Walk Forward Optimization

In his book, THE EVALUATION AND OPTIMIZATION OF TRADING STRATEGIES (2nd Edition), Bob Pardo wrote: "I have always viewed Walk-Forward Analysis as an idiot-proof wayof optimizing a trading strategy."

With such a tool available, I'd be an idiot not to use it.

Walk Forward optimization has been available for a while in most of the platforms I use: NinjaTrader, MultiCharts and TradeStation. All allow me to optimize a strategy and then show the strategy unseen data and see how it would have performed. All of the above 3 platforms performs WFO adequately. However, the one that currently provides the most statistical information about a WFO is TradeStation. The WFO in TradeStation is The Grail which TS purchased some years ago now and integrated into TradeStation. The  developer of The Grail working for TS was part of the deal.

A key issue in WFO is the data. Probably the best quality historical data currently available to retail traders at a reasonable price is the IQ Feed and its twin, Kinetick if you are a NinjaTrader user.

As long as I can get the data issue resolved, I can use one platform to do my research an another to do the trading. Why would I want to do this? For a number of reasons including:
1. Preference
2. Running multiple algos on the same underlying and needing different broker accounts for each algo of the same symbol
3. Spreading risk between brokers (This is an issue for me since MF Global and PFG Best - I dodged both those bullets but am nevertheless gun shy).

Optimization is meaningless unless the WFO test is passed.

A good walked forward algo should have stats such as the ones below from one of the longer term flobots I run currently run on the ES:

Again, passing all these tests is no guarantee of future profitability bt it is the best way I know of getting a great flobot. The repeated profitability and good stats in the Out Of Sample data as the WFO rolls forward gives me the confidence of robustness.

Lastly, Happy Holidays to everyone. Snow has finally arrived here in the Haute Savoie. The house is full of family although not everyone is here this year - 4 are in Oz - I am jealous that they can go to the beach.

Trading Without Stops!

Long time readers of the blog and students know that I advocate exiting a trade when the trade tells me to exit not some arbitrary stop. I advocate having a drop dead stop as a "safety net". Using normal stops, for me, has been a losing strategy. You are not only betting on direction but also betting, unnecessarily, that a nearby price will not be hit before the direction you are betting on happens. It only needs one big enough order to make a blip that elects a stop.

My risk management tool is your entry price and entry size and then doubling down. My size has to fit the distance of my drop dead stop multiplied by the number of contracts I may have on after doubling down "x" number of times. The drop dead stop and the "x" is defines in my trading plan after testing.

Today's pic is an example of what I mean. I was long the Bund at 140.29 for a bounce from oversold (outside in trade) that didn't happen immediately. I doubled down at 140.20 and looked to scratch after I saw that the trend had changed.  My drop dead stop was more than 25 ticks below the low the trade actually made.

Your trade plan could be a little different. For example, look for profit only after the initial entry but look to scratch if you have to double down. Backtesting will show how this can be profitable if the right metrics are chosen.

Become an Expert on the Open

I often tell the story of a guy in Los Angeles that I knew in the 1980s. T-Bonds was the market in those days. Well, this guy only looked to do one trade at the open. He did that trade and then had breakfast and hopped into his Porsche and went to the beach.

Doing the same thing over and over again makes you very good at it, eventually.  How long that "eventually" is depends on how much research and testing you do and how structured a trading plan you create. Market Profile for the "where" and a bar chart for the "when" makes the "eventually" a much, much shorter time.

My trade today in the DAX is a good example. The pic tells it all. I have a number of elements in my trading plan and this is one of them.

Finally, Making Money With Market Profile (TM)

Finally, Making Money With Market Profile TM.

That's the title of the Book. As readers of this blog and students know, context can substantially improve profitability. Yes, you can be CP without context, or at least without structured context (there is always some form of context in our minds) but using MP greatly improves my performance. Its a bit frustrating I can't effectively wrap that context into an algo.

However, for both discretionary and hybrid traders, context can be a like a magnifying glass on profits if properly used.

A good example is today's Bund. The Bund was my main market when I was on the LIFFE floor as a local. While the German unification was under way, Bund trading was like money falling from the sky. You didn't even have to bend over to pick it up. You also didn't really have to be a good trader to make money, But if you were good then ,,,,,,,,,,

Anyway, enough of wishful thinking of the good old days. Splitting the Profile correctly is the key to getting the proper information from it. Then, using the EL pictures at those key points makes for a happy trader.

Algo Expectations

Trading fully automated is quite different from both discretionary trading and hybrid trading. In this case, I am referring to the amount of profit per contract per month.

While as a discretionary trader I might make, say, $2,000 per contract per month, That would be say an Average Trade of $100.

