5 trades yesterday



2 wins and 3 losses

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.

After this week's trade


This week was bookended by losses on Monday and today

4 trades today;


1 win and 3 losses

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 scenarios 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;

3 trades today;


A win, a loss and a break-even

Good results today;



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

As previously mentioned 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 same type 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.

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.

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.

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.



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 has 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 lower volume markets - less competition - and on that basis the Russell 2000 is more attractive than the NASDAQ 100.

GLD/SLV ratio and GDX/SIL ratio;



The GLD/SLV ratio has been steadily climbing whereas the GDX/SIL ratio has been steadily falling.

This appears to be an unsustainable contradiction.

Since the start of September 2013 GLD/SLV has been outperformed by GDX/SIL suggesting the two are moving from a period of divergence to a period of convergence and therefore this may be a good entry for a trade.

Shorting the GLD/SLV ratio and going long GDX/SIL looks like an interesting trade at this point.

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 two 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 14th February 2012



"

PositiveDeviant, on 11 Apr 2011 - 8:10 PM, said:

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.

PositiveDeviant, on 29 May 2011 - 10:08 PM, said:

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

PositiveDeviant, on 12 Jun 2011 - 9:22 PM, said:

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.

PositiveDeviant, on 18 Jun 2011 - 11:46 AM, said:

~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

PositiveDeviant, on 16 Nov 2011 - 04:58 AM, said:

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.

PositiveDeviant, on 13 Feb 2012 - 11:23 PM, said:

Further divergence set up;

LHF

 

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.  They are the most inexperienced participants in the market and therefore the easiest to target.  My strategy aims to find times in the market where they as a group have put themselves into a difficult position whereby if the market moves against them then most of them get taken out, with the professionals operating in the market cashing in as a result.   I take the other side 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.

My wife is pregnant and due mid February and there is absolutely no way I'm going to let that get in the way of this opportunity.  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.

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 in my normal work life I've been spending so much time on that it 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 and therefore my position improved there.  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.

There are a lot more demands on my time now with work spilling over into my own personal time at home and hence diverting away my attention from this.  However as a result of my position at work I also have flexibility regarding what hours I work and I can put to good use here.

Updated chart from last weeks trade (lower chart)

It's been a hell of a grind but still an up period which is good (to point out the obvious). Some of the eagle eyed among you may have noticed this chart is slightly different from before - this one factors in the commission to give a more accurate reflection.



The performance of the strategy is in a diminishing phase right now as evidenced by the 10 period moving average of trade success, despite that it's been a profitable period, although very much 3 steps forward 2 steps back.



If these reckless folks on capitol hill don't get it together then I reckon the markets could get a real fright which will make trading interesting (challenging perhaps).

Here are the results after 2 months;




The chart below is a 10 period moving average of the run of trades, so it's really a moving average showing how the strategy fluctuates between winning and losing phases.

On the lower chart you can see that by trade 40 the vertical scale reaches 0.1, this reflects that of the 11 trades prior to that point, 10 were losers.  Similarly by trade 80 the vertical scale is 0.8, reflecting that of the 10 trades prior to that point, 8 were winners, 2 were losers.  It's an interesting way to look at the strategy.

I suppose it could be used as some sort of filter but I think if you start trading the equity curve it would destroy or interfere with the efficiency of the system in a negative way.  It just adds another layer where potential error can occur.

I've often thought the that perfect strategy would be one where the performance moves like a sine wave; and of course a sine wave is easily traded.

I'm running this for another month so I am looking for a continuation of the positive upward trend.

Looking a bit healthier now;




6 weeks of the test period to go.

I'm continuing from where I left off prior to my holiday with the live test of a trading strategy, the results so far;


It seems pretty mixed but I think it's probably wise not to judge it this early since these are only the results after around 45 days, and that would be the case whether or not the results were good or bad (although clearly if they were atrocious it wouldn't be encouraging).

I think after 3 months I will have a good idea about the strengths and weaknesses, so at the start of November I will be in a far stronger position.  I'm not too enamoured by the large drawdown seen but then of course the flipside of that is the last few days which has seen a run of many winning trades.  Objectivity is key to any analysis.

For anyone new to my blog, I have been trading futures for over 2.5 years on and off and have been consistently breakeven, I'm testing a new strategy using a SIM account to assess a new methodology, if I get sufficient confirmation validating it I will go live.  Really by 1st November I will have a clear view on whether it works or not, I am keen to trade it but common sense dictates positive results should proceed a commitment to capital in the market.

The anatomy of a turn;


Here we see Dow futures making a lower low whilst the Euro, Australian dollar and AUD/JPY make a lower high.  The first vertical dashed line on 28th August marks the day when the markets turned up in unison, the second on 3rd September with all the markets moving up to confirm the divergence.