Home > Markets > Options > What it takes to develop a profitable trading system?

What it takes to develop a profitable trading system?

  1. Here are the steps in my experience:

    1) Initial know how (math, programming, financial markets).
    2) Backtest system to research & develop trading strategies.
    3) Live (auto) trading (even if #2 is not great, because present reality is often different from the past snapshots).
    4) Analyze why you're not making money, tweak / improve and goto #1.

    Question is how much time passes until you're consistently profitable?
    Question number 2, how much money does that time value?
    And question number 3, how and if $50k can significantly speed up the process?

    Right now I'm entering another cycle starting from #1 (new knowledge), with high hopes this is the last time. If not, I'm thinking on hiring / collaborating with someone.

    I'm thinking on posting an ad on UpWork but I see problems with this approach. Apart from the confidentiality of my stuff so far, main problem I see is that this is not the regular "fuck you, pay me" developer job you see there. You just can't "sudo make me a profitable trading system" someone, even if you pay them :)

    It's pretty much a catch 22. The guy who's capable of developing a profitable trading system doesn't need a job on UpWork, he should be making millions with his own stuff. And the other guys I'm essentially having to teach them my system so they can leave and make their own millions with it when it's ready, all while paying them a living wage to do so.
     
  2. How do you know your staff works if you not even at backtest engine stage yet? Eyes could be very deciteful.

    If you need help with technical know how, pm me and I can provide some tips.

    And to answer your question, it takes insane amount of work.
     
  3. Actually, your best bet is not to hire someone, but rather go work for someone for a little while. There are plenty of people out there that can use your skill set to research new ideas or implement/improve existing strategies. After some time, you will find that you understand the process and will start getting ideas of your own.
     
  4. I've got a backtest engine (about 30,000 LOC of Java) + PostgreSQL + historical marketdata + live data subscription. And a simple but functional auto trading app, still Java, interfacing with Interactive Brokers. And 10 years as quant developer in finance. I know it takes a lot of work :)
     
  5. No, I mean work directly inside a money making group. Being in a support function is not going to teach you anything about the stuff you want.

    PS. If you go to an interview and see a guy that has zero understanding of your IT skills but knows how to make money, that’s the job you want :) “we have a trading strategy implemented in Excel/VBA and want to make it a bit more robust”
     
  6. There's always constantly lingering inherent dangers in the market. It's all about how you're able to perceive and act and react accordingly to it...in real-time, without getting too razzled and mentally distraught.

    If you're overly cautious, so much so that you can't step one foot into the trading war zone battlefield...be someone's accountant instead, behind the safety of a desk.

    Don't search for a profitable system, instead work on developing a profitable you. Embrace the unknown future.
    Good luck and Mazal tov and May the Farce be With you 2018
     
  7. ====What it takes to develop a profitable trading system?===

    depends on how profitable one needs it to be, and who's money at risk (yours or clients)

    if we talking about the usual wallstreet stuff: your ideas and client's money with anticipated performance not worth than the street's average - nothing special

    if we talking about trading for a living, using your own money - monumental task and your list of steps missing an extremely crucial component - finding the laws governing the market movements,

    man, you (or any aspiring trader) need to make something analogous to discoveries in science, without that all those back-testings , front-testings, tweaking, programming - just another form of masturbation

    good luck
     
  8. >> Being in a support function is not going to teach you anything about the stuff you want.

    I know. Again, been there, done that :)

    >> I mean work directly inside a money making group.

    Well, thanks for the advice but it's in about the same probability group with "go look for some flying pigs, they're abundant in some areas".

    So far the choices I have control over still are:

    1) Work by myself.
    2) Hire someone.
     
  9. All right, what do you think was your failure? Is it the strategy hypothesis, execution costs, over-fitting? Why did your strategy work in the back test but failed in real life?
     
  10. >> finding the laws governing the market movements

    Yeah, that's the stuff that makes a difference and for which I could probably use another (hired) hand. I know some, not enough yet, but definitely making progress. As I said, I've high hopes for this iteration.
     
  11. you won't find anyone or anything valuable for obvious reasons
     
  12. >>Why did your strategy work in the back test but failed in real life?

    It doesn't work in the back test either. To cut it short, it would if I could sell higher or buy lower but darn market already prices those things more competitive than I currently can. But who knows what the future may bring...
     
  13. >> you won't find anyone or anything valuable for obvious reasons

    Most likely. Worth posting the job just for the fun of watching the clueless apply.
     
  14. unless you marry to it :)
     
  15. well if some of them will be smarter (more knowledgeable) than you (but not than the market) then you will lose considerable amount of money before recognizing that :)
     
  16. My 2-cent recipe:
    1) Initial know how (math, programming, trading, financial markets, behaviorism, etc.)
    2) Find a profitable strategy/model/system using manual analysis (charts, excel, etc.). When found, goto 3.
    3) Backtest with several months/years of data. If still profitable, goto 4, else go back to 2.
    4) Live paper trading (paper money, real-time data feed) for a couple of months/years depending of the strategy/model and time frame. If still profitable, goto 5, else to back to 2.
    5) Live real trading with minimum size for a couple of months/years depending of the strategy/model and time frame. If still profitable, goto 6, else go back to 2.
    6) Live real trading with full size.
    7) Keep trying to find profitable strategy/mode/system, cause markets are evolving and you never know when your current system will start to be less profitable.