As a Hybrid trader I may be able to replicate that same performance and maybe even better it.

However, as a fully automated trader, I would be happy to have an Average Trade of $25 per contract per month.

The advantage of the fully automated trading is the way that I can leverage my skills. As a discretionary trader, I am trading one market. My profits are limited by the amount of risk per contract I am willing to take and the number of hours I am willing or able to spend fully focused in front of my workstation.

As a hybrid trader I can be a bit more leveraged and trade two markets at the same time.

But as a fully automated trader I can leverage myself and trade as many markets and contracts as I have capital for.

I had 5 markets that I was trading fully automatically today. Gold was the best performer and the ES was the least best. The other markets were the Euro (6E), Light Crude and DAX. By having that diversification I achieve a smooth upwards equity curve. Funnily enough, none of the markets lost money today.

Nowadays, I trade a mixture of discretionary, hybrid and fully auto. I run longer term positions using option strategies.

There are two schools of thought: put all your eggs in one basket and really watch the basket, and diversify. The choice is partly dependent on available capital.

Followup to Yesterday's Trade

I just wanted to show what happened to yesterday's ES trade in the previous post. There were two possible entries a little after the open. Putting on a trade and then managing it to completion is the skill that a trader needs. Its probably the "managing" part that is most important. As Pete Steidlmayer said to me, "just put the trade on and manage it", I kick myself if I overthink and miss a trade.

You can see one of my yesterday's entry trades in the bar chart below (first entry was a 50% size and I added to 150%). There was nowhere before the close that the chart said to exit the trade. The LURenkos took out all the noise and we were left seeing the clear order flow. Higher highs and higher lows. It ended up being a trend day with a close within the top 10% which means that there is a very high probability that I couls exit at a higher price after the close in the next 24 hours. As at the time of writing this post, there was an additional 3 handles profit available between the close and the high after the close.

The Book

The Market Profile book is back on. I had stopped everything when my Mother became ill but I've started writing again because I haven't found anyone teaching MP in a way that it can be used to make money consistently. The book will only be available on Kindle and kindle apps that run on the PC and Mac. I use both my iPad and my Android Samsung Note 2 to read Kindle books. The book will include a detailed explanation of the methodology with lots of examples.

As you guys know, I use the Profile for context and my bar charts for timing. Timing has always been the issue for me with MP and took me years and years to figure out. Matching timing to context creates a high win rate. Using context provides meaningful targets.

Today's ES trade is a good example. The RTH open gave the first buy as it bounced off the VA support. It coincided with an overbought bigCCI. If I had missed that, I had a second entry as price was accepted within the previous VA. That coincided with a pullback-thrust in the CCIs.

Both entries had measured MP targets and way points.

Keep It Simple

Lots of traders make it too complicated. Simple is easier to do and it works.

Identify the context with Market Profile then identify the trend and then just trade the pullbacks. The MP is the roadmap. It shows me where I should trade and the potentiality of the trade. My bar chart times the trade at the places where I know a trade is "valid" according to my trading plan. I just do this over and over again. Look back over the many hundreds of charts on this blog. The expression "I'm a simple man with a simple plan that I do over and over again" sums this up.

 

Done for the Day!

Today's futures trading didn't take long. I watched my trade setup and then just pulled the trigger, took my profit and headed downstairs to have another Nespresso. Mrs EL tried their new Vanilio flavour and is well and truly hooked.

We make trading much harder than it needs to be. It's not about how long we spend in front of our workstations but how much money we make. Every time I open a trade, I take on risk. I don't want risk. I want profits.

Markets move when they are out of balance. That happens at specific times of day and also after surprise news. That's when I want to trade. I want that quick gratification - I want to be paid for taking on that risk and I want to be exposed to that risk for as short a time as possible. I can do that as a Hybrid trader or as a discretionary trader. I can us this tactic in fully auto trading as well by identifying the window(s) in my trading day when my Flobot makes money. Both Bloodhound and MultiCharts allow mw to restrict my trading to specific times of day after I have backtested the when. Adding context is more difficult for auto trading but I find that by choosing the "when" correctly, I also hot the right context as my trading pictures do the rest.

Like today.

I chose the periodicity of the bar chart to specifically identify the timing for the VA entry trade.

Is It a Buy or Sell? Easy!

 

 

Is price here a BUY or a SELL? Value had dipped into the porevious day's VA but has also moved up a tad. Now look at the next pix below.

 

You can see that it was a BUY. Value moved up. Now look at the last pic. The renko chart shows trend as up and clearly identifies the pullback and thrust to get me long right at VAH support. Putting these two disciplines together provides more clarity of what "they" are doing.

