Anatomy of a Day in the ES

michaelday: “I will now try to outline one possible S&P emini trading strategy and if you could give me an opinion about it.”

Sure. I just want to mention that all of my comments are filtered through my own preconceptions regarding the market and, therefore, I may see difficulties where you have none. In other words, your style may work well for you even though it doesn’t resonate with me.

I don’t know where you’re at in terms of trading, michael, so please don’t be offended if I throw in things for other newer traders that may appear to be self evident to you.

“However my main problem is that I'm not sure if this entry strategy has positive expectation in the long run.”

First, I’d like to address the issue of entrys vs. exits. I think working on entry is very important but, initially, I’d rather work on how I intend to manage a position once it is opened. Once I’d devised a practical and effective method of trade management, one that not only strikes a balance between holding on for potential gains and preserving “in trade” profits but also can be altered to function maximally in different environments (i.e. opting for targets or tighter trailing stops in consolidating markets as opposed to greater freedom in a trending market), I would then begin to focus on improving my entry.

Understanding how to manage a trade, rather than making an entry, is more likely to have a significant impact on a trader’s long-term success.

Now, regarding trade management, I think it is extremely important to develop rules that allow one to determine the bias of the market throughout the day. These rules not only help traders to open positions in the direction that appears to be the most likely to produce profits, but also more importantly, gives one an idea of the environment that he/she is operating in so that a trader can begin to find ways to adjust trade management parameters accordingly. Creating these rules can keep you on the easiest side of the market.

Can I write some run-on sentences, or what?

“I am trying to base my trading style on "probability trading" similar to what Mark Douglas described in his book "Trading in the Zone".”

I haven’t read the book so if you want to explain the concept maybe I can offer some more specific comments.

“I draw the lines on 1minute candlestick chart. (Yesterday's high, yesterday close, yesterday's low, PP (H+L+C)/3, and most obvious support and resistance lines from last 3 hours of yesterday's trading). All together 6 lines.”

I like your use of important S/R, but as I don’t use Pivot Points in my trading, I cannot comment on their effectiveness as triggers. I can say that I do not see S/R “areas” or Pivot “lines” as triggers, though. I see them as filters that can help to guide my choice of a trigger.

The first thing that comes to mind is that I would want to use the current open as an S/R area, as well. With the exception of the morning, I would tend to favor the long side above the open and the short side below contingent upon my filters. Throughout the day, I would continue to keep track of the S/R areas that develop as the day progresses as well as those areas that have been weakened by penetration.

Speaking of triggers, I believe it is important to separate your indicators into distinct groups. Triggers and filters. Triggers will tell you when to enter and filters will help you to gauge how valid the triggers appear to be. Filters can also alert you to the need to alter your trade management to limit your exposure or risk.

“If there is movement through any of the six lines described above on increased volume I get in.”

This doesn’t tell me too much about how you choose to enter. What constitutes movement “through” a line? Do you enter on close? If so, on a 1-minute or 5-minute close? Where are you placing your stop? Must the stop be violated on close? What constitutes increasing volume? Higher than the previous bar or a series of escalating bars?

I’m not trying to be a dick. It just comes naturally. Kidding.

The point I’m trying to make, probably poorly, is that it is hard to focus on just the trigger when anyone, including the trader himself, attempts to evaluate a system. The effectiveness of your entry, in P/L terms, is completely dependant upon your trade management. Simply altering the placement of your stop can dramatically affect your P/L. Therefore, a trader needs to always evaluate the entry plan within the context of his trade management parameters.

As far as volume is concerned, here’s the difficulty I see with the standard 1-minute indicator. Is it continuation? Is it capitulation? Who knows?

In general, my take on 1-minute volume per bar indicators is fairly cliché. Volume should be consistent with direction. If volume is roughly increasing when the market advances and dissipates when the market declines then I’m thinking long side. The reverse for the short side.

“Also if there is bounce of any of those lines (here I am not sure if the volume should be incerasing or decreasing) I get in.”

What constitutes a bounce? When the line is broken or broken but no close? At what point or proximity after touching or breaking the line can you label it a bounce? At what…etc.

Unless you are adept at spotting capitulation, however you achieve this, then I’d go with the volume observations above as a guide. Obviously, extremely high volume can signal a reversal. Volume’s relationship to the range and the “body” of the candle or bar, T&S, or the squawk box can offer clues, as well.

“I also open 5 minute candlestick chart to have clerarer bigger picture...”

I think your use of the 5-minute to gain perspective is very wise.

“I have real time sound coming from S&P futures pit.”

Depending on how you choose to trade and the time frame (TF) in which you operate, a squawk box may help or hurt. Personally, I found it useful in the morning but quite distracting when I would shoot for longer extensions. I’d advise any trader to try it, though, and see if it worked for them.

“I also have MIRC s&p chatrom open and CNBC. Those two I use to be aware of any unexpected news.”

I’m not familiar with the MIRC S&P chat room and I don’t watch CNBC, but I think having access to a good news source can be very useful, especially in today’s environment.

