Wednesday, October 10, 2012

Anemic Volatility

Here we are into the homestretch of the trading year and volatility is frighteningly anemic. Meantrades just doesn't perform well on an intraday basis without those sharp swings between support and resistance. Taken about a 20% hit the past 2 weeks and am considering waiting it out a few days, even weeks, until the volatility returns. I feel fortunate I can see a link between the system results and a precise metric. However it still does not change the fact that market conditions are not ideal for a system which buys volatility.

Until I see a decent uptick in the 3 month ATMF volumes, I am going to trade the weekly version of meantrades where at least I know the markets can trend long enough to see some gains.

Thursday, September 6, 2012

Keeping the switch on

Looking back at the previous post so many months ago I am pleasantly surprised at how much my attitude towards automation has changed. Since the end of June I have been on an automated version of my system and the results have been nothing if not impressive. Some takeaways over the past few months in my transition from mechanical manual trading to automation include:

  • Accepting drawdowns with a more passive attitude. The roll-out of the EA conincided with a technically poor Forex market. There was no volatility or serious volume coming into the market this summer--which is to be expected with many large traders off for the summer months. However I kept the controls on and sat passively while the system took it's lumps. It was perhaps the first time ever in my trading career where I allowed my account equity to drop without any attempt at hedging or removing stops. Ironically I feel I have grown as a trader by becoming less involved in my actual trades.

  • Having a healthy expectancy. By knowing how meantrades has performed in the past, keeping the switch on during drawdowns enables me to avoid missing the huge upswings in account equity. At the moment my expectancy is only around 1.3 for every dollar risked. Most long term systems tend to float around 1.5 to 2 for really huge returns. There are a few considerations on the lower expectancy such as trailing supertrend exits too closely during flattening volatility in the Asian session. Widening the supertrend stop as well as taking Friday afternoons off are two of the ideas I am toying with currently. Generally speaking though, 1.3 is enough for things to get very interesting in the long term. Currently meantrades is running at about 60% accuracy on the 3 markets I am trading everyday (those are EUR/USD, GBP/USD and the cfd for oil). I am thinking like a trend trader on this matter and would probably like to tighten the stops more, reduce the drawdown and get larger returns less frequently. All in due course. For now it's about keeping the switch on and maintaining a healthy expectancy.

Wednesday, May 23, 2012

Weekly Meantrades

The past few weeks have been nothing short of frustrating. Automation with constant range bars on Metatrader 4 seems futile. With a single disconnect from the brokers server, the constant range bars are immediately scrambled and thus any reversal patterns are suspect. Somehow this had me thinking about how I can get this very decent system called meantrades running without a hitch. I came up with a version which uses 240 minute and 60 minute bars.

The only major difference (there is one minor variation however) between this system and the constant range bars version is that it is restricted to only 1 profitable trade a week. "Profitable trade" as in it will enter up to 2 unprofitable trades in the same direction per week. This is similar to the intraday meantrades which only takes two consecutive unprofitable intra-day trades in the same direction.

The results thus far are quite respectable. Considering the time invested versus return on capital, the weekly version of meantrades is a better deal for smoothing out the all important equity curve.

I realize these numbers probably seem absurdly high and I am just as skeptical as anyone else would be. But it's been backtested for several years and all trades are based on a closed bar basis so it is pretty hard to fudge the results.

Currently the XAU/USD weekly version of meantrades is running at 75% for the year with a total of 698 pips employing a trailing stop. With a fixed 100 pip target it's coming in at 871 pips. Let's say we are in June already, since we cannot take another trade until next week, that is a very tough return to beat of 145 pips per month trading no more than 1 winning trade per week.

The results for the EUR/USD market are also quite respectable. Coming in at 69% for the year trading only once a week the supertrend exit works out to 963 pips thus far while a fixed exit of 63 pips has yielded a return of 335 pips. Winning percentage is based on a total of 26 trades so far this year.

I initially set out on this discovery using the AUD/USD. My thinking was that somehow if I ever got around to getting meantrades automated I should probably try it out first on some less volatile pairs. I have never traded AUD/USD seriously as it seems rather dull market. In fact it's almost as profitable as any other market I looked at. The results came in as follows: 70% winners out of 27 trades taken. Most impressive are the drawdowns to achieve profitability. The market just seems to trend better than others when applying the lens of meantrades. Average losing trade was 67 pips while the average winning trade was 55 pips. This is the only serious issue for me trading less frequently. The average winner is normally larger than the average loser in a robust system. However when you are applying a trailing stop methodology for exits, the out sized returns of just a handful (or even a single yearly trade) can outpace the averages quite easily. As the Black Swan movement has attested to, the market does not reward those who seek the average return on equity as a benchmark, it obliterates them every few years with massive crashes and bubbles. I'm not a fund manager and I'm not seeking an average return so I will keep doing what I'm doing until something comes along which makes more sense.