Could You Trade this Algo?

The pix below show the metrics of a trading system trading the ES. There are no optimizable parameters. As you can see, it has a low win rate. But it makes money month after month. It has no target and it has no stop loss. There are no parameters to go out of sync with current market conditions.

Best of all, look at  the average trade size.

Maybe, the question should be not "could" but "would you want to". There are many ways of making money in the markets. Just the same number of ways of making money as losing it because it's a zero sum game - every trade has someone on the other side. If you don't like this system then you could just take the other side of the trade. Does saying "I wouldn't want to take either side" make sense?

Doing what everyone else is doing gives you the results that everyone else is getting.

Anatomy of a Losing Trade

The chart shows why I avoid anything but drop dead stops.

You can see where the trade entry is. Not a great trade location as it's a bit far from the  shorter EMA but still OK.

The trade fails as the trend is now suspect but the context allows an exit at break even. An order can be placed at resistance which in this context is the longer EMA. When the DoubleDown entry is executed, an order is placed to exit at break even with a drop dead stop still in place (there is ALWAYS a drop dead stop in place in my trading plan).

Market pulls back from resistance and the trade is exited at break even.

Looking for a new trade.

This can be done as a discretionary, hybrid or fully auto trade.

Consistency

One of the key components of CP is the Consistency. It's OK to have a few losing trades but a high win rate with proper risk management for the losses provides a mathematical edge in your trading plan.

Having tight stops is not the way I do it. Rather, doubling down and even tripling down in a trade where the entry qualifications are still valid allows the basis cost of the entire position to be reduced and facilitates the high win rate and consistent profitability.

Today's picture is the third day in a row with similar trades although each has a different context. However, they are all trades that trade the pullback-thrust of the trend of the chart in which they appear.

The initial entry was early but identifies the Fav Fib target below. It allowed a doubling down at a better price which resulted in a much larger profit on the trade. Initial entry may be 25 to 50 percent of the position with the balance entered on the double/triple down.

Just getting the trade on is what important. If you don't have a trade on then you cannot get a result. Overthinking kills consistency. Do the testing and rely on the metrics you discover. You MUST expect and accept losing trades. It only takes one strong hand to take the position opposite to yours to make a trade a loser but if your testing shows that you are profitable 75% of the time and green every week, just take the trade.

Ground Hog Day

This stuff works because these market patterns just keep on repeating themselves.

Today, the DAX had a deja vue trade - same trade as the previous post. Market thrust after the pullback and stopped at my Fav Fib. This trade worked as either a Hybrid trade or fully auto. I'm finished for the morning and it took all of 3 minutes or so. You do the math x number of contracts.

Hybrid Trade into my Fav Fib

The chart below is a Ninjatrader chart with Bloodhound taking my EL signals. Each of the racing stripes are a signal: Green for BUY and Red for SELL. There is a panel on the right that allows the trader to switch the algo on and off and to manually exit trades.

A Hybrid trader can turn the algo on when he sees conditions are close to a trade setting up. He can do this from watching his Market Profile or just looking at the EMAs converging or the CCIs changing trend.

Once a trade has been triggered by Bloodhound, the trade can be exited manually at a predetermined target such as my Fav Fib as in the picture below. If a trade is exited then the algo will enter a new trade when the conditions specificed in the algo are met. That's why you see all the racing stripes. No additional trade if you are already in a position in that direction.

If you turn on Flo and the conditions are not met, there is no trade.

It's Simple if you use Algos for Discipline and Focus

Trading is not easy but it can be made easier if you keep it simple. This morning's trades in the DAX are a good example.

Creating an algo - MultiCharts, TradeStation or Ninjatrader, it doesn't matter which - allows you to wire in the discipline and focus. Instead of needing to be focused and smart for over 480 minutes every single trading day, putting the effort in creating an algo to do what you would do to enter the trade makes more sense if you create a trading plan with specific goals. This way, whether you trade hybrid or fully algo, you leave the focus of capturing the trade to your Flobot. Then to manage the trade you can either trade hybrid (manual exits) or still fully algo but adjusting your stops and targets to the context that you see BEFORE you turn the algo on.

Here's the pic. The range of the overnight ES told me that a 250 Euro target would be high probability for both the Inside Out and the Outside In trade.

Today is the one month anniversary of the death of my Mother. She was 94 years old and passed away peacefully in her sleep. She was diagnosed with cancer in January - the same type of cancer that took my Father in 2007. I'll miss her a lot. I continue to support the various cancer charities, especially Macmillan, that either help look for a cure for cancer or support the people who are impacted by it.

Find the trend and Trade the Pullbacks.

