Following the Flow versus Prediction

As you know,I'm not big on prediction. Yes, when a market is over bought, you know it will reverse. But when? As John Maynard Keynes said, "the market can stay irrational a lot longer than you or I can stay solvent".

So how do you trade it. There are a number of ways, many of which work depending upon your tolerances and available capital. Let's consider two. Both work for many people.

The first one I'll call the anti-Keynes method. In this strategy, when the market becomes overbought "enough", the trader goes short. One well known proponent of this is Tom Sosnoff,the founder of Think or Swim. If the market goes "enough" against him, the trader sells more short and averages. This doubling down can go on until the market reverses enough to make a profit. This works if the trader has enough resolve and enough money. Not a method for everybody. I do use this technique in a modified way quite often. My modification is that I backtest the "enough" over years and years of data and also backtest a drop dead stop loss so I know when to say uncle" and take a loss.This can work a very high percentage of the time on specific markets.

The other methodology is to trade the order flow. The issue here is being able to "see" the order flow.I remember seeing the film The Invisible Man when I was a kid. They,of course,couldn't show you the invisible man because he was invisible but the audience had to "see" him or there could be no movie. So the writers and directors used two main techniques so we could "see" the invisible man: they showed us his footsteps in the dust and dirt and they also sometimes showed us his outline by wrapping him in bandages. Trading order flow is looking for those footsteps and seeing the outline in the bandages.

I'll post more on this subject using Thursday's and Friday's down moves as an example.

Kinetick, NinjaTrader and Bloodhound

I've recently partnered with NinjaTrader, Kinetick and Bloodhound as part of my trading evolvement.

I use fin-alg's Market Profile with NinjaTrader and use Bloodhound to develop and trade algo's. I choose the right tools for specific jobs. I'll be writing more about the diversification I have developed in my trading in future blog posts. The aim of the diversification is to utilize the maximum capital with the least drawdown. I'm currently trading only an hour or two as a discretionary trader but am trading up to a dozen other markets with FloBots. I also trade longer term option strategies.

If you use NinjaTrader then Kinetick is an excellent choice of a data feed. If you want to know more, watch their free live webinar - see below.

Trouble reading this email? Click here to view in your browser         Greetings, We are very excited to write you today announcing our new partnership with Kinetick, a new Market Data Service that is optimized for use with NinjaTrader 7. Their data is fast, is yours?     Join them for a Free Webinar & Discover the Kinetick Advantage!     WHEN: Thursday, January 9th at 12:00 PM ET     This fully interactive event will discuss why Kinetick can help boost your trade performance while saving you money including how to…

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Going with Flo and the Snow

Kiki and I had a working Xmas this year. The house was full with family. Sadly not everyone was here this year.

 

Anyway, we were working on readying our FloBots for 2014. We are both almost fully algo now in our futures trading. NinjaTrader, MultiCharts and TradeStation all have walk forward analysis that speeds up the process of ensuring that Flo is as robust as she can get. We have 8 markets being auto traded by Flo and will add more. All the above platforms support Portfolio Optimization and that is where I'll be spending a lot of my time.

 

All work and no play is not fun so we skied every day when the weather allowed. Kiki is a snow boarder and I ski as there was no such thing as boarding when I started. We finally got some good snow

 

 

The Guts of Walk Forward Optimization

Looking at the WFO report from the previous post, below:

we have some very valuable, in fact invaluable, information. These Out Of sample (OOS) numbers are the best estimate we can have of how an optimized algo will perform live. The one deficiency is that the impact of slippage is missing. Slippage will possibly happen on non limit orders. ooking at my algo, it's the losing trades that may have slippage. The winners enter on limit otders.

So to allow for this possible slippage, I must adjust the size of my average trade to account for this. If I have a 65% win rate then there can be slippage on 35% of my trades. I need to look at how the algo trades and estimate what percentage of that 35% will have slippage. Worst case is 100% of those will have slippage.

In the above example, there are 793 trades. Of these 35% or 278 trades can have slippage. If I say that all 278 will have a tick slippage then my $83,250 profit needs to be reduces by 278 times $12.5 ($3475) making the OOS adjusted profit $79,775.

There are lots of other available metrics that gives me more information  to avaluate the robustness of my algo.