    As for your questions, do all yourself. This way, you'll always be liable about everything. Counting on others bring you expectations, and they are rarely met. Being profitable with trading is very very hard. It might takes a few months (if you are lucky), but most likely it will take you years. And there is no guarantee of success at the end. But best of all, it is possible, others have made it. There won't be any free lunch (it reminds me a trading firm that was called TANSTAAFL 'there-ain't-no-such-thing-as-a-free-lunch', Don't know if they still exist!!!)
     
  17. Good point! Thanks for raising this up :)
     
  18. first of, what one man can do - not everyone can !
    and secondly - who had made it?
     
  19. %%
    Good thinking LOL. Dont know if it works with options, because most of it[95%+] is cash stocks ; 455/+ page system of Investors Business Daily founder works, but requires a good bit of discretion+ years..... Its a weekly newspaper now:cool:Even though he made much money with NYSE seat rates, ; its still do able, with other rates.....
     
  20. Seriously?
    Does it mean that you don't know anyone who had made it?
    Personally, I know a couple of guys who had made it, but since I've been working in the trading industry all my life, I might be in a better position to know those guys...
     
  21. @rb7: isn't your point #2 a bit self-referring?

    Most important step in developing a profitable trading system is to develop a profitable trading system.
     
  22. bs,

    we do not know anything about anyone

    and forget about trading industry - no one can trade for a living in that industry
     
  23. %%
    Good points; i dont really want to be a brain or heartsurgeon , but I'm not silly enough to think no one can LOL-LOL
    I like what the hedge fund manager said, in answer to the question '' which one,trader or investor?? Both..... NOT a prediction or a hedge fund manager.:caution::caution::cool::cool:
     
  24. I agree with you, my wordings was not as good as what I intended to mean.
    I meant to find a good potential system/model/strategy to advance to the following validation steps.
     
  25. how?
     
  26. I'm not talking about strangers on the Net. I'm talking about real people that I know.
    I'm sorry for you that you think that no one can trade for a living. I won't try to convince you about anything cause I don't have anything to get from that.
    I don't know what you do for a living, but for sure it has nothing to do with trading. No offense.
     
  27. almost everyone on this forum talks about people he knows :)

    as i said, we do not know anything about anyone :)
     
  28. Easy!
    Use Charles Tanti's best-of-the-universe system. :D
     
  29. that's what i thought :)
     
  30. I don't know if I'll get a commission from that once you'll become profitable and willing to pay back Charles ;).
     
  31. Your current problem is the exact problem I am aim to solve which is to drastically reduce the time it takes to find profitable trading strategies. I am going to have a very beta version of my Quant Machine Learning SDK available at the end of January. No need to have in depth data science knowledge. Just need to be able to write a little C# code. I'll send you copy.
     
  32. man, i am not a subject of this thread
     
  33. @fan27, OK, I'm looking forward.

    Although, lemme express my reserves about these trading systems where you don't need to know nothing, there's a button there labeled "Make Money!", you just need to press it.

    Programmers especially seem to have a fascination about these systems where you don't have to know programming to program, don't have to learn to trade in order to trade and don't have to understand science to be a scientist.

    Knowing things is so last century. Now you too can get a 6 figure paying job. And when you get a problem, just ask Siri:
    [ A Millennial Job Interview ]
     
  34. only when its not their money on stake...otherwise the fascination evaporates very soon
     
  35. I totally agree. It does not use deep learning where it spits out some Algo you could not possibly have any confidence in. It basically wraps user defined indicators, price data in classes and interfaces that can then be used to construct strategies on the fly. You tell it the "strategy components" you are interested in and it can test all possible combinations extremely fast at a rate of 1000 strategies per second. All will be clear when you see the SDK and code samples.
     
  36. Hey, easy! Someone needs to make sure your trades from 2PM feed downstream at 8-9PM while you're four beers deep at he bar...

    In all seriousness I think theres levels to how relegated you are in a support function. Being on the floor has taught me a lot in a short period of time. Only rarely do I really feel like a peasant and in general I think the business is pretty appreciative and 100% willing to teach. It would be a tough ask for them to tell me to code something and not teach me exactly what it is they want, right?

    Again, levels. I'd be living at my parents house playing xbox if they told me my job would be downstream settling trades or something. To be honest, I think keeping feed handlers running and learning about the right way to write trading infrastructure is really cool. I see it as valuable in terms of exit opps too. How many firms do you know that have this sort of infra? Pretty much every principal trading outfit I imagine.