Sitting at full alert for hours waiting for a trade is not easy. Los of discipline, missing trades, happens a lot. Using an algo to do the waiting and entering the trades that exactly meet your trading plan is a solution to about 70% of the issues that traders have in getting to CP. Managing a trade after auto entry is a lot easier and that can be rule based, either automated or manual.

Fore!

The LPGA came to my neighbourhood last week and Friday saw Mrs EL and I head to Evian, the home of mineral water, to watch the golf - The Evian Championship billed as the first Major in Europe. The course is breath-taking. It is situated in the foothills overlooking Lake Geneva (Lac Leman) and the day was sunny and bright.

We stayed the morning and got back to the farm after lunch in time for the RTH open.

I have two students on the go at the moment learning hybrid trading. One is still on theory and the other has started SIM with great results. We have a good trading plan that has achieved a high win rate and next week we are progressing to stage 2 along the road to CP. Hybrid trading seems to be the shortest road to CP as it provides the discipline to take the specific trades that have been tested and put into the trading plan. I'm teaching the use of a technique to turn the FloBot on and off as the conditions change making the appearance of a trading picture possible. This again improves performance.

This is Why I Hybrid Trade

Today's DAX chart shows it all. Flo got long just after the DAX open and stayed long for the whole move. Yes, as a hybrid trader I could have mucked it up a bit by exiting early, but look at the green bars on the bottom Bloodhound chart section. Each is a re-entry long! So if I had exited early -which I did I must admit I did - I had ample re-entry signals. I can also set Flo up to exit with a tighter profit target and re-enter if the entry picture represents itself and here that happened too. Notice how the LURenko bars smooth out the trend.

Hybrid Trading Made Easier

The advent of Bloodhound is a big deal for hybrid traders. The vid below shows one of my hybrid trading workspaces.

I have two types of entries: Inside-Out and Outside-In. the new GoFloTM FloBots are both active on the chart but can be turned on and off with a single click. The logic, created in Bloodhound, does all the entry work. However, and this is where it gets cool, several bars before any possible triggering of a signal, as I see the picture may be coming, I just turn on the trade I want to take. As soon as Flo sees all the conditions have been met, a trade is immediately fired of to the broker. I don't need to be too much on the ball or even be quick. Flo does that. I then manage the trade with my rules that have been documented in my trading plan. There is a drop dead stop and a "this trade is no longer a go" exit rule so if I'm not paying attention then the world does not end. I can make the trade fully auto by entering a profit target.

I make the choice of when to turn a Flo on and whether I want the Inside-Out or Outside-In logic to be active, or both. The beauty is I don't have to be too alert or too quick to catch a trade. I can easily trade more than one market at a time.

My tools: Ninjatrader, Bloodhound, PureLogik Renko bars, GoFlo (the EL algos), and a specific trading plan governing my trade management.See details of the tools here.

I've made a video to show how I do it.

Is it Is or Is it Ain't?

To paraphrase that great song by Dinah Washington "Is it Is or Is it Ain't?" a trade setup? That's the decision a discretionary trader must make numerous times a day. Lots of focus needed.

Pete Steidlmayer always said to, "just get the trade on and then manage it". Well, Flo can get the trade on better, quicker and more consistently than I can. I don't need to re-invent the wheel multiple times a day. The pic below shows yesterday's (Tuesday's) ES open using Ninjatrader and Bloodhound. Do I buy it or sell it? Flo went short and then it was a simpler a matter of managing the trade. Or I can let Flo manage it and do something else. These trades when a market opens and is in imbalance, can very often be the trade of the day. "Do the trade and go to the beach" as another trader I knew in California used to say. The profit per contract was $162.50 less fees (hybrid). Not hard to trade the size in ES that you need to make a daily profit target.

As you can see from the latest series of posts, I'm a big fan of using automation to at least enter trades. It just can get you to and keep you at CP much quicker. Don't get me wrong, this strategy has losing trades. Not many if you use the correct money management strategies, but losing trades non the less. Money management is at least 50% of the trade.

Algo Trading - a Different Perspective

For a long time we have known that different algos work better on different days. Putting that into Market Profile speak, an algo usually performs differently on a Trend Day ( or a more trending day) than on a Normal Day (when the market is rotating).

I have long been setting up algos to only trade at a certain times of the trading day when I believed that certain activity that suited the algo would more likely happen.

But there is a more hands on approach. The object of the algo is for it to quickly identify a trading picture and act on it without me being required  to be alert and glued to the screen. Much of the time I'm in my office doing research or putting on option positions etc. I love what I do and am never bored in this business.