For now, meantrades with trailing stops seems like the best way for me to trade these volatile and incredibly profitable markets for the foreseeable future.

Some of the inner workings for setting up the weekly meantrades method:

  • The ratio levels need to be set off of the first 4 hour bar of the week or the second bar. This is slightly subjective in that I prefer to use the smaller of these two bars, unless it is just too small a range. In that case I will use the first 4 hour bar regardless of how large it is.
  • Stops are usually an hourly close beyond the swing high of the trade entry. However in some cases this bar closes inside the Keltner bands (even though it is outside the highest high or lowest low for the trade setup). It is best not to take the loss until price has also violated the Keltner bands. There have been many cases where price makes a minor new high or low inside the Keltner bands only to reverse immediately. 
Here is the only trade currently open with Weekly meantrades. An EUR/USD short currently sitting at +110pips. Stops are already at break even since price has already touched the opposite Keltner band from where the trade originated (as per the original rules of meantrades).

Wednesday, April 4, 2012

Trending or Ranging? Stops or Cost averaging? Zero loss trading? Wake the fuck up.

There are a few basic unanswerable questions in intraday trading. Is the market trending or ranging? Do I use hard stops or average in? Has the market volume dried up for the day? Only the left side of the chart can give any clues. I've tried at various times to achieve some semblance of a complete system. One which avoided the draw-downs necessary in institutional standard systems popular in the trading community but I have never succeeded in achieving any level of certainty about my trading.

Last week I modified one of my basic exit criteria from using swing high extreme price levels to relying on a very good but nonetheless, delayed indicator called "supertrend." This resulted in disaster for my account. Instead of having a fixed stop loss range in place (because fills can be dubious in the forex world), I was giving myself back to the fate of the markets. Huge fuck up. Markets don't "respect" indicators. They are just tools to help confirm what you are already positioning for. Once you let indicators decide your sole entry and exit you are fucked and feeble. That's not trading, that's more like tossing a chinese star in the air with your bare hands below it. A bad idea set in motion. Sometimes I wish I had a very close trading ally. Perhaps this is why most great traders don't actually pull the trigger, they have clerks who do the "dirty work" for them.

March was a decent month. I only traded 2 weeks but came out with a 20% return on equity. Very pleased. But then I went and messed with a sound risk metric, employing "supertrend" as a stop loss rather than simply a trailing stop. This caused me to give it all back to the market. Back to humble pie for me grandma.

In addition to battle tested methods of meantrade, I have always been focused on finding a way to trade ORB (opening range) breakouts on the same chart as reversals. I finally discovered that using a trailing indicator such as the cci, stochastics or rsi on a larger time frame as a directional indicator of the current market (yes, still a lagging metric but trends tend to persist in forex for at least a few hours which is all I need to take profits on a weekly basis) creates very robust breakout trading opportunities on my constant range charts. I have been using 10 pip ranges for both my EUR/USD and GBP/USD charts as of late as I find the market is as whippy as ever and the 20 crb's were giving back far too many pips.

I am now taking the pre-London range as my two trade levels (long and short). I only trade in the direction of the 4 hour indicator (in this case the 4hr reading of the CCI should be above the 0 level). The results are not bad. With this method it enables two trade opportunities per market per day. If the market breaks out I can enter at first break and if it pulls back to a trade level I am watching, I can enter for a nice reversion trade. Now I have both sides of a good market on my radar and on the same chart. This is somewhat encouraging for me as I was often sitting staring at the screen waiting for a meantrades setup to occur while the market just takes off without any retrenchments. Not a particularly useful way to trade the forex market these days.

So I will take this massive hiccup in stride. I will stay the course, I won't take this as an indication that I have failed once again. But a very sound reminder that I have a decent system, which works but requires that I take my medicine. And everyone knows a traders medicine is their stop loss.

Sunday, March 25, 2012

Negative excursion volatility based stops

Over the past few months I have begun to employ more and more traditional price based stops. The beginning of this year found meantrades reaching into drawdowns which I was not that comfortable trading with. Taking hard stops and walking away for the day is tough in any system but when applying it to a mean reversion system it means you are inevitably getting stopped out just before the market turns.

Since employing supertrend volatility metrics I realized that there is a remarkably consistent pattern occuring between price action and the ATR based indicator popularly known as supertrend. When the market reverses and the signal is created in the meantrades system very often if the market does not take off in the expected direction it will pasue for a while and then resume the expected direction. However if it doesn't it will accelerate resuming the trend creating a negative excursion for meantrades. This is ok, I have always dealt with this and will continue to do so. But the beauty of supertrend is that it allows you a chance to observe price action and its commitment for continuation or mean reversion.