    I think I'm junior enough that there's still plenty of value in this sort of role (tell me now if I'm wrong though)! There's really very few tasks I'm asked to do where I question the educational value. Now of course I'm not sure I'll be doing this when I'm forty but I'm also not sure that's anyone's expectation.
     
  37. First develop a trading system catering your trading needs (trade stocks, forex, futures, options). Then, experiment with tons of trading strategy to see which one generates the maximum profit. And that's about it.
     
  38. Here’s a start -

    Price is the dependent variable of the independent variable volume.

    The market’s system of operation follows a sequence of events.

    The sequence of events unfolds in a fractal branching pattern.

    The basic grandularity of the market’s price action is a finite permutation of 10 unique price cases and 11 volume elements. These combine to create 56 posssible unique price and volume combinations.

    The market is fractal with symmetry. The basic pattern is composed of two interlocking yet opposite price trends.

    The beginning of the next trend is contained within the present trend. The present trend began in the prior trend.

    Trends are composed of at least three alternating trend segments.

    This can be coupled to the three moves of a trend.

    A trend begins with coherent price direction with increasing volume - this is known as Dominance. The next segment is a non- Dominant retrace of price with decreasing volume. The third segment is a return to Dominance with increasing volume.

    This pattern can be observed in a single bar or clusters of bars contained within each segment.

    Trends can be interrupted or progress to completion.

    The market operates in an orderly manner to provide opportunity to fulfill the needs of all market participants. We know this because all participation is voluntary.

    There is no noise, anomalies nor flaws in the market’s system of operation.

    Many would refute the above collection of statements as not true which points to the math most appropriate to understand market dynamics, participant sentiment and orderflow.

    The math of the markets operate on Boolean algebra with a bias toward negative logic.

    In other words, one can know a thing by knowing what it is not.

    All the above are observable and definable concepts with the ability to be tested as a True or False condition.

    Testing follows the form; If,... then,...

    Solutions exists outside the domains of the problem and require a different perspective to be perceivable.

    What separates the two is the engagement of purposeful learning through work

    Two broad classification of traders would be the informed and the un-informed. Another is the profitable and un-profitable.

    Two polar extremes are defined - the informed and profitable engage the un-informed and un-profitable whenever the former wants to trade. The former only trades when it’s profitable, they are aware of fundamental values that the latter is not. Their trading is informative. The latter being un-profitable engages in trades when prices are not informative, thereby being un-informed.

    Fundamental values are not well-known, if they were there would be no profitable trades since everyone would know the fundamental fair value.

    Fair value and market value are not the same.

    .
     
  39. It might sound ol' fashioned and too simple to you, but have you considered just learning to read the trend? You'd be surprised how everything falls into place once you can.
     
  40. Actually I just finished implementing the largely theoretical proof of principle (step #1 in my list) for the latest strategy ideas I have and the results are very promising. Next thing, #2: backtest on real marketdata and see if the promised opportunities are there, or darn market already knows what I just discovered. Will let you know, either glory or misery is possible at this moment :p
     
  41. I hope you make it Big Time.
    So Much larger than life. I'm gonna watch it...grow. My eyes are getting bigger like my Bank. Account. o_O
     
  42. Ran another proof of principle test with improved hypothesis and some tweaks and results are so good that I'm almost purring like a cat. Even if backtests will be disappointing (although I seriously hope not), I've got enough material for a new PhD paper, at least I'm getting my coordinator off my back.

    Although on a second thought, likely there still will be no paper but instead another incremental development based on the proprietary knowledge that I found so far. There's zero incentive to publish something that has even the remotest chance of being valuable for use by myself.
     
  43. I know a lot of failed traders, and I know I'm terrible but options for me are the only way to make profits. You need to work a bit harder but you do not have to be right most of the time- unlike forex or futures which are one dimensional and binary in nature. Most of those traders are quietly mounting losses and kidding themselves that a 'break even' trade is a win. You don't use stops with options and that's a huge plus. My UK site:
    http://optionsinvesting.co.uk/ftse-whats-really-going/
     
  44. When I was first learning to program, and I was God aweful the first three years, I went to local community college and I went to Computer Science Dean, I managed to talk the Dean into one class to program using Tradestation software on programming system I had been day trading for couple years, fricking difficult to work evenings/nights, grateful my two days off were Wednesday/Thursday to monitor students working it in lab, have enough time to trade and sleep. At end of semester, system was done but it was not working but 50% of how I traded it, but I provided huge pizza party, but did manage to have Dean give me couple of his lab tech students and they help a great deal, had each one doing separate areas so the other one didn't know what the other was doing. I kept both of them few years part time. My abilities to program went up much more rapidly as I was getting one on one help and they were doing anything I wanted to backtest. I found at the time, Tradestation had major flaws and never came up with 100% confidence. But as years have past, newer languages, and just about whatever you can dream up, programmers figure out how to do so.