I was often frustrated when I saw Flo take a trade that I "knew" was going to be a loser. When I first started trading with algos I often over rode the signals until I realised that I was wrecking the math of what I had created.

Taking one step back, what if a trader can identify the type of day that was happening, or just the type of market that was happening, and turned on the appropriate algo that was suited to that type of market. That would require a little attention but nowhere nearly as much as discretionary trading. Having the algo identify these activity changes was something I have tried to do and am still trying to do with different degrees of success. However, if a trend day starts I can easily tell Flo to only take trades in the direction of the trend. If I have a quiet day I can turn on a Flo that trades well in a rotational market.

Makes more money and takes away the frustration. Of course when I'm not there, Flo does her thing and gets more "average" (profitable but bigger drawdowns) results which is fine as that's the price of freedom.

Today's chart is a typical DAX trade. The market was called to open gap up - ES was trading higher overnight - so I turned on the Flo that trades this very usual trade. As soon as Flo entered the trade I went to my charts and quickly found the target and entered the order. No rush, no sweat. I also knew where the price had to go for me to be wrong and a stop was placed there.I then turned the automation off. There is no law that you have to use the same algo all day. The markets often trade in three different modes - the opening hour or two, the middle and the closing hour or so. The reason for this is that it is at the open and the close that the bigger market participants have to create and balance positions.

As you can see, entry was at 8254.0 completely automatically in accordance with the logic in the Bloodhound FloBot. Exit was on a discretionary but rule based basis (trading plan) at 8274.0. The profit of 20 DAX points or 500 Euros per contract meant that my morning trading could be done for the day. You can see where Flo would have exited the trade on an automated basis, at 8270.0, 100 Euros less profit. By trading as a hybrid trader, it is possible to consistently beat an already profitable algo by concentrating on manual trade management, a lot easier bar to meet than trading as a fully discretionary trader. The chart below is using the PureLogik Universal Renko Bar

More Outside In

The chart below shows Flo trading in Bloodhound using the LURenkos.Flo is fading the moves as she identifies areas where the market is likely to turn. If she's wrong, she doubles down using very specific rules. She also has a third double up her sleeve in case the initial trade was very early which it can be. Lots of people say that this is exactly the wrong thing to do and lots of people never get to CP. The math does not lie.

I've got a couple of guys (why do so few women trade?) starting algo training and we will be working a lot on Outside In trades to get them to CP as hybrid traders. Why Outside In? Firstly, because of the way that markets are trading now and secondly because Outside In trades are easier to hold. Learning the skill to know when a trend trade should be cut is more difficult than cutting an Outside In trade. If going short at 31 was a good trade (met trading plan) then adding to the short at 33 is even better waiting for the price to at least revert to the mean. The drop dead stop that has been backtested is the cut. This is a very high win trade.

What we'll be doing is having FloBots entering trades that have been backtested to be over 70% winners. Creating these algos means that a trader can be relaxed until the alarm goes off and know that the trade they are entering has an edge. Managing that trade manually gives them a lot of flexibility in managing the trade to suit their trading style within a very specific trading plan that they have created.

Everyone who is taking Monday off should enjoy the long week-end.

Outside In or Inside Out Trades

I've been looking back over my trades of the last few months and noticed an interesting phenomenon. I'm doing more Outside In trades than Inside Out. Why? Seems that the way that the markets are moving gives a better edge fading the moves than trading the pullbacks.

I think we are seeing the effects of the lower volumes as traders are staying away from the markets. I noticed a post in the Zero Hedge blog talking about how the viewership (is that a word) of the financial channels are dropping dramatically. I think that's partly because of less interest in the markets but also because people are finding better and more easily accessible information on the Web.

The reason that the Outside In trades are working "better" must be because moves are exaggerated and it's a matter of doing what I did on the floor: coming in and providing supply.  The pic below is an example. I start with 25% of my position and double and triple down as the trade goes against me. This trade management is important to maximize the profitability and reduce the stress of this trade.

Hybrid versus Discretionary versus Fully Auto

Hybrid trading has a different trading profile over both Discretionary and Fully Auto.

The way I set up my Hybrid Flobot is to create the trading logic I want to use to enter a trade and test it to it's highest win rate with a minimum profit target. For the ES, this could mean that I create a Flo setup that gives me, say, a 73% win rate with a 2 tick target. As a hybrid trader I then need to manage my trades to a better profit using my skills as well as trade management such as double downs. It means that I can trade more than one market at a time without the risk of missing an entry. Also, if I am competent at trade management (as distinct from trade entry which I don't have to be good at as Flo takes care of that), I will achieve greater profitability and smaller drawdown.

