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PetaDollar
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Registered: Mar 2003
Posts: 1768 |
08-20-12 04:28 AM
After thinking about Friday's losses over the weekend, I conclude the problem is general to trading a support and resistance model. After a breakout, let's say an upwards breakout, resistance can become support. So if you are selling that resistance, you're going to have to deal with the price dropping back into the top of your zone, then back up again. That's what happened to me on Friday.
So what I'm going to try first is adding another pre-condition to a support/resistance pullback trade: require the price to be in the band for a certain amount of time, or a certain number of ticks. It doesn't have to be (and certainly can't be) perfect. We just have to filter out some really bad entries. The analogy is what I described earlier about breakouts. If you trade breakouts by setting a stop order, you'll be burned here and there for some big losses when the price just pokes over and crashes back down. To filter these out, just add a time delay before placing the order. Of course, that requires you to buy the pullback after the breakout, so you miss out on some price explosions. It's the price to pay for "insurance".
To figure out how much time or how many ticks, I'm going to look at the past week a do a little market characterization. Then I'm going to write the new condition modules, put them under automated tests with canned data, and trade one day on the simulator to make sure nothing blows up. Then I'm going live again with 1 contract.
In other news, I wrote a nifty little python program to process my XML output files and tally up lots of neat information, in a form I can pass to and graph up with R. So in a few days I should have some nice graphics to post. (Why graphing in R? Well, I used to do it in Python, but R saves a lot of time since it's made for statistical analyses, while Python is of course a more general purpose tool.)
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PetaDollar
Moderator
Registered: Mar 2003
Posts: 1768 |
08-20-12 03:10 PM
Quote from HurricaneUS:
I personally like to see a forward test of at least 3 months (to encompass different market environments) and 30 drawdowns and at least 100 trades before I make a decision of whether to go live with the system.
What have I risked with this procedure? Zero dollars.
Well, by my reading of your procedure, you could (in principle, your software permitting) accomplish the same thing by:
(1) Using data from up 3 months ago for modeling/fitting/calibrating your methodology
(2) Simulating from 3 months ago to the present.
You end up in the same place as if 3 months ago, you used all available data and then forward tested on a simulator for 3 months. Again, software permitting.
Thus, I disagree with the statement that you have risked zero dollars with your procedure. You have lost the opportunity for 3 months of trading a profitable system. That's a real $ loss.
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gmst
Registered: Jul 2011
Posts: 3696 |
08-20-12 03:28 PM
Quote from PetaDollar:
The analogy is what I described earlier about breakouts. If you trade breakouts by setting a stop order, you'll be burned here and there for some big losses when the price just pokes over and crashes back down. To filter these out, just add a time delay before placing the order. Of course, that requires you to buy the pullback after the breakout, so you miss out on some price explosions. It's the price to pay for "insurance".
Did you compare waiting for some time vs buying the breakout immediately on historical data? For how many years, you mind posting the results if you compared the two choices? My testing on a particular breakout strategy on ES showed that if I miss explosive moves by waiting, returns become lower and DD increases. I will try to find out the results and post, but that won't prove anything. Because, different kinds of breakouts in different markets can have different results.
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HurricaneUS
Registered: Aug 2008
Posts: 755 |
08-20-12 05:00 PM
Quote from PetaDollar:
Well, by my reading of your procedure, you could (in principle, your software permitting) accomplish the same thing by:
(1) Using data from up 3 months ago for modeling/fitting/calibrating your methodology
(2) Simulating from 3 months ago to the present.
You end up in the same place as if 3 months ago, you used all available data and then forward tested on a simulator for 3 months. Again, software permitting.
Thus, I disagree with the statement that you have risked zero dollars with your procedure. You have lost the opportunity for 3 months of trading a profitable system. That's a real $ loss.
You probably could do it your way...but I prefer my method in order to reduce the risks of selection bias and/or inaccurate backtest data (i.e., the data may not look the same when loaded during a backtest as it would've looked during a real-time session depending on how it's timestamped in the software)...
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PetaDollar
Moderator
Registered: Mar 2003
Posts: 1768 |
08-21-12 01:58 PM
Quote from gmst:
Did you compare waiting for some time vs buying the breakout immediately on historical data? For how many years, you mind posting the results if you compared the two choices? My testing on a particular breakout strategy on ES showed that if I miss explosive moves by waiting, returns become lower and DD increases.
Yes, but only for a relatively small sample (compared to the years you mentioned) for the YM in 2005. I was trading a breakout strategy (purely discretionary) and entering with a stop order.
No doubt what you found is correct. But there are two details about what I am doing that you must consider:
(1) After the waiting time is over, I am placing a limit order entry near the breakout price. I am entering when the breakout retraces.
(2) My targets are small (5-10 NQ points)
And the big one:
This "semi-automated" technique I am trading is based on the idea of trading in today's market conditions. So if I notice most of the breakouts have pullbacks near the breakout price (true, recently in the NQ) I fit parameters on the fly. If next week I start seeing a lot of the explosive type, I can change the parameters once again (including the profit targets). I don't know if all of the will work; we'll see. So far, so good.
I am heavily influenced by the first professional trader I met who would first analyze the previous trading week. If the prices showed certain dependencies, he would scratch out a methodology for the current week. He always did very well.
In my case, I'm looking at yesterdays prices plus what happened up until "now" which is typically around 8:30 Eastern for NQ trades. I am also reviewing trades from the past few weeks and thinking about how I could filter out the bad ones while retaining the good ones.
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PetaDollar
Moderator
Registered: Mar 2003
Posts: 1768 |
08-21-12 02:15 PM
Today: buying breakouts of the premarket high (PMH) and buying support around yesterday's close. Back to real $ (no sim was needed); see below for the details.
First, I realized that I could fix the repeated bad entry problem (when support becomes resistance and vice versa) by first requiring the price to be more in the center of the zone.
THEN I realized I didn't have to write any new code to do this. I already support multiple conditions for an entry, so I used a "breakout" condition to make sure the price was where I wanted before looking for that support/resistance trade.
AND THEN I realized that I have actually created a trading programming language, not a just a trading program. It doesn't look like it now, but if I wanted to (I don't), I could create some syntax and rules plus a program to turn such source code into an XML input file. Currently, I specify all the possible trades for the day in an XML input file directly.
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