    I do see it best when there is a partnership, one guy who can trade and other program, but each should have ideas of how to continue if one gets ill, etc...Also, make it where whatever you doing-partner always be included, otherwise mistrusts form. You are so right, the guy who know how to trade is trading, but unless he also has all the hours to program, he is hugely limiting himself. Myself just too old at 61yo to manually day trade, can't remember all the rules nor all the systems. My best buddy, known him fifteen years, has full time plus job outside of programming, but he is very sharp at programming. So we formed Partnership, there are still areas of trading I like to explore, but can't trade as I once did, and why trade one market whereas programming can track 15,000 instruments, it a no brainer. His programming will get me over the next goal and my systems will allow him to attain his goals.

    What I have found about trading systems, easier they are or K.I.S.S., seem to do the best, the more complex I made systems, less likelihood they be profitable. Then come the "whys", why is simple works and complicated don't work as well. After many years you learn to not make something so abstract that big money are not doing it. You want to design something that either gets you in seconds before or during HFTs/Hedge funds/ big brokerage, that's it. Whoa, but what works? That can be the hard part, and the most practical area of a system is definition of TREND and make yourself dozens of examples that clearly show start of trend. Don't want anything too fast cause whipsaws, and too slow, little left cause getting in too late. There simple is too much information on the web, but great place to start is charting, support and resistance, have well defined trend rules and have 3,000 sample size of trend for starters.
     
  45. If you read qxr's other posts, you will realize he knows more about trading for a living than many of us here. :finger:
     
  46. I need to get a PhD in TA to understand what you are saying. :banghead:

    I think I will stay with staring at charts.:D
     
  47. Maybe, but in some posts in this thread, he seems to say that trading for a living was impossible. But maybe I understood him incorrectly.
     
  48. This year I finally figured out how to program in Excel/VBA. You are telling me that is insufficient?
     
  49. He's a smart guy but pretty closed-minded. That usually is a bad combination. I don't know what to think of him, to be honest.
     
  50. Well, as qxr would say, “It doesn’t matter what you think of me”. I enjoy reading his vulgar posts though. Crazy Ruskie reminds me of my old man, god rest his soul.
     
  51. I think I made to his dark side, since he has blocked me :)
     
  52. Haha. How do I know who blocks me? Maybe I shouldn’t check.
     
  53. If the user ignores you, he will also be invisible to you.
     
  54. Yeah, I started out in a similar space.

    At some point, one makes a choice to value their time and make the most out of ‘staring at charts.’

    Most of what I looked at was non-comprehensible to me. However, it is possible to start with little building blocks of truth and with testing build on what you know.

    My strategy was similar to the lifecycle of an insect (short & fast feedback loops.) It is a strategic compressing of time so that it doesn't take 10 years nor 10k hours to understand and gain clarity of the market’s system of operation. Polyphasic sleep cycles supported the effort of purposeful learning.

    If there is anything that accelerated my learning here it’s building an active ignore list. Negativity is a dream stealer, it ripples out and creates doubt where none need exist.

    When beliefs do not support desires - there is internal conflict. This conflict extends outward and influences perception.

    Of the two, one is based in the past and the other occurs in present time.

    A recent quote I came across in one of the posted dataviz was the notion of seeing;
    whether one sees to learn vs
    one sees to confirm.

    Both paths lead to entirely different outcomes.

    Edit:
    Some ask for stats and numbers to back up the things I claim. However, I have no desire to interact with those that are interested more in ‘show me the money’ vs ‘I want to understand.’ The later have their attention on the very thing that that would make a difference in their own lives. That is the reason for my posting - to pay it forward and as a way to honor all the knowledge contained here by others with a similar sensibility whose work that I have greatly benefitted from.
     
  55. Don’t waste your time staring. You’ll fool yourself. Study stats/probability, time series analysis, microstructure, position sizing, and you might give yourself a chance. If you do it correctly you’ll eventually realize how fragmented liquid markets are. Staring at charts creates illusions and delusions. Do the work. Organize and analyze data. No shortcuts or free lunches.
     
  56. Only you can answer that for yourself.
    Congratulations and just keep moving forward. Before you can walk, you need to crawl, etc. I recommend you use it to the max and see.
    It's a good start though:
    • Formulas provide you with a functional stateless language to programming. Being stateless means you never change any values themselves directly, only indirectly so that all changes (mutations) to values remain, ie. visible for inspection in the spreadsheet. This has enormous pedagogic value for newbies to programming.
    • Cells provide you spatial/visual inspection/debug capabilities that imperative programming often lacks. This makes spreadsheets viable as prototype tools at any time you need simple linear prototypes.
    • VBA, is slow and warty, but gets the imperative parts of the job done. However, should be used sparingly since it starts to hide values, slow down calculations and create artificial boundaries in your system.
    At some later point, Excel might seem restrictive as you'd like more real-time capabilities, larger datasets or whatnot else. Platforms such as NT might provide better visual rendering av charts, etc.

    At some much later point, you've gone through several such platforms, made something work on some of them, and just need to codify what you truly need to go forward. You've got a list of ideas/requirements, but need space and clarity, so need to get rid of the clutter of other people's platforms and systems. This is when you start with a general-purpose language, and have enough know-how, to actually be able to create something that works as intended, rapidly in a way that fits your "special needs".

