DAYTRADING FUTURES BLOG

VOLATILITY

2008-11-16T17:20:00.033+01:00

No one has missed the tremendous rise in volatility in september and even more in oktober: the VIX index thee-doubled in the value since the beginning of september. We saw intraday movements only normally seen in months. It is also the sudden change in volatility that has surprised many people.

Look at the VIX data at the yahoo website during the last 6 months and for a comparison a chart since 1990. It seems that all of a sudden the world has completely changed since oktober. In reality it hasnot.

(Data from Yahoo)

Quite a while ago I wrote an article about intrady movements on the German Future DAX in a magazine called Traders.

There I defined volatility as the difference between the daily Highs minus the daily Lows because this value being really of importance for daytraders as they feel this movement throughout the day.

The data were gathered and various statistical tests were performed with it. One of the aims was to see if the data would fit in some distribution. It was no surprise that these data did not fit in a normal ditribution. It is almost ridiculous now to think of normality data returns.

The best guess then was the General Extreme Value distribution (GEV). These kind of distributions are known from Extreme Value Theories, fairly complicated material and for more details I refer to my article.

Some of the conclussions drawn from the article were:
Importantly the intraday movements do not follow a normal distribution but exhibit a fat right tail and skewness to the right. The non normality of these intraday movements has consequences for risk analysis (.. as done in VaR calculations).

The observation of bigger intraday movements than could be expected when normally distributed has consequences for risk management. Fitting data in a Fisher-Tippett or GEV distribution and looking at the relevant cumulative distribution gives a much better insight in the possible intraday movements of the FDAX and thus in the risk you may expect, but also in the opportunities this gives.

This was a good thought and seems to be totally right (but not followed by the so called professionals).

PREDICTION OF THE FUTURE IN TRADING

2007-02-12T19:56:00.000+01:00

It is a general knowledge that the future cannot be predicted. Nobody knows exactly what will happen tomorrow let alone in a year. This fact leaves us with a very uncertain feelings and no surprise that a deep drive to try to control the environment and the future.

This can be seen in almost every field where humans operate: from production processes in factories to climate change models. Also traders face the challenge of dealing with the future.

Various methods exist to control and to get grip on the future and all of them are used by traders. Indicators, chart patterns, the use of regular cycles in one or other way (Gann), astrology and so on.

A good starting point to value these methods is to understand that future prices of assets cannot be predicted in general and the only way to deal with this is to use a concept of expectation of the future. An example with throwing a dice naturally comes in mind here.

Everyone knows that throwing a fair dice enough times will result in equally divided amount of the faces coming up. This is the same as saying the probability of a one, a two etc. is exactly 1/6. Our expectation of throwing a fair dice is 1/6 and so we know the future of this dice throwing process fairly well.

There is only one key assumption made here: a dice has to be a fair one. This is crucial. The consequence of using a fair dice is that it can be shown in a mathematical way that the expectation of throwing a fair dice is 1/6. This concept is used in our daily lives over and over again and used by traders. But here is also a big bootstrap.

Mathematics is not physics. Though the assumption of a fair dice maybe in reality a fairly good one (in fact, the contrary is assumed, if throwing a dice is not coming with our expectation of it, we assume the dice to be not fair). We are never sure if a dice is a perfect dice in a way that no imperfections exist with its faces which would result in unexpected results. Even when we know that such small imperfections exist we also know that it may not lead to in a different outcome when throwing it.

The understanding of this has consequences for our daily lives and the understanding of our evolution as human and so philosophical implications too.

Two examples from Traders of February may clarify my thoughts about this. The first one is about a so called Delta phenomenon from Marko Graenitz and the second from Tomasini and Jaecle about the use of indicators.

The Delta phenomenon is proposed to predict the future moves of commodities. The author shows how this delta is performing when used for the FDAX and the FTSE. It shows a fairly good forecast at the end of 2005 to 31 December 2006 for both of them compared with the actual chart. Without going into the question how good these predictions are (goodness of fit), two remarks have to be made here.

The apparent good prediction for these two index futures does not necessarily mean much if you realize that these are made over the same period of time because many if not all index futures showed the same strong upward movement the last year and the Delta would produce the same result for all of these indices used over the same time span.

The second critical remark is the following: whenever a prediction is made about the future that afterwards proved to be accurate what does this say about other predictions over other timeframes in other circumstances? When something seems to work here, does it still work there and there and then?

Think about the predictions of soccer games on Saturday or Sunday: there will be once in while someone who predicts all twelve games correctly, as there will always be somebody who predicted in the past the current oil price and so on. In the same line, always something can be found that predicts at a certain time fairly good a price in the future.

Another example is proposed by Tomasini and Jaekle. They propose a system based on a short period indicator and a filter of a longer period to obtain trade entries. The result is a very promising equity curve based on serious performed back tests over more than 600 trade entries during 3 years.

The question is off course, does the system produce the same results in the future.
This question is basically this: are results from a certain period in the past significant for a bigger period, a period also including the future in terms of expectation? In a way this can be stated as follows: is finding a good back testing result the same as finding a fair dice?

What I missed in these tests is at least a so called out of date test (sometimes referred as a forward test), a simulation of the system in real time. It will not be the first a time a good back testing does not result in good forward testing which is sometimes partly due to wrong interpretations of the back testing or partly to other factors. Also and very important the period which was tested may just not to be significant for the overall performances o the system.

CONSEQUTIVE LOSSES

2007-01-15T21:11:00.000+01:00

In two lucid and interesting articles in Traders of January two subjects were discussed, subjects I studied extensively. Luca Barberis tried to give an answer to the question how trading of various markets can enhance the equity curve without optimising individual trading systems. Optimising hides the danger of curve fitting. Though his results are very important a few aspects remains to be answered before applying his method: how many contracts do you trade the various markets, which is not a matter of classical position sizing matters and the question of a possible trade system correlation and what effect this has on risk.

Risk is the main subject of Philip Kahler in Traders. He treats various possible types of risk in trading, especially risk due to consecutive losses and emphasizes its importance to understand how consecutive losses can influence trading results. When studying consecutive losses in series of trades a huge field opens up: many different theoretical frameworks can be set up to master this phenomenon of trading.

There is a clear relation between the win ratio of a trade system and the length of consecutive losses. In an earlier post I stressed the importance of the win ratio in a different context. But it also plays an important role in the existence, the length, and the amount of consecutive losses.

In general can be said that the higher the win ratio the higher the chance becomes for a series of losses of a certain length. In his article Kahler gives some examples and a graphic which can be used to determine 5 or 10 consecutive losses for a given win ratio. It has to be said that these probabilities occur for a given amount of trades performed and will change negatively when the total trades increases.

Though interesting to know the chance for a series of losses it would be even more interesting to know a distribution of series of losses, e.g. the probability for all possible series of losses and moreover the maximum length of consecutive losses (maximum streak) you might expect for a given win ratio.

Below you can see a figure which gives the relation for the maximum streak and the probability of a loss (loss ratio). Total trades is 500, confidence is 0.998%.

From this figure again can be seen the importance of the loss ratio: the higher this becomes (the more losses)then the maximum strak increases exponentially. E.g when q, the probability of a loss is 35% then the maximum expected streak willl be 6 but when increasing to 70% the maximum streak increases to 17 consequtive losses in a row!

LUCK AND CHANGE ON THE MARKET

2007-01-07T14:13:00.000+01:00

My partner and I spent the week around Christmas in Mumbai, India. Mumbai is the financial and economic centre of India. The Bombay Stock Exchange (BSE) had a splendid year behind with a year output of more than 33%.

From local newspapers a moderate hosanna mood can be felt. Also internationally India got much attention in the last year. It is particularly the growing middle class that forms the driving force behind the economy and which gets attention of foreign investors.

With an increase of 33% the BSE is one of the best performing markets in the world. Of course it must immediately be said that almost all markets performed very well. The phenomenon that markets are moving more or less in the same direction is called correlation.

Correlation between markets is high: data which I have collected on 15 minutes basis of the futures on the FDAX and the DOW JONES appear to have a correlation of more than 90% over the past 2 years. This is almost complete correlation.

Now the question arises if a result such as that of the Bombay Stock Exchange can be attributed to well performing of the Indian economy or that also chance may play a role in it. It cannot be denied that chance and luck play an important role on the markets.

Let’s have a look at this without going into this matter to deeply. Suppose that an invisible hand would assign the different markets worldwide a return around a certain average. Then you may expect these returns to be divided normally.

A quick lookup at the financial site of Yahoo reveals the following. Of the 17 most important markets there is not one with a negative output over 2006. The output diverges from 10% (London) up to 55% (Moscow) with an average of rounded 24%. The spread, standard deviation amounts to 23%. This means that if the 17 markets are representative for all markets in the world, about 66% of all markets will show an output of 1 standard deviation above or below the average (therefore 24% ± 23%). Of all 17 markets there are only 2 outside this range.

We can look at this also in a different way: we can consider the return of an individual market as an estimate of the world average and look at how well such an estimate would be.

It is known that such an estimate will have a standard error that equals to σ/√T where σ is the annual volatility and T the number of years:

STD = σ/√T (1)

From formula (1) it follows that the standard error of an estimate of the world average decreases with the square root of the number of years.

Let’s take Mumbai as an example. The excess return or α, of this market above the world average is 33-24 = 9%. Though in general the term α refers to the excess return of a fund with respect to the benchmark, it may also be used for the excess return of a market.

To be convinced that an excess return is the consequence of a better performing of the economy and not to pure chance or luck then the return must be bigger than the world average with a significant size. In a one-sided test at the 95% confidence level the difference between the two must be greater than 1.65 standard deviations.

