Odds Czar: Simple Biases In the Futures Market: 2009

Happy New Year everyone. As you can see in following entries, the daily Czar signals would have been profitable in all three psoted stock indices over and above trading costs for 2008. The testing was done on the top box, which includes the six either-or signals. You can also see the results in the other complexes I track. Before getting to those figures, you may want to read or re-read my trading pliosophy, which I'll re-print here.

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I'm Art Collins, a published book author, lecturer, and a frequent contributor to Futures Magazine. I'm also a 20-year Chicago Board of Trade member, professional futures trader and mechanical system advocate and co-partner in the Trireme Capital hedge fund.

I'm here to share system ideas and for camaraderie, something I miss from my days on the floor. I've decided to keep a daily journal on Elite Trader as a way to generate more feedback on my system ideas. Each day, I will post my daily market biases to keep the discussion going.

Here are some of my core beliefs. Feel free to add feedback, call foul on me, or whatever.
1. The average trader can't succeed unless he or she is 100% mechanical. Most of us can not "hear what the markets are telling us" because for all practical purposes, the markets ain't saying squat.
2. Human psychology tends to be drastically out of synch with what is needed to trade successfully.
3. When one combines mechanical with discretionary, one tends to get the worst of both worlds.
4. Simple is best.
5. Basic elements can be combined to create greater wholes.
6. Day trading can work, but there are inherent problems compared to other types of trading. The main problem lies in the relatively small trading arcs compared to trading costs.
7. Ideas have to test well over a fairly wide array of times and markets in order to be considered trustworthy.
8. When you do decide to trade a mechanical system, you must adequately budget for it. You must also follow all signals exactly as mandated.

How do I go about building mechanical systems? I identify simple market biases, some of which are not good enough to overcome trading edges. By assigning them +1/-1 strength/weakness values, however, and combining them with other such indicators, you can often get a whole significantly greater than the sum of the parts. These are all derived from historical summaries in Trade Station. Anything that didn't perform well enough historically is not something I'd consider trading. I want edges, and I want to derive them in a rote, mechanical ("boring?) manner--no guesswork.

Undoubtedly, my programming skills are short of the levels many of you are at. I intend to keep expanding my abilities rather than justify my limitations. Just to reiterate though, I’ve been privy to some very esoteric complex systems and some very basic ones. The lion's share of profits has come from the latter, at least in my humble experience.

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The following are results of testing that spanned from January 2 through December 19, 2008. (I then went on vacation).
They incorporate the same methodology that I post every year (attachment) as well as details of exactly how it’s constructed but first, a little well-deserved crowing. Once again, this past year proves to be a most impressive winner to the point where I’m wondering why I don’t just trade in this fashion with no other systems. Consider what we have—all results for single contracts. Solid performance in the three indices that vault past the $20-per-trade we customarily apply against a mini contract. The other markets may not yield enough to overcome trading costs, but they do verify the concept. There was only one near break-even loser. The 30-year bond actually exceeded the customary $100-per-full-sized-contract barrier.
Again, with all due modesty, I’m offering a kind of “transparency” I never see anywhere else. This is a winning methodology that has proven itself in real time for the last three years. That’s on top of how it theoretically performed in all the prior years used to develop the system.
My daily postings include two different signal category boxes for the bonds and currencies. Seasonals are particularly repetitive in the indices, so that complex uses three boxes. I’m offering the top one which is the easiest for me to summarize.
The system contains six indicators. Each one signals long (1) or short (-1) every day, barring the rare instance where a number is exactly tied. The positive and numbers are then added together. Sometimes the cumulative total is zero in which case no action is called for. When the total is positive, the idea is to buy the next day on the regular session open and then exit on the close. For a negative reading, you sell short the open and buy it back on the close. No stops are included in the results although as I’ve mentioned, 66 percent of the previous three day average range can be an historically effective stop. (At the very least, it doesn’t make the results significantly worse). When the 66 percent distance is determined, it is subtracted from any long entry price (or the opening price—same number in this instance). That new point is the long stop exit. For shorts, you add the number to the opening-entry.