    Nowhere in this is there consistent profitability or guarantees. You could be profitable with just pencil and paper. Just eyeballing and waiting for the right opportunities, recognizing when they might be there and avoiding being caught on the wrong side for too long or risking too much. The game is as hard as you make it, but getting meaningful returns are rare and truly hard to get consistent.

    The tools are as good as its user.
     
  57. 1) Initial know how (math, programming, financial markets).
    Ask this question:
    What drives data? That is your starting point!
    (You do not need programming skills and you do not need to be a mathematical genius).

    2) Backtest system to research & develop trading strategies.
    This is so messed up it's not funny.
    Through proper objective research you will have a strategy to back test/forward test.
    Actually, if it's based on thorough objective research it will make money.

    3) Live (auto) trading (even if #2 is not great, because present reality is often different from the past snapshots).
    @#*$ me. Is this a joke?
    Getting #1 correct is critical!

    4) Analyze why you're not making money, tweak / improve and goto #1.
    I'm glad you haven't listed a #5

    These questions help you in what way to be profitable?
    What purpose do they serve?

    Come on, you're a smart guy! Let's step this up a few notches.
     
  58. Thanks. I am one of those who benefited from your paying forward.

    Regards,
     
  59. Thank you for your coaching.

    I learned VBA in order to model option pricing and strategy. I can calculate Black Scholes using Excel. However, if I want to do Monte Carlo to get the most likely outcome, even with BS, I don't know how to "do loop" in Excel except using VBA.....

    Since I got you here, do you know how I can calculate a "do loop" with just Excel without having to get into VBA?
     
  60. OK. Got it.
     
  61. Hello Handle123,

    Very good post. What do you mean " 3000 sample size"? Are you stating backtesting a strategy with atleast 3000 historical trades?

    Thank you
     
  62. For just looping, you can create new rows with cell formulas refering to the rows above and do conditionals, calculations and whatnot. You can use many excel functions over areas of cells and arrays, to aggregate, lookup values, translate etc. However, soon, especially for something like Monte Carlo, you'll need VBA or a more general-purpose language since you're hitting the limits what is practical and sane.

    So Excel got you quicker up and crawling, but to run, you may need to investigate other options, unless Excel serves good enough. It's important to learn more and not think the learning as "wasted time" I believe. We tend to think everything as a straight line, when they are anything but for hard-to-achieve goals.
     
  63. Just ran a first backtest and got a systematic positive return. Not exactly over the top but it's a start. Unless I messed up something, will see that after I review the algorithms again and run several more backtests.
     
  64. Depends, if system puts out many trades, you will want to that spot areas like the last 15 year if you can . Like have a system that only takes longs would be sweeping up, but times of bear market, you have enough rules in place for system to stop taking trades.
     
  65. This my 20th year trading options.
    Here is a few lessons I have learned in the last 20 years:

    [Lesson 1: Advisories and Newsletters]
    In the first several years I tried every option advisory and newsletter there was at the time.
    Only a few intermittantly made money but those eventually disappeared.
    Conclusion: You can't count on anybody for trading advice, because they will eventually disappear and leave you starting over at ground zero.

    -------------------------------------------------------------------------------------

    [Lesson 2: Back Testing]
    Back Testing only semi-works but is flawed.

    Back Test Example 1: Did the Low Price of the Day Fill?
    Lets say you have a math based system that requires the following historical option data prices: Open, High, Low, Close.
    Now lets say your trading system said to
    Buy the SPY JAN 272 CALL at 1.56 at Sell it at 1.96.
    Your historical data says:
    OPEN=1.82 HIGH=2.56 LOW=1.56 CLOSE=2.40
    You assume your trade filled at 1.56 because that was the low of the day and then the Close was 2.40 so your trade obviously won, right? Not necessarily. Without a Time and Sales Report you won't know if 1.56 went off at the bid or ask (bought or sold). Time and Sales reports historically only go back about a month on options, so its purely guess work as to if the trade filled and won or didn't fill because 1.56 was never available at the asking price.

    Back Test Example 2: What Really Happened after the Fill?
    Lets say you have a trade that says Buy at 1.50 and Sell at 1.90 and the historical option data days OPEN=1.80 HIGH=2.00 LOW=1.40 CLOSE=1.75
    You would assume the LOW=1.40 occurred after the HIGH=2.00 and then the option price never moved higher than 1.75 after you were filled at 1.50, right? Not necessarily true.
    20 years of Testing, Option Charting, reading Time and Sales Reports, and actually Trading options has a historical value of 50% correct in your assumption. In other words, 50% of the time the option price Opened at 1.80 and then tanked to 1.40 and then went to the High of 2.00 and then declined near the end of the day to 1.75.

