VAH to VAL

As I keep saying, this stuff is not complicated. Keep it simple.

The pic today showed the market accepting value inside yesterday's Value Area. Once I had the double TPOs below the VAH, I just waited for one of my EL pictures to show a SHORT and I pulled the trigger.

MP for context, EL bar chart for timing.

This trade hit its first target of the POC. Check out your own chart after the close to see whether it hit my second target of VAL.

What It Takes to Be CP Now

I've been writing this blog since 2009 and since then have worked with hundreds of traders. Many have succeeded in achieving CP (Consistent Profitability) but, sadly, many have not.

At first, I took the fact that a trader failed very personally. But over time, a pattern of failure has emerged that I could not mitigate in some people, no matter what I said.

The reason that traders fail is probably due to believing:

• I MUST make money today to pay the bills
• I'll trade too many contracts for my available risk capital
• I'll use tight stops so I keep my losses small
• I don't need a very detailed trading plan that covers every aspect of my entries and exits, so detailed that another trader could replicate my trades
• I don't need to stick to my trading plan. I can make changes on the fly. I think its easy to make critical decisions under extreme financial pressure and lack of time.
• I don't need to back test.
• I don't believe that the harder I work the luckier I get

After a lot of thought I've come to the conclusion that there is a solution. Everyone deserves to become CP if they put in the effort. So what's the solution? How can you almost know that you can become CP?

There is one way. Flobots! And not turning them off.

With a Flobot that a trader creates to suit his own requirements he (when I say "he" it also means "she" because women are very good at creating algos), a person can mitigate the ingredients of CP failure:

• my flobot has a positive expectancy so I believe I will be CP.
• my flobots provide statistics of historical trading over more than 10 years so I have a good handle on possible and probable drawdowns
• my flobots have data mined to discover where to put stops so that they are out of the way of positive market activity
• my flobots are built using a trading plan that I have devised based on real world trading. Anyone can replicate my trades by just turning my flobot on.
• my flobots are like Henry Ford's production line. Each flobot just does the same thing, hour after hour, day after day, week after week.
• my flobot does not change until I do a re-optimization based upon my trading plan and testing over more than 10 years of data. The trading logic and base inputs do not change.
• I have back tested my flobots "ad infinitem" until I know and understand how they perform.
• I spend 12 hours a day testing and developing and testing a flobot until it is ready.

Flobots (algos) are not difficult to create. You can have a lot of programming knowledge or no programming knowledge. My platforms of choice, in no particular order are:

• NinjaTrader with the Bloodhound 3rd party logic add-in
• MultiCharts using Easylanguage (and it is)
• TradeStation using Easylanguage

I'm on the move for the next 6 weeks or so. My Flobots will be trading away on my servers while I visit my kids in London, Dubai and Australia. All I have to check is that they stay on and trading.

I will be writing more on trading algorithms in this blog as I believe that there is a dearth of useful information available on how to implement this style of trading. I found that having Flo work while I play takes away that feeling of lost opportunity when I spend time away from my workstation.

I strongly believe that both a MarketProfile context based discretionary trading style and a portfolio of algorithmic strategies are both the basis of CP.  However, letting Flo do the heavy lifting is probably a shorter route to CP.

Oldie But Goodie!

If you go back over the thousand or so of the past blog posts you'll find examples of today's trade going back to 2010. These trading pictures just keep on repeating themselves.

The market opens out of balance and has to find new value. Orderflow shows the way. The pic tells it all. This stuff is not rocket science. Keep it simple. Look at today's Bund open.

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.