So I'm adjusting my stop method slightly again. Instead of taking the swing high or low I will employ the  supertrend crossover on its second negative excursion.

You can see in the screenshot below that a signal was generated at 11:24 and then the market resumed its uptrend. Once more the market began to revert to its mean however it could not reverse as anticipated so a stop was taken on the second supertrend crossover to the upside. Notice that the stop taken is actually lower than the swing high--where we have been taking stops for the past few months.

This stop method does have an unpleasant downside. You cannot know exactly where you will stop out before you enter the trade. However taking the observations of legendary traders who have come before me as dogma, it has been said time and time again, markets revert to their mean, even on a fractal level and thus for every larger stop painfully absorbed, there will be many smaller stops which create more meantrades alpha in a longer data set. Markets will always seek the most viscous point to move towards in order to damn the largest amount of traders in the market. By employing a volatility based stop which assumes markets will revert on every level of price action, stops should see a positive reduction in end of day balance draw-downs. However this means intraday account balances will almost certainly increase.

Employing this stop revision, results from the 3rd week in March have been encouraging.

EUR 3/19-3/23: +160
GBP 3/19-3/23: +47
XAU 3/19-3/23: +184 (this includes the stop posted above on Friday's trade)

Sunday, January 29, 2012

Meantrades in a slump; What would Jesus do?

As is usually the case, a trading system goes through periods of immaculate fluidity where almost every signal follows the market precisely. Meantrades had several months last year where profits became so much the norm that I briefly began to think it could be automated due to its steady ability to produce consistent and robust profits. Well, the past two months have put a real damper on my confidence in that regard. Granted, meantrades has, historically, never been very good in December and January. This year however, it's just worthless. There have been periods of more than 3 trading days where not a single currency pair I trade has produced break even results. Normally meantrades is very good at capturing ranging markets and occasionally a few reversal trades which turn into huge winners. This is the secret sauce to meantrades. It needs a few huge winners each month to make it truly profitable. Without that expectation, there is no reason to "blindly" take its signals. Expectancy is the Jesus factor.

Without faith there can be no commitment to the system. Once this is the case we are back to speculation and playing with randomness. Not a happy place for an independent retail trader to be.

So, where to go from here? Scale back. Trade smaller size and wait for the markets to come to me. No reason to think that there has been some fundamental shift in the pricing behavior of intraday markets. Perhaps contraction of overnight volatility paired with anemic global trade has taken many of the pricing spikes out of the market. I'm not an economist and I don't work at a bank but there is no reason to toss a system which has performed so well in the past just because of a few unprofitable weeks (no matter how painful that experience can be).

I will however keep trading my intraday trend system running to keep some balance in the portfolio. The trend system has performed quite respectably. Most days it can take a quick 30 pips from the market. Not always, that's why I have not completely abandoned meantrades in the past. The polar opposite approach of reversion to the mean trading is probably not trend trading but the two strategies complement each other with delightful symmetry.

A rare profitable day for meantrades on Friday, +59 before the NY open.

Markets seem to be headed into choppy waters for the foreseeable future I am prepared for the inevitability of contracting equity curves. Wish you the best in your own mechanical system equity journey.

Thursday, January 5, 2012

Goals for the coming year

With a new year comes renewed enthusiasm for my trading. I anticipate this will be my breakout year where I finally break the nut which has proved so elusive: consistent trading profits.

My first primary goal is consistency. I intend to trade 2 systems on the forex and spot gold markets.

The first system is meantrades classic. Depending on the prior months results I will either use 10 range or 20 range bars to maximize profitability.

The second system is a momentum based system which does not use support and resistance levels. A pure trend trade system which will test my patience as well as my beliefs about the forex market.

Another goal very much on my mind is the use of stops. Last year I discovered that the best thing about constant range bars was not their clarity of trend but their ability to reduce stops to the smallest level possible (but not any smaller). Thus my goal is to apply stops on a absolute dogmatic level.

In the past few months I have discoevred the world of online poker and have experienced some modest success. The exercise of playing another game of skill with money has helped me realize just how essential stops are in the longevity of a trading system. For years I struggled with this. Meantrades did not employ price stops and although the returns were outstanding, in other periods the draw downs were just unbearable.

On the mental side of things my goal is to not respond so emotionally to situations I find uncomfortable. Just try and take things in stride. I'm 36 years old, it's time to find some peace of mind in my life experiences. Some things in life are just unpleasant. Better to face them head on than the rant and rave about how distasteful they are.

Hope the New Year is a good one for you too.

Good trading