Suppose the volatility to be around 20% on an annual basis for the Bombay market then the standard error according to (1) will be 20%/√1 = 20%. The 9% above the average of the market is clearly smaller than one standard deviation above the average, clearly below 95% confidence level. It lies approximately at 50% what means that 50% of the return of Bombay falls to pure chance. In fact you can say that the 33% return of Mumbai is a good estimate of the world average.

We can carry out this calculation also differently and perhaps it will even become more clearly then. We saw that the standard error of an estimate of the average decreases with the square root of the number of years taken into account.

We know that: α =9% = 1,65* STD. It follows that STD, the standard error, equals 9/1,65 = 5,45. This value substituted for the STD in formula (1) gives √T = 23% /5,45 = 4.22 ==> T = 17,8 year.

This means therefore that the Bombay Stock Exchange for at least 17 years in succession must show a return that 9% or more lies above the world average to be able to say that for 95% this is due to a better performing of the economy and only for 5% to chance.

Around these days various funds present their performances. Some will show better results than others. From the previous it must be clear that luck may play a large role besides skill of the fund managers and in any case is much larger than they will admit. Think to that.

CONSISTENCY AND SHARPE RATIO (1)

2006-12-12T18:02:00.000+01:00

For me consistency has always been a very important and interesting factor in trading. By consistency I mean how long, in a given timeframe, let say 12 months or 12 weeks, my trades are giving a positive result. Can I expect 6 months out of 12 being profitable or more or less? This is one of the questions which I always try to give as best as possible an answer.

One of the most used criteria for evaluating fund managers is the Sharpe Ratio. The Sharpe Ratio is used for this because of its easy use: the bigger the Sharpe the better the fund or the fund manager. This almost has become fait accompli.

How is the Sharpe Ratio calculated? It is simple obtained by dividing the average net profit (mean or expectation E) by the standard deviation of the trades. The standard deviation is, as you may know, a measure for the spread of winners of losers around the mean. Because the deviation is a measure for the trade spread it is also considered as a measure for the risk of the fund or the fund manager, but this standard deviation is also defined as the volatility of the fund.

The Sharpe ratio is in this way defined as the mean profit of the fund (-manager) per point risk or volatility. The bigger the mean, the bigger the Sharpe the better the fund (-manager) is performing. That's the idea.

An example. Suppose trader A has a gain of 5 ES points per trade, a spread of 10 points, done over 100 trades in one year. This means that, when trader's A profits are normally distributed over the losses and the winners, 99,73% of his trade outcomes is lying between 5 minus 30 (=-20) and 5+ 30 (=35). The Sharpe ratio is now 5/10 = 0.5 .

Do you see how it works? When the trade outcomes would have a bigger spread but with the same mean the Sharpe ratio would decrease, the mean per point risk will decrease.

When you look closely at the Sharpe Ratio you will see and understand that is in fact a measure for consistency. To see this take the next example. Trader B takes 100 trades a year but with every trade being a winner (if this would be possible, but for clarity reasons taken here) for 5 points. His net profitability and mean is the same as for trader A but his Sharpe ratio becomes 5/∞ = ∞. His consistency is 100%.

We defined the Sharpe ratio as the mean defined by the spread. This is not precisely correct. The exact definition is the excess profit over a zero risk profit divided by the spread. A zero risk is generally the return of a 30 year T-bond but also a European long bond could be taken. Off course the risk is not exactly zero but is considered to be and also T- bond returns are changing over time (inflation).

Our definition of the Sharpe is a modified Sharpe, but it doesn't really matter, because the exact definition doesn't give more information. You only have bear in mind how the Sharpe is defined when it is used in comparisons.

There is a clear relation with so called z score of a normal distribution and a lookup in a table with a z 0f ∞ gives a 100% consistency. In this way consistency can be defined and I use it this way.

But before closing this post three remarks have to be made.

1. The Sharpe and the consistency is defined for normal distributed trade returns but in practice returns seldom are.

2. The spread as a measure is not a very good one because in this way it also takes positive returns as a risk and this is not what traders and investors generally feel about positive returns.

3. The longer a trader stays in business the bigger his draw downs will be. Or said otherwise: the more trades a fund manager takes the bigger his draw downs will be, or said it in another way: the more trades a fund manager takes, how bigger his drawdown. The consequence is that the longer a fund manager is in business (the longer a fund exists) he will be punished with a lowering of his Sharpe ratio. I will come back to this in my next post.

So the conclusion is that Sharpe is a useful concept but not more and so other concepts for consistency are needed. These are the Sortino Ratio, Callmar ratio and the Martin Ratio. I developed another concept of consistency which I called Excess Loss Wealth Function (ELWF) which I draw directly from the theory of random walks.

TRADE SYSTEMS AS SUCH

2006-12-03T13:43:00.000+01:00

Last time I was talking about expectations and the use of stops. One of the things that interested me was the relation between a stop and other system parameters like amount of losses/winners and the average win/loss. I stated that for a given trade system a clear relation between these parameters doesn't exist.

But, as you may have noticed in earlier postings I wrote about the win ratio and it's relation to expectation. I described expectation in terms of win ratio (chance of a winner) and one of the things I found was a clear relation between the win ratio and the profit ratio (= average/average loss. From the figure given there some conclusions cold be drawn how big the profit ratio has to be with a given win ratio for the expectancy to be positive.

Now, you could ask, is this in contradiction with findings in my last post?. It is maybe a surprise but I think there isn't.

When I tried to describe a relation between expectancy and win ratio I was primarily interested to let you see the importance of a high win ratio, in contrary to some, or most, writers who stress the importance of an overall profit but ignore to tell you the serious problems you encounter when your trading systems comes up with only a few winners and a bunch of losers. They may be right but is it workable, see my last posting about expectancy and win ratio

So, in these postings I was comparingdifferent trade systems to each other. I then focussed one a particular system and its parameters. I have a strong conviction in the existence of trade systems as such, whose trade parameters are fixed. I think of trade systems as being some entity that produces so and so many trades a year, with a certain expectation per trade and profit factor. Seeing systems this way it is no longer a contradiction to say that parameters of a system in particular are dependant.

Now, the question is now as follows. When I or you try to trade this system, do we get the same results as theoretically would be possible? I already posted before about this (Luck and Randomness) and I suspected then some interesting aspects of trading on which I want to post in the future.

STOPS AND TRADING SYSTEMS

2006-11-28T16:17:00.000+01:00

It is common to use stops to avoid big losses and to avoid the psychological danger a trader can have when he is uncertain to close his positions at time.

Still sometimes no stop is proposed in trading. We all now that too small a stop the will punch out too often, sometimes leaving us behind with a potential winner while too big a stop can have a big influence on our overall results.

Suppose someone trades 100 times a year of which 80% are small winners and mall losers. This is not an unreal situation for a discretionary trader. His results are determined by the last 20% which we suppose to be big winners and big losers.

The influence of one of such a trade is substantial. A big loser or big winner can make a substantial difference to the final results of the trader.
But the question remains if how losers and winners effect each ohter.

We know the concept of Expectancy:

E = P / NP - L / NL = Average Win – Average Loss (1)

In words: The expectation of a trade is the total win divided by the total amount of losses minus the total loss divided by the total amount of losers.

The above formula has four variables, P the total win, L, the total loss, NP the amount of winners and NL the amount of losers. Each of them can be changed, e.g. decreasing the the total loss L, decreases the average loss and so increases the sum which is the expectation E.

But changing one variable in formula (1), changing one may affect the other ones. The variables are said to be dependant from each other. For a given system, changing the average loss may result in changing the average win too!

An example: a system produces 100 trades a year, 60 losers and 40 winners. When 5 potential losses could eventually turned into 5 winners by taking a bigger stop the average win will increase due to this, but you may also expect that the average loss will increase due to the bigger stop of the remaining 35 losses. We also could go for bigger winners just to see an increase in the amount of losses.

We don’t know at forehand what happens and the problem stays. Suppose there is a function G with parameters NP, NL, P, L so that :

G (NP,NL,P,L).

G produces some results in terms of expectation E:

G (NP,NL,P,L) = f (E) (2)

I did some effort to investigate some general characteristics of formula (2). Though not being very being successfully it helped me I a better understanding the concept of a trading system, in fact a way of producing losers and winners which outcomes are dependant to each other.

One of the strangest things I found was that the outcome of a system is changing over time and not seldom worsening, not necessarily in terms of expectation E or E per dollar risk but more in terms of other characteristics as drawdown, amount of losses and winners, runs of losses and winners and so on.

This is a fundamental (stochastic) principle everywhere probability plays such an important role.

AUTOMATED TRADING

2006-11-16T18:05:00.000+01:00

One reason of not being updating recently is a circumstance that I never thought would be important to me. I met a few years ago a trader which became also a friend and after numerous discussions about trading we decided this summer to join and trade some systems I looked at the last years.

This trader would do the actual trading so that would let me time to do my own trading. A good plan until he decided not to trade because of private reasons which left us with the question how to proceed. Go on with it or not. We wanted to proceed but it would mean I had to make the trading efforts.

It was than that I thought about a fully automated trading system (ATS), so that the computer would take the decisions of taking the trading, managing it and closing it. This is not an easy task.

First of all I had to consider my trading configuration. I trade with Interactivebrokers, a broker which also delivers the data. My charting program is SierraCharts and I use a Bracket Trader as a front end program. I am aware of the lacks and the failures of this configuration. I always look at other possibilities but it is somehow difficult to change what you are used to but besides that IB is very cheap and reliable.