    Back Test Example 3: Did the Stop Price hit before or after the profitable sell?
    Your Buy Limit was filled at 1.60 and your Sell limit was 2.00. You see a high of 2.20?
    Your thinking this back-test won. But did you notice the Low of the day was 1.10 and your Stop was 1.20? So did the trade win or stop? Without accurate option charting which only goes back a month you will never know.

    Conclusion: Because of the 3 flaws noted above in back-testing, when I develope a back-tested theoretical system that has a Win/Loss Record of 85-90% over a minimum time frame of 12 months, that trading system doing the real time trades over a period of the following year has a actual Win/Loss Record of 70% to 75%. (I did some of these real time in my old threads Purely Mechanical Option Trading and Purely Mechanical Option Trading 2.)
    ----------------------------------------------------------------------------------------------------

    [Lesson 3: Total Automation] It it Always Possible on Every Trade? Not Always.
    To have total automation means your computer program interfaces with something like Interactive Brokers Application Programming Interface (API).
    So you set it up for the following parameters on your option choice:
    Buy Limit: 1.50 Sell Limit: 1.90 Stop: 1.10
    So this order is active before the market opens (otherwise its not total automation) and
    the option opens with a Gap Down Opening of 1.20.
    Your order fills at approx. 1.20 (give or take due to the volatility Gap Down) and immediately
    drops lower to 1.00 and you are Stopped out!
    Total Automation doesn't work in cases of Severe Gap Down Openings.
    I use semi-automation: I have a semi-automated I.B. Bracket Order ready (but not transmitted) with my Buy Limit: 1.50 Sell Limit: 1.90 Stop: 1.10, "BUT" I wait to see the opening price before I transmit the order. If the option opens below my Buy Limit, I simply re-adjust the Bracket Parameters accordingly.
    Example: Opens at 1.20. Adjust Bracket to Buy Limit: 1.20 Sell Limit: 1.60 Stop: 0.80

    Conclusion: Semi-Automation, not total. Too many wild gap downs when market volatility picks up. (And yes, someday Volatility will come back into these markets.)
     
  66. Before you even begin looking to "backtest" anything, get a grasp of he second arc sine law, and how that might affect the results you see with any trading system.
     
  67. Hmm? I don't think understanding the nature of random processes per-se is as valuable as understanding the limitations of your data and the various biases that you introduce in the backtesting process. Once that is internalized, next step is to understand how various ways you tweak the strategy produce a fit (i.e. that any empirical modification introduces a bias too). Plus, for anything that deals with asymmetry, understand the limitations of conventional analysis tools.
     
  68. Very nice post! Can you or anyone (@sle?) comment on something that stops me from diving deeper into options? How do you manage overall exposure? Most online advise I follow says to sell premium. Then they say invest only about 50% of total capital. They say try to diversify, but I don't think it's as easy to do with options as with futures/equities. So I have an impression that option trading is for hobbyists, retired people trading with play money, or ex traders who just trade part of previously earned pot. Are there any traders making living trading options ONLY portfolios (not OPM)? How do they mitigate risk? How do they position size and diversify when, essentially, they are either long volatility or short volatility? Thank you.
     
  69. ------------------------------------------------------------------------------------------------------
    I have only bought premium in a cash only account through I.B. for the last 20 years.
    I simply buy calls or puts and use a pre-determined Buy Limit, Sell Limit, & Stop.
    (Its just a supplemental retirement income.)
    With I.B.you can combine all 3 orders using a Bracket Order. You then press transmit and it does the rest.
    I believe one's risk per trade is the Buy Limit minus the Stop plus the Commissions.
    So if I buy 10 contracts with a -.50 Stop, I just lost -$500 plus -$16 commission.
    -$516 Risk on a $20K account is -2.6% total account risk per trade.
    That means I would have to lose 38 straight trades to be wiped out!
    I haven't lost more than 3 consecutive trades in 10 years.
    Some members on ET will argue that your stop plus commission isn't your total risk in a trade. They will say your total risk in a trade is everything you have into that trade, in other words your "total debit." Going on that premise I then have 10% to 15% of my total account into each trade. But I totally disagree with that premise.
    Its only possible to have a total wipe out on a trade with a stop if your holding the trade overnight and the market opens catastrophically (Black Swan Event) against you. That happens maybe once or twice per decade. So in that very rare occurance I would lose 10% to 15% of my account, still not a big deal.
    I just looked back a few minutes ago at all my 2017 trades to see what my worst surprise negative gap down opening price that took out my stop. There was only 1 trade that blew below my stop and cost me extra loss. Its was the difference between a normal -.50 stop
    and a negative next day gap down opening on the option of -.68. So a surprise occurance cost me an extra -.18 times 10 contracts (-$180), and that was it for 2017.
    That's why I define risk as stop minus entry price plus commisssions.
     
  70. This is what I ended up doing before I saw userque's post. It is cumbersome and for some loop I wanted, difficult. The end result was I forced myself to learn VBA, but that has its own challenges and not exactly user friendly either.

