, Trend Following. I always thought the trend following system meant you had to trade crossovers of a moving average or calculate atr ranges until your brain was swollen, but its really all about at the heart of the matter is the flow of the market. God I love it when I have a rare epiphany in the market!

Here is what I read today in all it'd delightful glory:

Ed Seykota once told me a story about being in Bermuda with a new trader who wanted to learn the secrets. "Just give me quick and dirty version of your magical trading secrets," the neophyte said. Seykota took the new trader out to the beach. They stood there watching the waves break against the shoreline. The neophyte asked, "What's your point?" Seykota said, "Go down to the shoreline where the waves break. Now begin to time them. Run out with the waves as they recede and run in as the waves come in. Can you see how you could get into the rhythm with the waves? You follow the waves out and you follow them in You just follow their lead."

I finally felt that today. I didn't just read it and remember the words, I experienced the concept in all it's expansive glory.

Daily Charts "Triple Threat"

Been reading a lot of Trend Following ideas from people like Michael Covel. He talks a lot about following the trend on Daily charts and longer. I decided to find a way to trade the daily charts which suited my temperament but also managed the volatility without giving up too much in terms of profit.

First I went through all the turtle style systems and decided that although they have extremely large winners once every few cycles, on a yearly basis they don't perform very well. The Alpha as they say is almost nonexistent. Enter a small adjustment. Instead of tracking Moving averages of price, try tracking the crossover of momentum with the RSI and CCI. I used a 10 period SMA and the results are mighty satisfying.

One way I found which manages to get better exits than using hard stops is to wait for the daily close outside of the swing high or low to exit with a loss. I have seen that almost half of the trades which ended in loss later turned into winners if this one simple rule was followed. Just on Gold alone the market has done this a handful of times. It changes the outcome of the system results from break even to extremely profitable.

Here are a few results from this year so far:

Gold:  +1500 pips
SP 500: +7150 pips
EURUSD:  +1123
USDCHF: +1328

If market closes outside of the swing high and positions are reversed the returns are doubled! (perhaps this is the main finding of this entire study which I did not even consider until I posted this blog entry) This is probably the most robust daily trade system I have ever data mined. I will definitely be forward testing this and probably making an EA out of it.

REcalculating by stop and reverse the pip totals are just sickening...

Gold: +1475 (loss of 25 pips; but this takes into account those several 180 pip price swings in the past month so definitely a fat tail to consider)
SP500: +8187
EURUSD: +1060 (loss of 63 pips but well worth the extra risk considering the huge bump in other mkts)
USDCHF: +2079

Even when the stop and reverse decreses the pip total if we look back on multiyear data it will be obvious how this can lead to greater gains. Based on my years of price observation, swing high reversals are very high imbalance points in price. What this means is that price either reverses or it doesn't. Price does not just hang around these points and consequently the intial trade will work out or it will reverse against the original signal and run like hell. The way I see it, taking on more trades in this method is actually a reduction of risk.

Friday, September 9, 2011

Maximum Price Excursion

Now that I am finally working with a programmer for automation, margin levels are as important as ever. A basic   standard to follow is whatever the highest price excursion from the backtesting results, the margin level should be some multiple of that. I have chosen two times that as the benchmark. On average, price excursion reaches 60-100 pips per week per standard lot. For every 10,000 usd risked, the account should have at least 1,300 in available margin. The maximum lot risk per trade is 4. If we take 100 pips as the MPE per lot and double it (for black swans...) we are at 1200 margin per 10,000. 1,300 seems the best number to work off of going forward.