A fully algo trader has the benefit of being able to trade many, many markets at the same time and benefiting from Portfolio Diversification although this has the price of greater drawdowns than both the Hybrid and Discretionary and thus capital invested. He also has the benefit of not having to sit in front of his workstation as long as he has mitigated the technology risks.

The competent Discretionary trader has the highest win rate and the lowest drawdown but requires being glued to the screen throughout his trading session. He can achieve higher profitability by trading greater size. Of course the discretionary trader can use algos to test trading theories and fine tune how he trades.

Making a choice of how to trade is a personal choice based on all thes and other criteria. Using the technology lowers the skill required to trade and no matter which you choose to be, the use of algos in any way shortens the learning curve.

I Love the Smell of DAX in the Morning

I'm getting quite a few questions bout how I'm going with Bloodhound. This is a Flobot that I use in the European mornings on the DAX. As you can see, its all outside in trades which work well on the DAX as it overshoots a lot. You can see the ENTRY and EXIT signals generated by Flo in the Hound as well as how those signals are executed using my autotrader in Ninjatrader. Same Flobot works on a number of markets and periodicities. I've got a few new guys doing the Flo Algo Training and I'll be sharing this and other logic with them. I'm also using my MultiCharts for longer term trades and for strategies I haven't ported over to Bloodhound yet.

If you want to see more on Bloodhound, use the link on this page.

Pick Your Jib

I love sailing. I've had two boats of about 37 feet long. One crossed the Atlantic from Spain to the U.S. My happiest days were the days I bought them and the days I sold them and all the days in between.

One of the things you learn as a sailor is to pick the right jib ffor the wind. Just like that, I pick which "sail" Flo should use to trade a particular market on a particular day. There are three types of algos that I can choose from:

• Trend day
• Normal day
• Sideways tighter range day

Picking the right algo improves my profitability. But I have to make sure that if I pick the wrong algo for the day - and this happens - that I'm still OK. So I test which algo works best on which type of day.

Today was clearly one that would start as a Trend day down. I picked my "jib" for trend and off she went.

This is what Flo did during the time I let her run. There is no law saying I have to leave Flo to trade 24x7. Picking a time of day to auto or hybrid trade is just as important as picking a time to trade as a discretionary trader.

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Algos or What

I became a trader very early in life as I was very entrepreneurial from an early age. My Dad always had his own business and that was my example.

In my quest for even more freedom, I have thought for a very long time that it would be neat if I didn't even have to turn up and the cheques kept on coming.  However, life isn't like that unless you inherit your money so a degree of perspiration is always required. However, thos of you have been longtime readers of the blog know that one of my favourite quotes is: "Genius is 10% inspiration and 90% perspiration" (Thomas Edison).

Nevertheless, I believe that I should be the one to choose when to expend my 90% and when to expend my 10%. I've more than put in my 90% so now I'm enjoying using that 10%.

I've been working like a fiend with Bloodhound. Bloodhound has allowed Flo to progress well beyond my meager programming abilities and to be released from reliance on anyone. Here's one I did earlier.

The algo uses the LogikUniversalRenko bars that get rid of noise. There is a downside to these as there is a 3 bar slippage at the turning points but I take this into account when I show Flo what to do - all with no programming, just picking logic blocks. All my algos have the same premise of following the orderflow. No prediction. As the Chinese philosopher Lao Tzu said: " Those who have knowledge don't predict. Those who predict don't have knowledge".

As you can see from the pic, Bloodhound allows hybrid trading from the same chart.

Shortening the Time to Consistent Profitability

In my post here, I wrote about the strengths of Automated Trading. I want to take this further in today's post.

Traders seem to be able to learn the mechanics of trading quite quickly. They can find a good trading picture or copy someone else's and get to CP in SIM in a very reasonable time. The big leap seems to be getting from CP in SIM to CP with real money.

Automated Trading is a way to make that transition much more quickly. If someone has worked out a trading picture to trade and made it into an algo, backtested and forward walked it and then successfully SIM tested it, then the only way they can sabotage their success is to either turn the algo off or to override its signals. Two failings that are easier to cure than having to make discretionary trading decisions ten times a day.

What is interesting is that you don't need to be a programmer to create your algo. On May 22 I started using BLOODHOUND and am live trading. Flo loves the'hound. I can setup more interesting rules that I didn't have the competence to do in easylanguage.

Additionally, I'm using Logik Ultimate Renko bars. These take even more of the noise out than the range bars. Renko bars are complicated and have many pluses and minuses. I'll post separately on this topic but for the time being I can say that all renko bars are not created equal. Far from it. I tried about a dozen of them before I found Logik.

I haven't recommended much in the blog in the past but these two add-ins to Ninjatrader are together a quantum leap for me.