    I have excel 2010, a Mac version so don't know if the circular function looping is there. If not I may have to upgrade to a newer version because from the link, it is what I needed.

    Thanks for your suggestions.
     
  71. Circular reference is traditionally an error in Excel. I would rather use VBA or something else, than trying to use circular references outside of intended usage. This is an area where you want to move away from formulas (functions) and into more general purpose languages, because what you're trying to accomplish is to be free to do whatever you want to do, and a platform will restrict you through all its predefined structures and limitations.
     
  72. It states "you may want", but who here have actually used iterations like that and how was the experience?

    In my experience, circular references in Excel have always been a PITA, and was never designed for such usage, so will yield both problems and limitations due to that.
     
  73. Right, of course. It's not telling you how you must code or build a sheet.

    My post was to show that using it was, in fact, an intended purpose. In response to your exactly opposite assertion.

    Yeah, I've never used them for anything. I did test them out long ago.

    Also, the OP asked a question, so I answered.

    He is aware of VBA and chooses a different path than you or I would. I wish him the best in solving his problem, whichever road he chooses.

    "What another eats, doesn't make me shit." :)
     
  74. Its good to balance a discussion. However this use case was not designed in from the start, and not too useful. The feature can help to resolve badly formed spreadsheets but in too unpractical and surprising ways to rely on. So id not recommend using it other than just always having it turned on (better). Ive strong doubts this feature will provide new/useful functionality, but it was always best to keep on just to get to see results faster and for debugging purposes. IIRC it avoids full calculation of worksheets on every small change, which is its main purpose.

    I had to give up excel when files became > 200 mb. Its amazing what you can build with it, but anybody feeling the pain of VBA should get sound advice.
     
  75. My cite was from Microsoft. They stated it can be used in the way the OP seeks. I have no information that MS didn't originally intend for it to be used that way and you've provided no reference. Even so, that's irrelevant as MS currently indicates that it can be used that way.

    Whether or not a feature of excel is useful or not is in the eye of the beholder. Again, the OP understands the power of VBA and the greater power of real languages yada yada yada. The OP asked a question about iterative calculations. I answered.

    I have no idea how useful the feature will be to the OP. I could guess--without knowing or seeing the OP's sheet; or knowing what the OP is trying to do--but that would be silly of me.

    The OP appears to be a grown man; If the OP asks for advice, rather that a specific question; I'll give him advice.

    VBA is an easy language. Anyone feeling pain with it (as far as being able to loop with it), will likely feel even more pain with real languages.

    Despite all the "...you should learn programing..." advice dished out on this website; everyone is not built for programming anything more than something simple. :)
     
  76. Thanks for your coaching. I don't like VBA because I could not find functions within VBA to do my computation and has to circle back into Excel to get the right function, toggle between Excel and VBA is a pain. I am not smart enough nor have time to write my own function subroutines, not an excuse sir.

    Regards,
     
  77. Since no one seemed to have tried this circular do loop, I am going to see how it works and let everyone know.

    Simples and userque, I am happy with and appreciate both your recommendations and will try both.

    I actually knew how to program, in FORTRAN, years ago in undergraduate classes :D, but have never done any programming since other than learned VBA recently.:(
     
  78. It's OK. Me and Userque just have two different approaches to answer this. His answer is that this is a possibility (which it is according to docs). My answer is that this will be impractical and not fit for purpose. If it doesn't cost too much, it's good to try something new though (and learn from it).

    I'll be happy to hear of your progress and your experience with this. If viable after all (proving me "wrong"), it could be useful for one offs in the future.

    I understand your pain of the VBA-formula division in Excel, however, VBA is general purpose, although slow, so you can make your own procedures and libraries if there's something you lack. If this is too complex to do, you may need to seek a trading/analysis platform or get assistance from someone who have the technical knowledge.

    It's not very important for me to be right or wrong, though I'm saying this with 30+ years of programming experience, it's good to get assumptions tested also (but I'm more willing to chat about it than spend more time in Excel ;)). (Am actually spending more time in LibreOffice nowadays, as this works under Linux, and works well enough when you learn it's quirks).

    We won't know for sure until someone has tested the waters! :cool:
     
  79. Thanks, but just to be clear. I only answered the original question--regardless as to possibilities. There was nothing to be right or wrong 'about' at that point.

    You then chimed in that Excel was not 'meant' to do 'that.' I responded with a simple cite from MS to the contrary. Thousands of words later--here we are; right back where we started.

    That said; without knowing anything about the OP's project; of course it's possible. Possibility is not the same as something being 'easy' or 'probable' or 'likely' or 'the best course of action' or ... etc. I never addressed those things because they weren't the question.

    You did address those things, which is fine...expect you made an incorrect statement regarding my post--upon which I offered you correction. Some get offended and defensive and excited when you correct them after they've had 30+ years experience. :)
     
  80. userque and Simples,

    I am using a version of Office for Mac, 2010 edition. So far I am unable to find the "options" to enable circular computation. If I am not getting any traction, I may have to purchase a newer version.