“I don't use any other TA indicators such as EMA, Bollinger, MACD etc., at the moment, if you could recommend some I would appreciate it.”

I don’t use any of the indicators you’ve mentioned, either. I rarely use any “popular” indicators. If I do refer to such an indicator it is not in the fashion that they are normally used. I’m not suggesting that they can’t be employed successfully, just that I don’t use them.

I do, however, use custom indicators that I find very effective.

“I prefer to play short at this time because bad news is more likely to happen than good news and therefore is better to be caught while being short.”

Personally, I don’t worry about that. I’m more worried about getting the direction right day after day, week after week, month after month, year after year.

I’m not dismissing your fears, but I’ve been caught on the wrong side of an announcement before and I’ve recovered. On the other hand, I’ve known traders who’ve slowly bled to death because they didn’t focus on the fundamental issues of survival. One of those fundamentals is getting the directional bias right so that they weren’t continually finding themselves fighting the market.

“If the trade is going in my direction I use trailing stops and once one point is made that trade should never become losing trade. At least break even.”

I see nothing wrong with the your idea of not letting a profit go to a loss after a certain point. I use something similar in my trading, but 1 point seems a bit tight considering my TF. I’m not you and I’m not trading your account or your style so I can’t be sure that the number of points you’ve mentioned is appropriate or not.

Please keep in mind that everything I’ve said is only my opinion, so take it for what it’s worth to you. I tried to convey my ideas as completely as possible, but undoubtedly I may not have hit the mark. Personally, I find it very hard to discuss all the subtleties and nuances of trading in writing. I’m sure that I’ve failed to mention some important qualifiers. I hope I haven’t misled anyone.

 

I know what you mean. My remark was more envy than anything else. When I use discretion it does not take long for my fear to screw up my trading.
However, sometimes, when I am in the zone, discretion is a great way to make money. but this is the exception, not the rule. So for months now already, I do use only automated trading (semi automated, since I still have to send the orders, but within a few weeks now it will be 100% automatic).
Sometimes I see the system about to do something stupid, and I wish I could just bypass the trade. However, on the long run, I am still more wrong than the rules I set up for myself (that is also what you mentioned).

My remark was more to say how pointless it is for me to comment what trades I do, unless I give out my entire system. Foolish of course, since a public system is a dead system more or less. Well, maybe not with me, I am small enough.
While sometimes I see nice and well known patterns and I wish I could exploit them or talk about them.

Now, it is my turn, don't get me wrong, system trading is the best way to go imho. well, at least to live from this business. But with experience, added discretion does improve the score.

tntneo

 

tymjr,

Thank you for your elaborate post. I think that the main point you were trying to get across is importance of Market Sentiment (direction, bias) on any given day and need to adjust one's strategy accordingly. What do you think about using Dow and Nasdaq TRIN's when evaluating market bias for a given day? Another thing that I can think of to evaluate bias is to draw trend lines on daily charts in order to get some sense of a direction.

Kirk (WarEagle),

What about RavenQuote? Is it comparable to TradeStation?

Thanks.

 

tntneo: “When I use discretion it does not take long for my fear to screw up my trading.”

I can relate. I’ve tried very hard to remove any possibility of my doubt or greed altering my trading by making what I do as automated as possible. At this point, though, I see great value in the way in which I organize my indicators and it would be very difficult for me to try to program my mental “value algorithm”, if you will.

“I do use only automated trading (semi automated, since I still have to send the orders, but within a few weeks now it will be 100% automatic).”

I’m the one who should be envious. Sounds like you’ll have a great setup that offers plenty of time to work on other things, depending on your TF.

I’ve personally thought about moving out to the daily as it has become harder and harder, in a variety of ways, for me to trade intraday.

“Sometimes I see the system about to do something stupid, and I wish I could just bypass the trade.”

Yup. And that’ll be the big one.

“A public system is a dead system more or less.”

I’d agree.

“System trading is the best way to go, imho. But with experience, added discretion does improve the score.”

Well, I’d say, “can improve the score”, but that improvement comes with a price.

“Now, it is my turn, don't get me wrong…”

LOL. Haven’t we been down this road before on another thread? You’re a great guy, Neo. Always a pleasure hearing from you.

 

michael,

I looked at RavenQuote awhile back because I was using Qcharts, but I never tried it out. I know they offer some strategy testing, but I'm not familiar with the formula language or interface for programming your ideas. If it is flexible, it may be worth a try. It is inexpensive, especially if you are already using a compatible data feed like Qcharts.

I got lucky because I used to use a product called SuperCharts by Omega Research, the ones who do TradeStation. As a result, when the new TS came out, I was able to get it for $99/month since I was a former customer (I think its a couple hundred per month otherwise). Since I was already paying this much for data, it was a no brainer. It is extremely flexible, and can probably have just about any idea programmed and tested no matter how complex. If you use their brokerage (I don't), then you can automate it almost 100% (you still have to hit a confirmation button). If you are serious about testing ideas, and in particular if your goal is to develop a mechanical trading system, then I think TS is the way to go, unless you are a computer programmer and want to start from scratch.