Full Disclosure: I'm now an affiliate of both Bloodhound and PureLogik. My aim is to help both these good products get into the hands of more traders on their road to CP. All financial recognition from these vendors will go to Macmillan Cancer.

The chart and stats below tells the story. It's a very simple reversal algo. I am running a number of different algos on a portfolio of markets.

A Business Plan, Different to a Trading Plan, Part 1

Trading is a business. A business needs a business plan once you get to CP.

The business plan is different to the trading plan. The trading plan is the detailed way you go about trading a particular market(s) and periodicity including the trade and risk management. A business plan is a plan how to conduct and grow your business.

While most traders have now finally "got it" that they need a trading plan, most still don't have a business plan. The business plan is not talked about so much as most traders are still trying to reach their first goal of CP.

So what's in a business plan? The starting point is the same thing that's in most business plans, an analysis of costs and the profits that are required to hit breakeven taking into account all expenses (even living expenses for a trader).  The second part of the business plan is describing the actions required to meet those costs.

For example, a trader starting out in business may plan:

Costs per month

Data                                                        120

Platform                                                    50

Rent & Utilities                                      1,500

Car Expenses                                          500

Education                                               200

Various                                                  930

TOTAL                                                3,300

Income

Breakeven @ 165/day for 20 days        3,300

Requirement

Trade 2 contracts ES per trade to earn average 1.5 points per trade as per my trading plan for ES day trading.

This busines plan  provides a goal as well as an assurance, if met, that the trader has a business. Income surpasses expenses. As the business develops, goalls change and the business plan is updated.

OK. Now you are a successful trader with a number of dependents and a higher level of expenses and income and the business is growing substantially, what sort of business plan might be prudent to protect both income and assets. This was something I took a lot of time over and still do. I'll write the second part of this post soon.

The Ever Evolving Trader

The road to consistent profitability is to find something that works and then do it over and over again.

This doesn't mean that you do EXACTLY the same thing for ever as markets are evolving, particularly as technology and the economic climate changes.

To meet these changes, we must subtly tweek our successful methodology.

How do we know that its necessary to tweek and how do we make the tweeks?

We know that it's necessary because we keep detailed records of our trades in either a spreadsheet or in a program like MSA. By knowing the profile of our trading, we can see statistical changes taking place. We then go back to our charts and look at the trades and see where the issue is.

Once we have an idea of the changes taking place, we go back to our trading app and rerun the algo that we use to test our methodology - assuming we have been clever enough to create a model of our trading.

Creating a trading module - an algorithmic represntation of how we trade our pictures/ setups is cnow necessay, even if we are discretionary traders. We need to test the effectiveness of our entries and exits. If the math doesn't work we can't be CP.

For me, alogorithmic testing is the starting point of a new idea. Without this, it can be just guessing. Looking at the number of traders who don't use algos for working out their methodology gives you an idea of why most traders lose.

Automated Trading

We have been actively trading Flo for a long time now have a lot of experience and statistics available.

It is my strongest belief that as the markets have changed and continue to evolve with technology, the way for traders to now succeed (succeed = to make consistent profits) is to use rule based, back and forward tested, methodology.

Having interacted and/or mentored with hundreds of traders, I believe that traders fail because of a lack of a properly tested trading plan or a failure to follow a trading plan.

The medicine for this, I believe, is to trade using an algo. The very act of properly creating, testing and using an algo means that there is a properly created and tested trading plan which is adhered to.

Trading is a business of probabilities. When we see "A" there is a predominance of probability that "B" happens. We then wrap money management around this and we have consistent probability.

The least important part of all this is what "A" is. There are millions of "A"s that result in high probability "B"s. It is NOT difficult to create a consistently profitable algo.

What is more difficult is to create a consistently profitable algo with the average trade size and drawdowns that do not cause the trader to turn the algo off. That means the trader needs to find an "A" that fits his trading DNA.

The basis of finding an answer to this question is determining a couple of basics:

• Are you an inside out or outside in trader or both

• What size of swings/oscillations do you want to trade taking into account that the markets moves in thrusts and pullbacks during the trade

Algo trading and HFT trading is increasing exponentially, not just because of the speed required but also because a single trader can trade a"portfolio" of markets thereby smoothing out his equity curve.

While HFT implementing HFT is beyond the pockets of most retail traders, MFT (Medium Frequency Trading) is definitely not. MFT involves scalping the market with automation. Why MFT?