I looked for programs doing he job but I did not found it. Tradebolt suggest doing just this but did not convince me. Than I found the website of this German guy, Juergen. On his website he offers a Replay module for back testing Sierra charts but also offers some kind of rudimentary ATS for SierraCharts and Bracket Trader, called fscript. It is written in VBScript of which the bron code is free; an ATS sample can be read and this was what I needed.

The last time I programmed was maybe 20 years ago in old languages as Pascal and Fortran. Programming in a script language was completely new to me and I have to admit it was by far not easy but finally succeeded. It was a very nice surprise to me that Juergen offered his help where he could.

What does fscript do? Simply said it reads data from SieraCharts, decides if a trade has to follow, and send it through Bracket trader to my broker. After weeks of testing it runs now completely free of hands. The only thing to do is to start the program. Off course I have to monitor it because with such a ATS in place something unexpected can happen.

The system is a combination of the FDAX, and two BUND future systems. I hope this will give me and my partner good trading results. The most satisfying was the completion of the ATS itself which enables us to develop and trade future systems automatically and independantly.

TRADINGSYSTEMS AND THEORY

2006-08-27T13:49:00.000+02:00

You may have wondered why I didnot update my blog regularly this summer. The resaon is quite boring: I went back to my study to work on several aspects on my tradingsystem.

I have to admit I worked at this for quite a long time before but the last months I focussed on some of them. Trading is a live time endeavour and by no means you will get all the answers but trying to see where u can go is a challenge by itself.

The things of my interest are:

1. Can something be said about drawdowns and losses for a given tradingsystem?

2. Can you expect bigger losses than your backtesting and actual trading results shows?

3. What is the nature of my return distribution?

4. How do you know if a tradingsystem gives better results than random?

5. Is there a better measure for trading performance than the Sharpe Ratio?

6. What effect does stops and targets have on my tradingsystems?

7. What effect does autocorrelation and trade dependancies have on my tradingsystem?

8. Is it possible and if so ,how, to maximise my trading in terms of risk and return by combining different tradingsystems?

As you can see, quite a lot of questions to be answered and a lot of theoretical work so it is not surprising that I was surprised pleasantly by an article in Traders of september about a traders tournement which is held every year in Europe and organised by Emilio Tomasini (www.toptradercup.com).
Asking myself if I would try to. But how are the rules of the game, eg, how do they measure somones performances?

MARKET UPDATE AND PREDICTABILITY

2006-06-22T11:09:00.000+02:00

The markets in a decline at the moment, we can recognise that off course. If we look at stocks moving above 200 and 50 day moving average (symbols: $SPXA200 and $SPXA50), we can see that both are moving at the bottoms of recent years, see charts below.

If we are not too bearish about the current markets, and why would we? we may expect a recovery or at at least a sideways movement from here.

In Business week I found an interesting article about the predictability of market prices. I was posting earlier about it. If you think markets are moving in a random way, as some theoreticists postulate, it has no use to try finding a way getting more from the markets than the average benchmark (such as an indexfund) does.

I earlier summed up some opposite opinions about this view. Make up your mind. I agree with this writer when he says:

The first thing you need to do is convince yourself that the markets are not completely random. If the markets are completely random, no amount of research, emotional detachment, etc. will help. To continue to trade when you know the markets are random is to engage in gambling. Do you think that winning traders over a period of years gamble? I've been to Las Vegas many times and never put even a quarter in a slot machine.

Once you convince yourself the markets are not completely random, your search will take on new meaning. The challenge then becomes how do I locate non-random opportunities in the market so that I can exploit them?

From: Elitetrader Forum

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BEHAVIORAL FINANCE VS. EFFICIENT MARKET THEORY

2006-06-13T17:11:00.000+02:00

There is an ungoing dispute between some scholars from financial universities and others over the effectiviness of technical analyses for predicting market movements.

Since the random walk model contends that price fluctuations occur randomly, technical systems which rely upon the existence of price trends cannot be profitable in the long run. The thought of a random walk being a condition and also an indication for the existence of an efficient market. Supportes of this theory deny the possibilty of predictability of pices on the stock market.

Others don't agree with this. There are studies that technical analyses do work, while even some question the efficient market theory itself eg. behavioral economist's as Tversky, Kahneman and Barberis. Some articles can be found below.

Trading System for Australian Dollar using multiple moving averages

Unsystematic Futures Profits with technical Trading Rules

A Survey Of Behavioral Finance

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SYSTEM DEVELOPMENT (AGAIN)

2006-06-08T15:43:00.000+02:00

There are many aspects on trading which must be adressed before trading a system. Some of them can be found in the sidebar under Interesting Posts. The following will be treated on a next occasion.

consistency

robustness

traders psychology and behaviour

As allways I am looking for new tradesytems besides retesting the current in use. You never know what the results will be of these exercises. One of the most compelling aspects of trading is the valuation of the drawdowns of a system. A drawdown defined as the maximum top-to-valley drop in the equity curve.

Drawdowns can be seen as extreme events in a ditribution of possibble events but due to their extreme values they are almost allways underestimated in statistics, especially in normal distributions.

A relatively new research field of statistics considers extreme values. This so called Extreme Value Theory not only studies the markets but has also applications to other fields as floodcontrol, sea waves and material exhaution models and so on.

The mathematics is as usual interesting but really very complicated. I will try to give a survey of my findings another time. Some articles:

Drawdown of A Brownian Motion

Maximum Drawdown annd Risk Measure

The Pros and Cons of “Drawdown” as a Statistical Measure of Risk for Investments

The last couples of day I performed some trades, see my FDAX Trades and my DOW JONES Trades.

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LUCK AND RANDOMNESS

2006-06-01T16:38:00.000+02:00

There is no doubt that luck or more general speaking randomness plays an important and unpredictable role in trading. Nobody can escape from this, be it in business, science, love or trading.

A computer simulation of a portfolio starting with equal amounts of money and trading the same system (win ratio of .6 and profit/loss factor of 1) reveals the following result. It is by any means a profitable system but while some portfolio's made a nearly 140% return, others suffer from bad drawdowns to only a 60 % return. This cannot be attributed to skillness or whatever, but is just a matter of randomness or luck which alters someones result. See graph below.

KEEP THIS IN MIND when trading, I find this a very disturbing but also a very reassuring thought at the same time, not everything is in our hands.

I traded yesterday very carefully on the FDAX before the FED's announcements. I never trade on news and I try to avoid these to interfer with my decisions but I know all to well that some news can disturb the markets on the short term very heavily and FED news is one of those newsfacts. My entries are given in the next chart arrowed at the upper side of the graph.

I traded the intraday 5670 level (lined). At arrow X, I hesitated to go short. I connected these moves with the FED and I decided not to enter. I was clearly lucky, no skill, just lucky. Later on the evening I entered long.

The DOW JONES for a couple of days now finding resistance at the 200 SMA. Also bouncing off the support at 1245. See S&P 500 today

Looking at the markets today I am wondering if the DOW futue will show us up with a Adam and Eve doubble bottom, like the FDAX last week, see an intrady chart (eg. at yahoo finance), or below:

Daytrading
Dow Jones
FDAX

TRADING DIARY

2006-05-30T20:53:00.000+02:00

I performed two trades on the FDAX and the mini DOW JONES

Normally I keep in WORD a diary after a trading day but I am looking for a software program to do this. Until now I didnot find a good program.

I finished a posting on Hellodax, about market participators, will be posted tomorrow.

Talking about diarries: this story about One Bad Trade performed is interesting stuff to read for anybody.

THE MARKET NOW

2006-05-26T20:40:00.000+02:00

I was thinking the last couple of days about the market and the doom scenario's some described, comparing this market with the fall of the late nineties after 1997, talking about inflation risks and FED's chairman Greenspan commenting about the market and inflation.
Off course the usual conspiracy theories always pop up.

Niederhoffer posting about the common errors made by forecasters, quite amusing to read.

Markets started two weeks ago to go down rapidly, an end of a trend , off course I meant the trend of this year which started in November of last year; though the DAX still is in a big uptrend since 2003, see a classical uptrend in the chart below (click to enlarge).

Markets bounced up thursday, there were some clues though given by some. So Stephan Vita who posts this graph of the NYMO McClelan indicator, an indicator more often used by index followers, and asking the retorical question : "Why Does a Bounce Come?" ; it speaks for itself.
The S&P 500 bouncing off the 200 SMA very neatly: safed by the bell a least for the moment.

I am allways very cautious about predictions because who can predict the future? But to be honest I saw wednesday the FDAX nice bottoming out, with a double bottom and a positive divergence in price at C assuring at least a short term recovery.

Also read again Niederhoffer when he is Briefly Speaking about the markets and about romance too :)

FDAX
Dow Jones

EXPECTANCY AND WINRATIO (3)

2006-05-24T11:59:00.000+02:00

One of the results of my last posting on expectancy is the size of average win compared to the average loss:

"With these examples we see that increasing the average win is more favourable for the expectancy and therefore the profability than decreasing the average loss, but also that increasing the win ratio proportional increasing the expectancy."

There is a restriction to these statements: this is only true for a winratio p < 1/2. I stated it here due to my own bias towards trading in the sense that I never look at tradingsystems with a winratio smaller than 1/2.

Although completely possible for someone to trade, it is not my cup of tea. You may find and trade a sytem which produces 3 winners out of ten, the winners to be bigger than the losers. See the graph for the expectancy in this case in my posting before. I personally discard these systems because of the following reasons.

The problem of outliers.

Psychology involved

Consistency

Formal reasons

I. The outlier problem.
One of the problems of data sampling and data processing is the uneven influence outliers have on the results. A big trade outcome may be not representative but just a coincidence. You have to watch for this trap. How many data do you need to obtain reliable results? Though allways important for valuating a trade system, for a system with the need of bigger winns (a trend following system) this becomes very urgent. You may be waiting for another winner which may never show up.