    In any case,

    I am not smart enough to write my own function library, just too complex for a senior citizen.:(

    My main objective is to find a simple way to do a Monte Carlo on expected returns. I want to use several different distribution functions (i.e., account for fat tail) and see how they affect the outcome. If I can perform a do loop within excel, it makes my life easy.
     
  81. Exactly what problems are you having trying to perform a do loop?
     
  82. Thanks for asking. Maybe I am making things way too complicated, but this is what I like to do.

    Using Black Scholes, or other options pricing models to simulate the behavior of the option price as a function of the various variables. For example in Black Scholes:

    C = F(S, K, IV, t, r, d)

    C = call premium
    F = function, e.g. Black Scholes
    S = Underlying price
    K = Strike
    IV= implied volatility
    t = time to expiry
    r = risk free rate
    d = dividend rate

    I want to calculate a time series of C, changing the value of S(t), IV(t) as time unfolds, S(t) can be lognormal or historical or fat tail.., IV can be a constant or follow some empirical skew function... I can use a random number generator and the lognormal function to create S(t) as time unfolds.

    Since C is path dependent, to see how the most likely value of C unfolds as a function of time depends on S(t). For this time series calculation, a simple Excel will do. But I need to run enough cases to get the most likely C(t) and therefore a Monte Carlo. In my younger days using FORTRAN to run Monte Carlo, I typically ran ~100,000 cases. Not practical to do that with Excel without a do loop. I can do it with VBA but I don't know how to create functions for the Black Scholes equation within the VBA subroutine.

    I thought at first that the most likely C(t) would be to calculate S(t) as if it grows as square root of (IV*t) but could not prove that mathematically, so am resorting to a numerical simulation. Plus, with a numerical simulation, I can input any function for S.

    Am I making any sense? If not, please set me straight.

    Thanks again.
     
  83. Maybe start your own ET thread for this project?

    I think I understand you. Been awhile since I've watched a PBS documentary explaining the origins of the Black-Scholes equation--a good watch btw.

    Are you sure you have Office for Mac 2010? And not 2011:

    "Microsoft Office for Mac 2011 is a version of the Microsoft Office productivity suite for Mac OS X. It is the successor to Microsoft Office 2008 for Mac and is comparable to Microsoft Office 2010 for Windows. Office 2011 was followed by Microsoft Office 2016 for Mac released on September 22, 2015, requiring a Mac with a 64-bit Intel processor and OS X Yosemite or later."
    https://en.wikipedia.org/wiki/Microsoft_Office_for_Mac_2011

    A while back I introduced you to the Excel WORKSHEETFUNCTION. What happened with that?

    Maybe upload your workbook somewhere where I or others can take a look at it. If you only want me to look at it, PM me the link. You can try to strip any personal or proprietary data from it by replacing it with dummy data...as long at it still 'works' the 'same.'

    If I can't make sense of it; don't want to make sense of it; or you don't want to upload it; I may attempt to just code a simple version to do what you state above whereby, hopefully, you can learn from and use as a sample to apply to your project.
     
  84. Yes, it is Microsoft Office for Mac 2011.

    As for this:

    No, I don't think it is that interesting a topic.

    As for this:

    I did try but could not make it work, so I still use Excel to calculate the function and send it over to VBA to continue the computation and then send it back to Excel... As I said, cumbersome but workable for what I wanted to do. If I cannot make the circular to work I will jus have to use a large array calculation and repeat it multiple times.:(

    Thanks. You helped me enough already, shouldn't waste more of your time. You have more important thing to do.

    Regards,
     
  85. What if you used an Option Calculator Program as the heart of this program and then create data inputs for the Option Calculator for:
    C = call premium
    S = Underlying price
    K = Strike
    IV= implied volatility
    t = time to expiry
    r = risk free rate
    d = dividend rate

    The F = function, e.g. for Black Scholes is already built into the Option Calculator.
     
  86. I talked to someone familiar with Microsoft Office for Mac 2011. I can now get the circular iteration loop going by: press command and comma simultaneously to get into the options table, then click calculation to get the circular iteration function. Let me try a simple Monte Carlo and let you folks know how it works.

    Thank you very much for your kindness.

    Regards,
     
  87. :fistbump:
     
  88. >> Thank you very much for your kindness.

    Well Ironchef, you exceed by much the international math olympics I've seen in 10 years of competing with them and who could not say thank you if you sailed them a lake full of crocodiles on their way to conquering that mountain top and not only that, they'd purportedly kick you into that lake should you given them the slightest chance.

    They've no doubtedly never encountered the Moscow Jews. Fuck these guys and the 1000+ years that brought them here.
     
  89. ????
     
  90. userque and Simples,

    I tried it. It worked.

    Really neat! To be able to calculate a do loop within Excel, priceless.:D
     
  91. Yes, that should work. I may just try it for fun.

    Thanks.
     
  92. Really glad it works for you!!
     
  93. :thumbsup: From your previous posts, I knew you found them.:finger: