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.