1. Very high win rate due to small profit targets
2. Reduced risk as the trader is in a trade for a short time albeit many times a day
3. Triggers on easily identified bursts of order flow and momentum
4. Using an algo means the trader needs to be smart once - creating the algo -not smart for every entry and exit.
5. Your trading plan can be both back tested and forward walked so that you can be as certain as possible that Consistent Profitability (CP) is there, all before any money is risked

The methodology is still the same: inside out trades identify the trend and trade the pullbacks in the direction of the trend. Outside in trades identify extremes and fade moves to revert to the mean or better.

My tool of choice has been MultiCharts but there is now something new for someone who cannot or does not want to get involved with programming. This something new is BLOODHOUND, an add-in to Ninjatrader. BLOODHOUND is a tool box of logic and solver modules that can be picked and clicked and put together like a Lego model to create both signals and strategies that can be fully or hybrid autotraded. I've been working on porting Flo over to BLOODHOUND since the end of May and the results are looking pretty good. I'll post more on this in the future. In the mean time, click the BLOODHOUND link and have a look at their videos.

Busy Year

It's been a busy year, personally, for me. And it looks like it will get busier still.

I spent the winter skiing a lot. We had a number of house guests and Kiki was here over the Xmas period. She's a snow boarder and I enjoyed spending a few weeks with her again.

We've also been travelling and will do a lot more of that this year. We recently were in Dubai in the U.A.E. It's an amazing country where the vast majority of its residents are foreigners. There are literally hundreds of new skyscrappers. The pic below is my favourite. We went up to about the 140th floor to see the view. Its hard to find a building older than 10 years.

The result of this has been a change in timeframe for my manual trading. While Flo is still grinding it out day trading, I've moved to a daily timeframe for my manual trading except on the few days when I can sit in front of my workstation.

Using the daily timeframe is the same as any other timeframe except that I can make my market decisions outside trading hours.

I run a number of live trading accounts and I have decided to use this blog to document the trades in one of them. Not all my trades will be shown nor will the size of my total position as trades areallocated to different accounts and can be exited differently. I'll post after the close of the day when the trade goes on and before the open of the next trading day. The post will include a picture of the execution confirmation in the IB trading account.These trades can have a much larger drawdown per contract but with a commensurate larger profit.

I intend to post regularly, whenever there is a trade I want to share.

I'll start off with the trade below which was executed a couple of days ago:

As you can see, I basically went short using options. The trade is profitable now. It would have been profitable even if the proce stayed the same or went against me slowly. The risk is limited to the difference in price between the strikes of the options. The profit potential is the difference between the sold premium and the bought premium.

This trade is one of the usual Outside In trades. My rules trading daily charts are the same as the rules I use for intraday.

They Are Still Printing Money

Everyone is still printing money. Strangely Gold and Silver have had their day for the time being. Maybe I'll be able to buy back the Gold I sold at $880 and then watched the price go up.

Lot's happening in the markets again as the transition continues. The only constant is the methodology I use to make my trading decisions. I'm spending a lot less time in front of my screen and am using the daily timeframe with options more and more.

Here are a couple of charts that show the type of things possible. When you look at the chart, if you ignore the description on the top, the chart looks like any intra day chart even though it is daily. Instead of using the underlying, I use a vertical credit spread (VCS) so that my ROI is increased and I improve my edge by more than 66%. How is the edge improved? Well, the VCS means that I make money by both the directional move and the erosion of the sold option. My typical trade is a 15% profit on the margin I use. It's important how the trade is constructed using the variables of DTE (days to expiration) and the Deltas of the two option legs. I've set up a screener on MultiCharts and can follow lots of symbols and take the cream, trading as many opportunities per month that come up. Same analysis as intraday.

The book is going slowly but surely. I'm getting what is often called "scope creep" which means that what I have decided to cover in the book is increasing. As I cover something, it leads to something else that I think is important. And so it goes.

I'm skiing most mornings. We've had lots of people staying over here during the winter and that's been a welcome distraction. We're heading to Dubai in a while to have a look and then to the Italian Riviera as summer gets under way. I'm planning on getting a Microsoft Surface Pro as my travelling PC. I can connect it to TVs wherever I am with HDMI and get a big enough screen. My Samsung Note2 will allow me to tether to the Internet wherever I go.

And So It Goes

A new year but the same old global problems. The transition is continuing. More uncertainty in the U.S. and Europe. We'll see how all this finally effects China.

These days, I'm trading through Flo and trading option strategies. Not much manual trading. I'll be in London for a week soon and Dubai in March for The Dubai Cup, with a few more trips later in the year

I'm skiing in my mornings. We've got a great season here in the Mont Blanc area. The book is progressing, albeit slowly.

I have nothing new to say at the moment so I'll be posting sporadically but I'd suggest that any new readers wanting to see the EL methodology in action go back to the beginning of the blog and start reading. It's all in there.