Maybe Neo would be willing to say what software he is using to develop his systems or if he is programming his own.


Kirk

 

tom_p: “I was envious when I read your excellent post.”

Thanks a lot for the kind words, tom. And thanks to Magna, michael, DATT, and the ever helpful tntneo and WarEagle for each of your individual responses, as well. I appreciate all your comments.

“I desperately need to introduce some formal methodology and discipline into my trading - it has become way too discretionary.”

How much discretion is a good thing for me? I’ve wrestled with this question from time to time. I’ve compared the P/L of a highly mechanical approach with that of the same system that allowed for judgmental overrides. The results seemed to indicate that each worked equally well, over time, but tended to favor different situations and market conditions. The difficulty was that it was next to impossible to predict, with any meaningful consistency, the onset of the necessary condition appropriate to the style.

A similar situation arose when I'd tested targets vs. trailing stops. I found that, over time, each had its strengths and weaknesses exploited by different market conditions, as well. Obviously, consolidating markets tended to favor targets while trending markets favored trailing stops. I’ve my own proprietary method of predicting market behavior but I have to admit it can help and it can hinder. Just when you think you’ve got a lock, bang, you didn’t read the onset of a big move properly and you’ve pulled out way to soon.

Please keep in mind that the “testing” I’m referring to is not exclusively of the rigid scientific variety. It is a combination of years of observation and experimentation with many different methods, real-time and back-tested.

“I follow similar principles to those you outline yet I'm certain that the lack of formalization has cost me plenty.”

I think that traders shy away from wanting to be locked into a specific response to a given situation for fear of being forced to make the wrong decision repeatedly or they just don't care to take the time to specifically spell out each and every situation. This very fear or the lack of a definitive set of instructions can, ultimately, lead to the worst possible conclusion. Losses over time with little or no idea what specifically went wrong and therefore no idea what to work on.

Most every successful trader that I know of or have heard of appears to have practiced the same pattern. Create a rigid plan, play the game, modify if necessary, and then play the game, again. Repeat until profitable. Without this kind of consistency it is next to impossible to determine what it is that a trader is doing wrong or what is not functioning properly.

Blah blah blah blah... anybody still with me?

 

Originally posted by tymjr
LOL. Haven’t we been down this road before on another thread? You’re a great guy, Neo. Always a pleasure hearing from you.
LOL Yes, I remember. I am glad you are an active member tymjr. Great contribution.

 

Originally posted by WarEagle
Maybe Neo would be willing to say what software he is using to develop his systems or if he is programming his own.

Hi Kirk.
Well I use Ensign Software on eSignal datafeed. It is similar to RavenQuote I think, in the sense it is a kind of script, but very complete language. I did not find yet something I could not do.

I used Tradestation in the past (not the online version) and it was very bad at intraday (programming is difficult with TS because each signal is a separate module. with Ensign you can code the complete 'story' from top to bottom with all your rules. with TS you code all this in pieces and when making them work together you pray it does what you want).

For the full automation, I am coding at the moment with a Windows Macro language. this allows Ensign to send keystrokes, mouse etc.. to IB (!). In other words Ensign is replacing me placing orders in IB. This is the second best thing to direct API to JTWS (anytime Def, thank you).

It is a bit of a complex solutions, or let's say not integrated. but it is starting to work. I expect full automation within a few weeks now. It requires 4 modules : eSignal, Ensign, Macro Scheduler and IB.
There are other more direct ways (ie Tradestation Online) but if you want to build a trading platform with the data provider you want, the broker you want, my solution is very powerful (also because you can change afterward broker or whatever. freedom is important there too).

tntneo

 

tymjr

I like to use a combination of targets and trailing. In fact I always do that. A part of my position will be assigned a target (with limit order sent to the market) and another part will wait until it is time to pull out. That way I can have it both ways.
Gauging the market condition can help in defining how many contracts should use a target and how many should use a trailing.
At least that works with me and does increase my bottom line.
tntneo

 

michaelday: “I think that the main point you were trying to get across is importance of Market Sentiment (direction, bias) on any given day and need to adjust one's strategy accordingly.”

That’d be one of the points I was conveying. Most important in my mind, though, is the importance of developing an effective form of trade management before focusing on improving entry. Trade management can include a market bias indicator, of course.

“What do you think about using Dow and Nasdaq TRIN's when evaluating market bias for a given day?”

I’ve worked with the TRIN and I’ve found some value in it. It is a much more broad or larger TF tool than I was suggesting, though.

“Another thing that I can think of to evaluate bias is to draw trend lines on daily charts in order to get some sense of a direction.”

You are thinking on a larger TF than I was intending. Nothing wrong with that. That's valuable info if you’re shooting for larger multi-day extensions or if you can organize it properly with other intraday data. As I’m sure you’re aware, there can be many “significant” reactions/extensions up or down even though the daily TF bias contradicts those swings. I was speaking about developing rules for determining intraday bias, which can change quickly.
Trend lines, as a filter, to help determine intraday bias? Sure. I don’t have much experience with them but whatever you decide is relevant as long as it appears to keep you on the easiest side of the market more often than not.