The six individual components within are:
1. A bullish reading (+1) if the close was above a 40 day average close.
2. Bullish if the 2 day average close is lower than the 5 day.
3. Bullish if within the last 50 closes, the highest occurred before the lowest.
4. Bullish if the range was smaller than the 10 day average range and the close was higher OR the range was larger than the 10 day average range and the close was lower.
5. Bullish if the close is greater than 15 days worth of highs and lows averaged out.
6. Bullish if at least two out of the last three closes were lower than the opens.

Anything opposite the above conditions are negative(-1). Results reflect going in the direction of the simple majority.
I don't see any reason to change the format this year. We may be getting close to where more concentration on the indices and bonds may be prudent. the currencies continue to lag in the performance department and may get the proverbial stage hook soon if they don't shape up.
I’ll have additional material on traderinsight.com, which I share with Dr. Adrian Manz and Tom Incorvia.
I love sharing ideas and as always, I encourage feedback. I try to answer all correspondences. (I have occasionally let some get by during particularly harried times. I apologize for that—it was inadvertent. I’ll do better).
There’s an old expression “May you live in interesting times.” They may be even more “interesting” than we’ve bargained for, but at any rate, they have and will present enormous opportunity. Here’s hoping we all stay on the right side of it. Happy (and prosperous) New Year.

 

Art's futures biases for Jan 5.

A "1" means bullish bias. A "-1" means bearish bias. The total is the sum of biases. A positive sum will be long bias. A negative sum will be a short bias. A sum of zero will be a neutral bias.

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Friday's sharp drop in bonds should reverse direction on Monday according to the CzarCharts. The currencies are also flashing buy signals.

 

I just discovered this.
It's extraordinarily refreshing.
Question (the first of many, believe me): can I take it that you are net bullish on the SP, given what you display here, for Monday? (I ask because it's 0 on the either-or, negative on the infrequent, but positive on the calendar biases)

 

Hi Art,

Please don't give the currencies the "stage hook." I don't think you're giving yourself enough latitude. This past year, in my humble opinion, the currencies have been acting in manner which defy the logic of most, if not all, systems incuding mechanical and fundamental. I would list what I think are the reasons but I suspect you know them better than me.

Please keep the currency forecasts Art.

Happy New Year!

Regards,

ETUser.

 

Art's futures biases for Jan 6.

A "1" means bullish bias. A "-1" means bearish bias. The total is the sum of biases. A positive sum will be long bias. A negative sum will be a short bias. A sum of zero will be a neutral bias.

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For Tuesday, the 30- and 5-year bonds continue to signal for a resumed up-move which the neutral 10-year is at least not contradicting. Obviously, when the signal is wrong, it can be spectacularly wrong as we saw on Monday, so caution is advised. At the moment, these market are more volatile than the indices.

 

Art's futures biases for Jan 7.

A "1" means bullish bias. A "-1" means bearish bias. The total is the sum of biases. A positive sum will be long bias. A negative sum will be a short bias. A sum of zero will be a neutral bias.

 

re the last two correspondences--
Ok ETU, I'll keep the currencies for at least awhile longer. Both they and the bonds have been providing more action than even the stock market so, who knows? Tre, I'm sorry I didn't get to your time-sensitive question. Generally, I won't take A plus bias in the S&Ps if either of the related markets (Nasdaq, Russell), contradict it within any of the three major signal boxes. That's not always a hard and fast rule given other indicators I consider, but when I am going to make an exception, I do disclose that.

 

Art's futures biases for Jan 8.

A "1" means bullish bias. A "-1" means bearish bias. The total is the sum of biases. A positive sum will be long bias. A negative sum will be a short bias. A sum of zero will be a neutral bias.

 

Thanks Art - appreciate it.

ETUser

 

Art,

When looking at the notes and bonds are you likely to consider the complex for taking a trade or let each symbol stand on its own?

I ask obviously for the conflicting scores across the complex.

Thanks, Chris