There is another practical problem: you may not miss the bigger trades , this is allways possible for many reasons, your final outcome of your system being very sensitive to pick these winners.

II. The psychology involved
It can be very hard to trade a system in which many losers occur in a row. You have to be very patient and disclipined to trade a system like that. Your account has to be big enough to take this easily, the risk of a gambler's ruin is allways at stake here.

III. Consistency
Time consistenccy is an important facor in my trading and may be treated on a next occasion. For the moment it is enough to note that consistency in trade systems with lower win ratio's only may be expected in longer lasting time frames, a result badly bearable for me.

IV.Formal reasons
There exists a rigorous and formal model for a maximum betting size based on the work of Dubins and Savage (1976) in their book with the inspiring title How to Gamble if you Must. One of their results was that in an unfair game, eg. a game where your win chances are less than 1/2 (a play in which the odds are against you) your maximum chances are only achieved when staking the maximum. This is called 'bold play' in these models.

Later work confirms these results, see eg. an overview of Schweinsburg : Improving on bold play when the gambler is restricted. For a superfair game, eg when p>1/2, it has been shown that a more realistic timid strategy of staking being optimal.

Now these models cannot directly transformed to trading systems because they are restricted to so called red and black models in which outcomes are either black or red (plus 1 or minus 1 and so on, the casino games) but may give some clues to sub-optimal strategies when using winratios > 1/2.

Related:

EXPECTANCY AND ACCURACY

EXPECTANCY AND WIN RATIO (2)

Systemtrading
Expectancy

EXPECTANCY AND WIN RATIO (2)

2006-05-22T18:09:00.000+02:00

My posting about expectancy made very clear the importance of this quantity for developing and valuating tradesystems. A good and clear understanding of the meaning of Expectancy is therefore necessary. But how important expectancy may be, one of my last statements is that, at least for me, the winratio is of very great use. I want to place some additions and comments on expectancy here.

We know that:

E = P(w)W - P(l)L (1)

where:

E = expectancy

P(w)= probability of a loss

P(l)= probability of a win

W = average win

L = average loss.

Van Thorp uses in his analyses the expectancy per dollar risk, the expected return of a trade per dollar invested. He therefore divides E by the average loss L. Three examples may clear up the influences of the varying parameters involved.

I. Suppose an average win of 200 euro, an average loss of 100 euro, a win ratio of 0.75.
E becomes 0.75*200- 0.25*100 = 125 euro. Per euro risk is this 125/00 = 1.25

II. Now suppose the average loss two times as big, eg. 200 euro.
E = 0.75*200 - 0.25* 200 = 100, per euro risk of 1 euro.

III. Now we halve in our first example the average win to 100 euro.
E = 0.75*100 - 0.25* 100 = 50 euro, per euro risk 0.5 euro.

IV. Let p be increased with a factor of 15% eg p= 0.8625 in our first example.
E = 0.8625*200 - 0.1375*100 = 158.75 euro which is almost a double of increase for E.

With these examples we see that increasing the average win is more favourable for the expectancy and therefore the profability than decreasing the average loss, but also that increasing the win ratio proportional increasing the expectancy.

We can write Expectancy per euro risk as:

E = pW -qL, off course p+q = 1

E/L = (pW- qL)/L

E/L = (p/L)*W -q/L*L

E/L = pR - q (2)

in which R= W/L the profit factor.

(2) Describes the expectancy per euro risk as a lineair function of R, so a line with slope p. When putting E = 0 (2) becomes:
0= pR - q , so R = q/p the intersection with the horizontal R axis and -q the intersection with the vertical E axis. See the figure below

From this figure we can see that if p < q eg. p < 1/2, R the profit ratio has to be bigger than 1 and even bigger than q/p for the expectancy to become positive. When p > 1/2, R also equals q/p but because in this case the ratio q/p is less than 1, a positive expectancy can be expected sooner, eg. with a smaller profit loss ratio.

The figure also gives how big q/p has to be for a system with a positive expectancy for a given profit loss ratio R.

Another point which has to be made with relation to expectancy is that formula (1) for the expectancy is only an approximation for a real trading system. In a real live real tradingsystem we may expect many possible outcomes for a trade, positively or negatively, and each outcome with a different probability p. Let outcome X¡ with ¡= 1, 2 , 3 ..k and probability p¡.
The expectancy of this real live tradingsytem becomes more complicated and becomes:

ΣP¡X¡ /ΣP¡(X¡)^2

See for a formalism this article about Money management.

Another point to be made here is that returns, the outcomes of a system may not be normally distributed but oblique towards (hopefully!) positive returns. This may especially being the case when using a fixed stop. Such a distribution may be more precisely described as a Weibull distribution, an interesting point but beyond the scope of this posting.

I currently look at my returns with respect to a Weibull distribution. One of the nice things of this kind of representation is that a Weibull distribution has a surprisingly relatively simple calculus involved.

Systemtrading
Expectancy

A REVEARSAL CHART PATTERN

2006-05-18T13:53:00.000+02:00

Markets clearly topping off the last days,as expecting in my post 'The end of Trends' , almost totally correct the rise of this year. You can see this in the chart of the S&P500 , the Dow Jones and the German FDAX.

Chart patterns can be very usefull, but are not easily recognised immediatelly. It is allways easy to see a top revearsal afterwards as shown in a post of Stepan Vita. He describes a classical top pattern in the chart of Toll Brothers (TOL). You can see a Shoulder, Head Shoulder (HSH) pattern and also a black cross. Now this is recognised at the moment when most of the correction of last years bullish trend has been done, but off course difficult to predict in an earlier stage, eg after the HSH patten occured.

RANDOM WALK, GAMBLING AND TRADING

2006-05-16T17:49:00.000+02:00

Physical problems are sometimes modelled as random walks, sometimes also called a "drunkard's walk". In this model many successive steps are taken, but each in a random direction. The direction of each step being independant of the direction of the previous one.

A famous example is the Brownian motion of a smoke particle in very dilute gas. The invisible gasmolecules colliding at random against the, in comparison to the molecules, very big smoke particle. In two dimensions a random walk can be seen in the figure below.

Random walk of 1000 steps

Random walks have serious implications for probabilty events. When throwing a fair coin, you know the chance of a head equals the chance of a tail (50:50 or p= 1/2). But what are possible outcomes when throwing a fair coin? Suppose the coin did come with a streak of 6 tails in a row? What is the chance of the next throw also being a tail? The chance of another tail is just 1/2 independant of the foregoing outcome.

Many people intuitively assume that after a series of consequtive tails a head must show up with greater certainty. There are many examples of this assumption of what is called the expectation a regression to the mean.

Last night I watched on television a pokergame (Texas Hold'em at the Poker Den organised by PartyPoker.com). There was this beautifull young lady getting bad cards al night and the commentators just outbursted that it is not possible to get bad cards forever, she had to get good cards at last: she played out without getting a picture and only a few hands played.

The man in the casino watching slot machines which didnot pay out for a long time is also an example of an expection for a regression to the mean. Casino's know this too well and just let the slot machines produce random numbers so the next outcome is independant of the previous one: a losing game by all means, the edge is to the house, the chance of a win is smaller than 1/2.

But let's return to a coin. I found an astonishing picture in A Guide To Gambling, Love, The Stock Market & And About Everything Else, a book I noted before.

The graph shows the result of a computer-simulated sequence of thousend thosses of a fair coin, eacch time a head is coming up it adds up +1 and when a tail comes up-1. You feel since the probability of each result, tail or head, is equal, here should be as may heads as tails after a certain time.

Now this is true but only after a very long time, in fact after infinite time. Over the short term, which may relatively long periods, more heads than tails occur and vice versa. This supposes very long lasted unexpected streaks of either tails or heads. This is the random walk of a coin.

There is a formula for the probability of a streak:

q = [1+(n-r) p]q' (1)

n = amount of tosses (trades!)

r = losing streak

p = chance of a single outcome

q' = P^r (power r)

For an explanation and an example see winning and losing streaks.

We return to our activities on the stockmarket. Market prices are sometimes also considered as random walks (especially as the outcome a of classical price theories). In a way we could see in graph above the movement of a stock price (or future or whatever) in time.

In an earlier posting I gave a distribution of one day and 5 days returns on the GBP/USD. Clearly these distributions are not random: it resembles more of a normal distribution around a mean. Whatever it is, the movements in a much smaller timeframe, eg ticks, could still be a random walk. Maybe the duration in which the one day and 5 day returns are gathered is just to small to reject a random walk.

In approximation the distance R² from a starting point in a random walk to the end point is proportional to N in which N is total of steps:

R² = N*r
(2)

r is the square root of the average squared step size or root mean squared step size. If I take r as a tick on the FDAX and normalise to 1 formula (2)becomes:
R² = N.

and R is epresssed in ticks.
(followed)

Systemtrading
gambling and trading

THE END OF TRENDS?

2006-05-14T12:43:00.000+02:00

Trends do end in any given timeframe. We saw on the last two days what maybe an end of this years strong bull trend, although it may not be over yet.

I was thinking of this when reading Paolo Pezzutti's posting what Mr. Buffet warnes about speculation and and the investments of the public. I cite his posting:

"The price of metals, such as copper, and other commodities like oil, initially climbed on fundamentals, but the gains have now attracted more investors betting on further price gains, he explained. “What the wise man does at the beginning the fool does at the end,” he quipped. “Once a price history develops enough for other people to see it and get envious, that takes over markets. We’re seeing that some areas of the commodity markets.” "

"Selling in may and go away" be the right thing to now. The DOW still in it's trend but the broader markets aren't. See charts below, click for a full screen.

Systemtrading
Dow Jones
trends

TRADES AND MARKET MOVEMENTS

2006-05-11T20:01:00.000+02:00

After a couple of days I was finally able today to place some orders on the FDAX and on the DOW future.

What was the reason for not trading? Well, the market did not came up with my favourable setups but just trended upwards very strongly, every position would be unsecure. We have to see if the market wil revearse from here for a more longer time or just a blow off after FED's decision and suggestions about further interest rates.

Joao and fernando of Hello Dax, a blog on which I am invited to write something about futures, propose a setup for a winning option strategy on the DAX. I have some doubts about this.

Movements on markets are not linear as they suppose to assume but rather random walks, certainly in the short and middle long time span. Markets move in a jagged fashion which may be demonstrated by comparing distributions of returns over various time periods. Just look at the graphs below.

The fact that the range of the 5-day distribution is nowhere near five times the width of the 1-day distribution (in terms of max to min) tells you the market
almost never moves directly from point A to point B. Off course this is a valuta index but you may expect this being the case for stock indices too. Options are very susceptiable for such movements.

Dow Jones
FDAX
Systemtrading

BEARS: ALLWAYS UP ?

2006-05-10T10:06:00.000+02:00

Fridays outbreak at the markets must be something of a killer for the bears as Stephan Vita notes on his blog. They may think they are right and the markets wrong..The Dow Jones tries to hit all time high, attracted by it like a magnet.
See chart of the Dow since 1935. Allways good to see and now you know why our queen became so rich.

The European indices still some 25 to 30 % away from the highs of 2000, so they have a long way to go. See chart of the Dax since 1990.

Dow Jones
FDAX

MARKETS UPDATE

2006-05-08T13:30:00.000+02:00

Both the S&P 500 and the Dow Jones closing to year highs eploring new territories as you can see in the charts. The broader Russel 2000 (symbol: $RUT) at all time high. We cannot go up forever, what are the underlying reasons for these uptrends? I don't know and it doesnot bother me either. I do know we will correct someday, but not now.

Dow Jones

DOW JONES UPDATE

2006-05-04T15:52:00.000+02:00

The last days the Dow Jones wrestling with the 11400 level. Let us see if it can stay above this level maybe testing the upper trend line today. See chart.

Dow Jones

DISCIPLINE AND MISSING THE BIG ONE

2006-05-04T09:52:00.000+02:00

Discipline has many faces when it becomes to trading. Earlier I gave the doubts and visions of globetrader. Now the word is to Victor Niederhoffer himself taken from his website. Later on I will give my experiences. He describes the subject of stubborness of traders, a must be killer to a trader. Never ever be stubborn in your vision when markets are against you. It is good to have a vision in general but never fight against the market, because you wil lose. Remember markets and trading is not of being right but of making money.

Comparing the battle between some passengers taking his bus with the operator due to possible delay and gamblers completely losing their senses in attempt not to miss even one chance.:

"....and that the remaining passengers, who were involved in a screaming battle with the bus operator over possible delay in getting to the track on time were more typical. This remnant certainly suffered from the tendency of all gamblers to completely lose their sense of balance and priorities in a desperate attempt not to miss even one chance to get even"

Traders inevitably allways see comparisons with their trading activities but this one surely being a surprising one and funny too.
He goes on:

"I once had a client from the Mediterranean who insisted on selling the stock market futures short whenever it set a five-day low. He lost about 20 times in a row after 1987 and I advised him to take a break. "I can't. The big crash might come while I was away." he said."

And than off course romance comes into play:

"remember Artie's telling me that one of his best friends missed his wedding and never married because he got into a card game on a train going to his own wedding"

I admire Niederhoffers style and the surprising turns his articles take, sometimes long-winded but allways pointing to trading and the markets.
So stubbornness and losing sense of balance leading a trader to disaster.

There is another aspect which is as deadly as those mentioned: addiction to trading. In a comment (Jared Albert) puts his experiences:

"..the anxiety of watching the market rebound and being unable to trade was unbearable and eventually he'd have to take the phones to work with him after a losing streak. Luckily I wiped out 3 times in 6 years and discovered that the pain of having no steak is worse than the pain of missed opportunities."
"The issue of compulsive trading or trading for excitement are clearly among the most dangerous."

Now misssing the big one or addiction to trading being totally different from problems whith missing some good opportunities that can arise by various reasons as abstinence or pulling the trigger fear. I wrote earlier about missing trades.

Systemtrading

DISCIPLINE WITH TRADING

2006-05-01T21:28:00.000+02:00

Yesterday Globetrader added an interesting posting about discipline in trading. He compares it with stopping with chocolate. He used yesterdays holiday to investigate this aspect on his trading and studied the patterns when losing his discipline.

Some quotations made by him:

"You have an edge, you have your good winning streaks, but somehow the losers still take care of them and at the end of the month, at the end of the quarter you have retraced back to zero."

"Be it one or two exceptionell big losers, because everything you’ve learned the last few years goes overboard, in this moment, or be it a streak, where nothing you do seems to work, where you get signal after signal and they all get stopped out."

He admits to be in the first category:

"I’m in the first category, I blew it all in 1 or 2 exceptionell bad trades, sit there, look at me, tell me “oh shit Chris, you did it again”."

And:

"I know I can, I know I have an edge, I trust myself and I’m (usually) not trigger shy. But I have these whipsaw trades coming now and then, which take care of a good chunk of my profits."

I find this very brave to admit because I know he is true.
More about trading and discipline:

Trading Psychology And Discipline

Brett Steenbarger on discipline and psychology

TRENDLINES

2006-04-27T11:50:00.000+02:00

I don't use trendlines very often, I prefer moving averages, eg. 50 SMA to depict a trend. Trendlines often being to subjective, but in the chart of the Dow Jones it can be seen how usefull trend lines can be.

The chart of the S&P 500 is not so clear. Alhough the index being up this year, there is a broader feeling amongst traders the markets not doing very well. How does this come?
First, lt's see the charts of the Dow and the S&P, both probably taking today a breazer.

This broader sense of markets going nowhere can be understood if you look at stocks moving above or below their 50 SMA's. The ratio just moving in a range of 350 and 225 since a few monts so going sideways, on average the amount of stocks moving above their 50 SMA is not increasing and I suppose this being responsible for the general feeling by some these days.

Systemtrading
Dow Jones
trends

DOW TREND

2006-04-21T18:56:00.000+02:00

The DOW seeking higher levels again. Now do you want a trend? See chart, the upperline coming into reach again, but I am not sure we will go that high immediately. Two nice Long trades in a row this week

Dow Jones

DOW JONES UPDATE

2006-04-19T13:49:00.000+02:00

The DOW Jones is still in it's upward trend and found support at 11050 the last couple of days. It resulted in yesterdays big rise of almost 200 points with a small runaway gap in the future. See chart.

I added a blog with my mini-sized DOW future trades on this blog. The system has a stop with 30 points and a target of 50 points.

Dow Jones

EXPECTANCY AND ACCURACY

2006-04-18T12:51:00.000+02:00

Expectancy is a very important aspect of trading. It is not valuated by traders very well and not treated in books very often. The concept expectancy is based on a typical size of a typical win compared to the size of a typical loss.

There is a natural human tendency to want the majority of attempts to result in success. In most cases, this is very good but is it the case in trading? If trading more positions we may think the more winning positions, the better. Is this really the best way to measure a trader's effectiveness?

Expectancy is about an average outcome for a trade. The formula is derived very easily if one takes into account that the outcome of a trade depends on the probability of an average win minus the probability of an average loss.

E = P(w)W - P(l)L

(1)

where:

E = expectancy

P(w)= probability of a loss

P(l)= probability of a win

W = average win

L = average loss.

The probability of a win equals the amount of winners divided by total trades and off course P(w) + P(l) = 1.
By this you can see that a system's profability depends on the size of a win versus the size of a loss and even with a low probablity of a win the system can make money. Lets take an example. Suppose the average win is 10 points and the average loss is 5 points and the probability of a win is 40% than:

E = 0.4 x 10 - 0.6 x 5 = 1 which is positive so even with more losers than winners (6:4) the system makes money. An expectancy of 1 for a system giving 100 trades will result in 100x 1 = 100 points profit.
You could setup many scenario's with an expectancy being positive with varying average losses and winners.

This is the outcome of various articles about expectancy eg.

Van Tharp:
.... your trading system should have a positive expectancy and you should understand what that means. The natural bias that most people have is to go for high probability systems with high reliability. We all are given this bias that you need to be right. We're taught at school that 94 percent or better is an A and 70 or below is failure. Nothing below 70 is acceptable. Everyone is looking for high reliability entry systems, but its expectancy that is the key. And the real key to expectancy is how you get out of the markets not how you get in. How you take profits and how you get out of a bad position to protect your assets. The expectancy is really the amount you'll make on the average per dollar risked. If you have a methodology that makes you 50 cents or better per dollar risked, that's superb. Most people don't. That means if you risk $1,000 that you'll make on the average $500 for every trade - that's averaging winners and losers together.

But now that we have got the clue to expectancy we may not conclude that our natural tendancy to trade a system with more winning trades, a system with a better accuracy is not important at all. In fact it is and I don't agree with
others on this subject.

Let me write the formula for the expectancy in another way. We know

P(W) + P(l) = 1 so

P(l) = 1 - P(w)

E = (Pw)W -{1-P(w)}L

E = P(w)W + L{P(w)-1}

(2)

Now we may start to investigate the role of P(w), the probability of a winning trade. Formula (2) consists of two factors: P(w)W and L{P(w)-1}. The first is allways positive while the second is allways negative because P(w) is smaller than 1. You can see this by taking an example and you have to bear in mind that P(w) is allways a number between 0 (zero) and 1.

So the bigger P(w), the bigger the first factor P(w)W but also the smaller negative the second factor becomes and so the bigger the result which is E the expectancy. This is true for every trade system. It is allways good to have a good accuracy for a tradingsystem.

Let's proceed and let us assume the expectancy being zero eg. E = O. This means that in the long run you win as many money as you lose. In gambling this is known as a fair game. It is said such a game to have even odds. Most gambling games don't have even odds, but negative so you lose in these games.

E = 0, eg formula (2) becomes:

0 = P(w)W + L{P(w)-1}

P(w)W = - L {1-P(w)}

P(w)W = {1-P(w)}L

W/L = {1-P(w)}/P(w)

(3)

This formula describes for every probability of a win P(w) the relation between the average win and the average loss, so that the system in the long runs has an expectancy of zero, making no loss nor profit. Suppose the probability of a win is 30%, than W/L becomes 2.33 which means that the system to break even must have an average win that is 2.33 greater then the average loss.

To become profitable the system must produce either bigger profits or smaller losses. But you have to keep in mind that bigger profits or smaller losses may change the probability of a win. This makes finding a trading system sometimes so frustating because minimizing your losses or maximizing the size of your win may lead to more losses and so to a lower win probability P(w).

A good accuracy for a system is psychologically very attractive to trade and also a very good to thing work for but you have to keep in mind that the expectancy must be positive by looking at the ratio of your average win to the average loss. But this is in a way the old adagium of cutting your losses and maximizing your win's

Systemtrading
Expectancy

BIG DOW HOPELESS?

2006-04-13T17:45:00.000+02:00

“Frankly, if you look at the number of exchange traded funds out there, you could wallpaper your hall with most of them, because they are not being used for anything else.”

Strange words especially if you consider who said this: they are from Robert Ray who is senior vice- president of business development at the CBOT, so the man also responsible for these numbers of traded products out there. CBOT offering the big DOW now, but still after two weeks volume still very low, only in the (lower) hunderds a day.

Of course the CBOT rivals CME for customers fiercely. The competition between exchanges is leading to strange products, such as european weather futures which seems to me to be more some kind of betting product, beyond other things as the extension of opening hours of the NYSE and others.

Here is an interesting discussion about the big DOW, some of them propose to eliminate the 10$ dollar DJIA future.
I think the bigger players won't get attracted so easily to the DOW. They trade the the ES and/or the big SP and why would they change? The DOW for them not being the benchmark of the US economy but the S@P is.

Dow Jones
BIG DOW future

DOW UPDATE

2006-04-12T20:56:00.000+02:00

The DOW closed yesterday below the upgoing trendline that started November of last year. Today the DOW has support at the 50 SMA and the rest day it is trapped between these the Moving Average and the mentioned trendline. See chart.

Support at 11050 and then 10950. Closing below the 10950 will change the overall bullish picture.

Dow Jones

FED'S DECISION

2006-03-29T18:12:00.000+02:00

After last nights FED decision to raise interest rate, citing resource utilization and commodity prices as having "the potential to add to inflation pressures." The markets sharply fell and today the market seems to wait what next but we could expect the intrest rate, so what?

Is there a disappointment here? "In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives."
(Federal reserve realease)

Did we expect Bernanke saying the interest rates will never rise in the future again? The FED will raise interst rates wehn they think it is necessary to do so, be it Bernanke or Greenspan. Nothing abnormal.

The DOW JONES at outbreak levels but still within the upgoing trend and recovering at the moment. See graph.

FED
Dow Jones

FOLLOW THE TRENDS

2006-03-27T18:42:00.000+02:00

John Henry discussing about his trading philosophy, claiming no knowledge of the future (nobody does) but allways following the trend.

"I knew I could not predict anything, and that is why we decided to follow trends, and that is why we've been so successful. We simply follow trends. No matter how ridiculous those trends appear to be at the beginning, and no matter how extended or how irrational they seem at the end, we follow trends."

I was thinking about the strong trends we see on the markets these days, despite todays losses, when reading Henry's article. See first the German DAX trending since November of last year, reaching for years high of 6000.

The DOW JONES trending above the narrowing rising channel. Even a correction to 11100 would maintain this existing trend.

Systemtrading
Dow Jones
trends

BIG DOW FUTURE STARTED TRADING FRIDAY

2006-03-26T17:06:00.000+02:00

Last friday the CBOT started trading the big sized DOW future (symbol DD). The multiplier is 25$ so now we have the mini DOW (5$ per point), The DJIA future worth 10$ per point and the big DOW. The big DOW wil only be traded electronically. The contract specifications being the normal ones.

The first day volume was not big: only 246 futures were traded. It will be a product for bigger traders.

BIG DOW future
Dow Jones

GAPS ON THE MINI DOW FUTURE

2006-03-24T14:49:00.000+01:00

An email noticed me to a new blog, Short-Term trading. The first postings were about gaps. I tried to comment on it but that somehow it didnot work? So I give the link to the website on my blog and give my comment here.

I looked in the past at openinggaps on the mini DOW future. The first question which arises what defines a gap and when does it happen. Particularly if you take into account that the DOW is electronically traded almost 24 hours a day so the timeframe you take is a little bit arbitrarely chosen.

I decided to take the opening hours of the New York market, eg from 15:30 - 22:00 CET (9:30 a.m. - 4 p.m. in New York). I then defined a gap occurring when at least 10 points big, to take smaller ones is of no use. The stop was set at 20 points (which may be too low).

The backtested trades were opened at 15:30 and were closed at the close of the day before. No trail. I found a disappointing profit per trade of only 5$ but with a Profit/Loss ratio of 2.42 which is very good (giving acurate trades).

Now the site mentioned above drove me back to my data. I will have another look at it, now w with more data and I will take another setup. I will use a bigger stop (1.5 to twice the possible gain) and also vary the minimum gap size.

Daytrading
DOW JONES
Gaps

NO REGRETS WITH TRADING

2006-03-21T14:01:00.000+01:00

Globetrader is complaining about his trades. He was dissapointed about two trades hitting their stops on the same day. I had comparable feelings last week too.

I don't trade after a certain hour. When in position I close my trade after this hour no matter what because from close watching the BUND I don't expect the future moving much in the last tradinghours. Though being so in most days, after closing my trade the future made a big movement in my direction.

I was only a little dissapointed, I know I traded correctly. There must be no regrets when trading the markets. I closed and thats just it "knowing" that in the next trades the biggest movements occur before the last tradinghours of the day.
At least i hope so.

Nice reading: Personality traits for a trader.

daytrading
BUND

CHANCE: GAMBLING LOVE AND MARKETS

2006-03-15T14:21:00.000+01:00

After days and weeks of moving inside a tradingrange the markets yesterday decided to go up closing near a few year's highs. Allthough the US markets hesitating the last weeks there was in fact no sign of hesitation on the European markets: they are up in a trend starting from november last year to all time highs recently.

Yesterday I found a book which tittle immediately decided me to order it: Chance: A Guide To Gambling, Love, The Stock Market, & Just About Everything Else. I will report about it when read and if as interesting as the tittle suggests. Probability being a subject to many fields including markets and science.

Dow Jones
Probability

PARDO AND SYSTEMTRADING

2006-03-13T13:51:00.000+01:00

I read an interesting article from Robert Pardo: some quotes here without comments. It speaks for itself.

About optmization:

"A lot of people will say, “Let’s try some moving average idea, and optimize and see what we come up with.” They may optimize and find a few models that look really good and completely ignore the fact that most of the rest look pretty bad. I don’t consider optimization to be the way to find if a model is good."

About random trading:

"Think about it. If you buy or sell off the flip of a coin, and you know how to manage your risk and your profit, you should be able to make something. I have a former client who had determined, prior to starting with a system, that he would some make money even with a random trade selection. He called it a money management system—I’m not sure that’s what I would call it.

At any rate, you have to ask yourself why people lose so much money trading futures and stocks when by random selection, you should be able to get a fairly even mix of wins and losses. Most people don’t ask that question, but it’s a good question to ask."

About market characteristics and differences:

"Would you also like to see confirmation in other markets?
I’m a little bit different than a lot of people on that count.Let’s say somebody came to me and said “I’ve got a bunch of different models that trade a bunch of different markets, and they’re all different, but they’re all really great.” If I looked at the models and saw they were sound, it wouldn’t bother me a great deal that they wouldn’t work in other markets. Not as long as I felt they were sound in the market they were designed to trade. Individual market characteristics do exist."

About targets and profits:

"With the systems I’ve used over the years, targets have made the models perform less profitably. What you might find is, a model that trades a great deal and is highly accurate could be made more accurate by targets. If you’ve got a model trading 60 percent profitability and it’s a good model, the targets might add 5 to 10 percent to it. So then you’re right seven times out of ten, and for a lot of people, that’s a big difference. They really like being right that often. But that’s another reason people don’t trade well. They’re more interested in being right than they are in just making money."

About accuracy:

"I’ve never really cared about accuracy in a model. A lot of people do, and obviously,the more accurate the better, but I’ve never made that a primary focus in building a model. The models that my current platform started out with were in the area of 45 to 48 percent accurate. They still made a lot of money because they let profits run, and the losses were very manageable. It’s a great irony to me that with no effort to get accuracy, my current models are in the 60 to 65 percent accuracy range."

Systemtrading

QUOTATIONS ABOUT TRADING AND PERFECTION

2006-03-06T17:19:00.000+01:00

A boring and no trading day on BUND and DOW, some quotations I saw today:
From TaylorTree:

Trading cannot be taught...it has to be caught. By that I mean you must have a perceptive nature. Without it, buy a system and execute it mechanically."

"I've had experience with this problem (self-sabotage). In short, I found if I had a goal that my self-concious believed was not doable, then I'd self-sabotage my trading. Once I realized this and changed my goals, the self-sabotage stopped."

"If you want to remain emotionless during trading, concentrate on the process and let the outcome happen."

From: Daily Speculations:

"I have traded continuously for some 10,000 consecutive days, but never had a single fully satisfactory one. Yesterday was no exception. Among other things I did not get out of all the positions I wanted to at the close, I allocated much too much of my capital to a certain search engine stock powered by executives too smart by half, and I suffered from faintheartedness the previous day when I should have taken out the cane but instead merely used a walker"

"Perfection is an ideal to aspire to; once you make it the standard to live by, you're doomed to be dissatisfied, if not downright unhappy"

daytrading

MARKETS UPDATE

2006-03-01T14:14:00.000+01:00

Markets closing februari still in their tradingranges, although at the end of last week and the beginning of this one's the markets seemed to break these levels to find their way up. Yesterday's pull back maybe led by Google's drop.

From this point I still expect the markets to test the lower boundaries of their trading ranges,as I stated before.

There has been so much said about Google lately and also on the clarifications Google's chief financial officer, George Reyes did yesterday, I rest it here, but
this link makes it very clear that Google may have problems.

daytrading
dow jones

NIEDERHOFFER AND THE MARKETS

2006-02-22T12:56:00.000+01:00

Via a book review on the site of Tradermike I came across the name of Victor Niederhoffer. Known in the eighties and nineties as one of the most succesfull traders on Wall Street but broke twice as is described by Malcolm Gladwell. He maintains a very interesting weblog about the markets with subjects concentrating on statistics, probabilities and failure.

Markets in a consolidation phase, not much to say about it. The Dow Jones moving slightly above its tradingrange and the S&P 500 in a narrowing range:

daytrading
dow jones

TIME FILTER

2006-02-20T20:03:00.000+01:00

One of the things concerning me at the moment as a trader is the question if I should take all the tradesetups my system gives. I trade in a very distinctive timeframe: I only trade during the day and don't take positions overnight, so setups that occur after a certain hour I don't take.

The question is not a question about looking for an indicator filter. It is merely a point do I take another trade if my first trades were winners? Why take another another risk? Systemtically you should take the trade but is it worth the risk?

I am not a mathematician but suppose the system produces 10000 trades. You tested it with Monte Carlo or otherwise and it should give a nice profit. But wouldn't you expect that a random part of these trades, say 1000 trades, produce the same result?
I would think so.

But what if I sample all these 10000 trades in series which are determined by timeframes, say weeks or days. Would the result of such a sample serie, in the long run be the same as any other? That's the question I ask because if yes, this would mean that in any chosen timeframe it would be more profitable to stop after a winner or consecutive winners.

daytrading
system trading

SIMPLE DOW SETUP, TOO SIMPLE?

2006-02-09T13:17:00.000+01:00

Via the website of the Chicago Board of Trade (CBOT) where the mini Dow Jones is traded I came across this article about scalping the mini DOW. A very interesting article by no means but the essential part, where the writer describes his trade setups I got doubts. He is using a one minute chart and solely trade SMA crossovers of 9 and 16. He is taking all the trades, which "keeps him on the right side of the of the DOW for most of the day" as he says and he uses no indicators and focuses solely on current supply and demand. He gave this chart as an example to show how profitable this system works for him. Yeah.

Well this is how I look at my chart one a one minute basis: It gives me so many trades which will eat ayay my profits and result in a big loss. Or do I use another chart than this guy does?

daytrading
system trading
dow jones

DOW SYSTEM AND MARKETS UPDATE

2006-02-07T12:37:00.000+01:00

It has been a few days not posting here, too busy with other things. My forward testing of the mini DOW Jones (I am trading it in simulation mode, software also available on the site of CBOT) gave some surprises: it forced me to go overnight several times in a row.
This changes a daytrading system into a positiontrading one. This has consequences: first my riskmanagement changes due to possible gaps occurring on the DOW frequently. Gaps can be huge on the DOW: 50 or 70 points do occur on a regular basis. Secondly, the margin is withdrawn from my account so my regular trading can be influenced the next day. I will test it further but results or not negative for the moment.

A few charts of the markts. The S@P500 and the DOW moving sideways in a range which started at the end of November last year, but below their respective 50 daily SMA. Futures a little lower at the moment. We may test the lower range in these days, see charts below.

daytrading
system trading
dow jones

SYSTEM DEVELOPMENT

2006-02-01T11:27:00.000+01:00

In developping a trade system on the BUND the aspect of the Profit/Loss ratio worried me and still does. No system will ever be perfect, you have to find a tradeable system. Now in my backward and forward testing I got a P/L ratio of 1. This means on average one loser on two trades. So it is crucial that my winning trades are bigger than my losers.

I mentioned before the bad spread of the BUND, this comes in especially if you have a system with a P/L of 1. Suppose you have with the BUND a loser of 10 points and a winner of 10 points. What will be the result? The spread is 1 point, so the loss on the losing trade will be 12 points, whilst your win of the winning trade will be 8 points. Net is this a loss of 4 points, besides the transactions costs. 4 Points being 40% of the trade...
So my winning trades have to be at least 1.4 times bigger than my losing trades.

daytrading
system trading

MISSING TRADES

2006-01-26T20:34:00.000+01:00

No BUND trades today either, though the future noting considerably lower. As said earlier the day the US markets at higher levels today. The DOW testing the 50 SMA and the S&P500 testing the upper level of the range 1245-1275.

One of the best tradersblog is that of Globetrader. He has an interesting post about missing trades. Missing trades is an important factor in trading. It can be due to:

-Physical absence, not being at your screen when the setup occurs. Can be everything,shopping, visit to a doctor, lunch, you name it.

-Hesitation, the most important obstacle of traders, everything is there but you can't pull the trigger. Sometimes you may hesitate, you see the market moving in thye expected direction and you want to jump in.. just to see the markets turn.

-Lack of concentration, trading can be boring at times, the long hours at the screen can exhaust you and you get distracted by other things and you may miss the trade.
Innerworth.com asked: "why are winning days often followed by plateaus and losing streaks? Loss of focus and concentration is a major reason" and that "that winning takes psychological energy. Winning may feel great, but as you are winning, your adrenalin is pumping. After a big, exciting win, your mind and body just want to relax. When you are worn out, you are prone to make poor decisions or trading errors."

You have to reckon this in setting up your system, the more trade entries your system gives, the more trades you may miss.

daytrading
system trading

US MARKETS TODAY

2006-01-26T15:05:00.000+01:00

We could see an interesting day. The mini DOW in premarkets moving higher, but coming the highs seen earlier on the day. As you can see in the chart below the DOW bottoming yesterday.

Though not to become to over-optimistic lets look at the broader picture. The DOW JONES yesterday just closed at the upper trendline of last year's tradingrange. If this will be support has to be proven.

The S&P 500 at the 50 SMA but between the range 1245-1275. Closing above this probable and makes me a bull too.

For the moment I agree with the vision of Tradermike

daytrading
DOW JONES

PATIENCE AND GREED

2006-01-25T14:29:00.000+01:00

There were not any trade setups in the BUND today, so I have to wait for chances later on the day. Patience is crucial for a trader; you have to wait untill your setups occur. Many novice traders make the mistake to overtrade. They want the thrill and become too impatience and greedy. No trades , no money, but also no money loss.

The DOW JONES moving in premarket hours 20 points above the yesterday's close.
Some charts:

The S@P 500 and the NASDAQ finding for the moment support at the daily 50SMA but can they stay there?

daytrading
DOW JONES

TRADES

2006-01-24T17:07:00.000+01:00

A boring day. Two trades which were stopped with only minor gains. Could have been better.

Short 121.35
close 121.33

Short 121.24
close 121.24

A look at the mini Dow Jones: probably going lower today, maybe bottoming out. I am still forward testing a quite simple trend following system. When this will give resonable results I will trade this system. It already has proven itself in the last month (forwarding) but the last days it lacked good entries.
Forward testing is important. Before actually trading a system I allways trade it in simulation mode.

daytrading
BUNDFUTURE
system trading

FINDING A SYSTEM TO TRADE

2006-01-24T13:36:00.000+01:00

To find a system to trade is not easy. For me to find a decent working trade system on the BUND started with watching the future move intraday. The BUND shows very nice moves. The BUND opens 8:00 CET and closes at 22:00 CET (21:00 GMT)

The BUND shows a slight bias towards better consistent moves in the afternoon, maybe due to the opening of the US markets. In the chart of the December 2005 contract this is depicted with arrows.

This could be for you a possible edge for a trade setup. Now to find an exit was crucial. I don't scale in or out the amount of contracts, I only use a fixed size.

To find the entries of my setups I use a trend following indicator together with candlestick inspection. This gives me also trades earlier in the day so I trade these too. My initial stop is allways 10 points.

The FDAX shows a nice intraday cup and handle pattern indicating the future can go higher today.

daytrading
BUNDFUTURE
system trading

BUND TRADES

2006-01-23T16:57:00.000+01:00

I went short on the BUND today but in my winning position my connection with my broker went down and I had to close my position with 10 points win.

Short 121.44
close 120.44

The FDAX seems to bottom out today and is noting higher than friday's close. On the DOW we also see a small recovery, but we may expect a further movement south in the comming days/weeks. You can see a the DOW clearly breaking the 50 daily SMA pointing towards the flat 200 SMA. Or was friday just due to a temporarily fear reaction? Don't think so.

CHANGING TO THE BUND FUTURE

2006-01-23T14:08:00.000+01:00

I decided to change markets to the German BUND future. The reason for this is that increasingly lower intraday movements on the FDAX.

I looked for another market for some time and I found the BUND a nice alternative. Volatility and liquidity is high throughout the day, a minimum requirement for trading.

The BUND also has nice consistent movements, though the spread is not that good (one point, also being the minimum tick).

I also decided to look and to trade the Mini Dow future, a market with preferable movements and spread than the more popular mini S&P, well, in my opinion.

Off course I will have a close look at the DAX. Last week there were serious attempts to look for lower levels on all markets. The DOW making on friday it's biggest intraday fall in three years. See picture

daytrading
FDAX

TRADING HOURS

2005-11-22T16:45:00.000+01:00

Yesterday the EUREX expended the opening hours of their benchmark products (FDAX, BUND, ESTX50, BOBL)to 22:00 CET (15:00 Chicago time). As expected a low volume trading and a doubled spread (normal daily spread is a half point).
Of course we will see lesser openingsgaps so for position and systemtraders a later closing time can be good news.
We will see.

daytrading
FDAX

HIGHS OF AUGUST

2005-11-17T17:45:00.000+01:00

At the markets we are almost at the highs in august. First a chart of the S&P500. We will test the top very soon and maybe take the top still this year.

Nasdaq:

daytrading
FDAX

GAMBLING VS. TRADING

2005-11-15T16:17:00.000+01:00

Some people compare trading with gambling. They tried to trade and lose or reject the concept of trading at all. Of course there are some similarities: the fact that no one can predict the future and no one can predict with certainty the next movements on the markets.

Though this may be true, there is one very big difference between trading and gambling. The main difference is the influence a gambler and a trader has on the outcome of his action. With a gamble, be it the casino or the lottery or whatever, the gambler has no influence on the result he gets. He can jump, shout, walk away, yell but this will have no effect. He can do nothing on the result.

The outcome of a trade, on the contrary, solely depends of the trader. He decides when to stop a trade and this decision will make his system a winning or a losing one. If the markets turns against his position he decides how big his loss in that particular trde will be. If the market moves with him he decides when to take profit. This is the most difficult part of trading but also the the most important.
Exits my friends!

daytrading
FDAX

Impatience

2005-11-14T15:32:00.000+01:00

Today I feel to restless to trade resulting in two losing trades on the FDAX. Restless because I don't know what I will do with my website later in the month. Probably I will stop giving future advices.
So be it.

The trades where performed immediately after the opening. The rest of the day I didnot get a chance to see how to trade again. Impatience and restlesness are bad feelings for a trader.

The DAX is moving again on recordhigh, around the 5100, but I don't get the feeling a trade setup will occur today so I go out for a walk.

daytrading
FDAX

EUREX

2005-11-10T14:31:00.000+01:00

Bourses are these days organised as companies trying to increase their market share and they offer more and more products to attract clients. The EUREX has announced that from 21 november trading hours of their most heavily traded products will be changed more in accordance with the opening hours of the US.

This means that for deratives of the DAX, The DJ EUROSTOXX50, the BUND and the BOBL trading sessions will end at 22:00. These are long days for a trader like me. I don't know. I remember that two years ago the CASH DAX (the DAX30 index) changed closing hour from 20:00 to 17:30. This was done because the lower volume in the evening hours. Volume on the future (FDAX) as a result went also is lower so that you can see in these evening hours a spread of one point in stead of the "normal" half point during the day.

They want to attract US clients. Will an individual trader from the US consider changing from the US markets to the EUREX products? I don't think so. Why would he? The bigger institutions already have their subsidiaries in Frankfurt don't they so for them changing trading time is not needed.

In general European markets are US followers. Changing trading time to the same as the US trading hours will result in even more following markets

No on the contrary, I expect volume to be very thin in the evening hours. But for me I still have to watch and monitor these bourses.

daytrading
FDAX

.

My reminders

2005-11-08T14:53:00.000+01:00

MAKE A TRADINGPLAN

TRADE YOUR PLAN

STICK TO THE OBVIOUS

MANAGE YOUR RISK

Simple eh? Solutions in life can be simple but sometimes we are only focused in a certian which only will hamper us and our profability.

daytrading
FDAX

Backtesting

2005-11-07T17:23:00.000+01:00

I am still backtesting my tradingsystem manually. In the past two days I tried some software but that did not satisfie me. I used the software from globetrader extensively in the last week but it didnot bring met expected results. Problmem is aalways that you dont see what is going on under the hood.

My website DFO is a mess at the moment but I dont have time and the guts to fix it for now. I probably switch to another host which will bring an extra amount of work.

If you want to trade objectively, it is essential to develop and trade a detailed trading plan. If you have a detailed trading plan, you can focus your attention on executing it. When you have a vague trading plan, in contrast, you must do more thinking. You are more likely to focus on the emotional consequences of losing, and at that point, you will lose focus and your ability to concentrate fully. .

daytrading
FDAX

New computer

2005-11-04T14:51:00.000+01:00

Yesterday I installed my new computer. Today I finished installing all ther software I need for trading.
I finally have 1 gig memory, so it is much easier to perform multiple tasks. In the meanwhile still working on a sytem. Backtesting can be so boring. .

daytrading
FDAX

Enet and papertrading

2005-11-01T14:52:00.000+01:00

I was looking a long time for broker which offers mini contract futures. Off course you have the e mini (mini s@p500), mini DOW, but this is not what I mean. I was looking for enet speculation

With them all offered future contracts (and they offer quite a lot) are multiplied with 1.!! So 10 points means 10 USD gain or loss.

It is very sutable for testing in real time a tradesystem. Disadvantage is their high commission in comparison with the future multiplier: 4.5 USD. So Enet can better be used to test position trading systems, than for intraday trading sytems.

daytrading
FDAX

Psychology

2005-10-12T20:57:00.000+02:00

Losses are inevitable for traders. The Stockbandit is writing about it today.
I find it very usefull to read about psychology and trading at Steenbergers blog. Innerworth, I mentioned it before, it's very useful stuff to read everyday and to remember when trading.

Markets further down today. Difficult for the bulls at the moment, though not closuing at the low of the day. You might expect some recovery from here. The VIX for the 7th day in a row up, see chart below, and far away from the 200 SMA.

daytrading
FDAX

Markets down.

2005-10-11T21:41:00.000+02:00

The charts don't look good to me tonight.

daytrading
FDAX

Interactivebrokers and filling orders

2005-10-11T15:29:00.000+02:00

Interactive brokers is one of the worlds leading brokers for electronically providing data to traders. It is cheap, vey reliable, outstanding resources and a wide productrange to almaost all markets in the world.

A minus allways was and is that IB doesnot provide historically data: you have manage that by yourself. Since a while they provide a backfill up to 100 days for most of their products which is a huge advancement.
Filling orders never have been a problem. I don't have experience with the EUR/dollar future. Reading some forums about FOREX trading learns you orderfilling may be a problem for FOREX traders.

Somebody wrote me a mail this morning about orderfilling with IB on the FDAX. He is currently trading with 4 contracts and he has the suspicion the filling is not allways done simultaneously. Now this would be very strange and a very negative thing for IB because I can't imagine 4 contracts to be that much on the FDAX market. Or is there some bias to smaller inverstors? I'll try to explore this matter a bit further. >>

daytrading
FDAX

Frustations

2005-10-10T17:04:00.001+02:00

Frustations are a regular business for traders. Yesterday I bought a pocket PC and also tried to switch my wired network to a wireless one. I could manage a wired connection to my PC's but a wireless connection to my new pocket PC is not possible for the moment. It's a frustating effort, you feel sometimes like a programmer as a trader.
Globetrader: describes another kind of frustation: despite the good work he is doing he got not many answers for his questions. You could say he makes a mistake to presume that his interests and questions are that of others too but clearly he feels frustated by it.
Innerworth, a free registrationgave an advice for those feeling out of control:

A more adaptive approach is to realize that it's impossible to be thoroughly competent, adequate, and achieving all the time. Sometimes, you just cannot trade perfectly. You can't control all circumstances. When things go wrong, practice radical acceptance: "I can't control everything. I am going to accept the cards that fate has dealt me today. I'm going to accept what I cannot change, and be grateful that matters aren't even worse." Rather than have unrealistic expectations of success, it's wise to approach trading with a healthy sense of skepticism. Things may go wrong, and that's all right. If you anticipate problems, and actually expect them, you won't be bothered when things go wrong. Try it. It really works.

SFO Magazine of oktober adresses some of the frustations and problems occuring with daytrading. The main article is asking if a daytrader is rewarded enough for the efforts he has to make. Other interesting articles are related:
Your order entry is ready,
SO, you want to Day Trade SPOT FX? THINK AGAIN>

daytrading
FDAX

A few charts.

2005-10-07T21:09:00.000+02:00

In the last hour can happen a lot but at the moment it seems the markets rebouncing a little. The S@P 500 below the 200SMA but testing this level today. The Nasdax above the 200SMA. We will see next week if these levels can maintain or if we will go further down. I expect a further recovery from here, but the optimistic mood of the last weeks is over for now.

daytrading
FDAX

System trading vs. Discretionary trading (2)

2005-10-07T12:55:00.000+02:00

System trading has an advantage over discretionary trading: it can be automated partially or fully so that all decisions and emotions of the trader are negelected. The system works for itself. Now this is also the big disadvantage too: the experience, knowledge or intuition of the trader can be extremely worthful, things you can never progam a computer to do (despite many efforts neural networks hamper still too often).

Still I am trying to find a more systematical way of trading. I found this piece of software wich is really worth mentioning. It can be used as order entry or for simulation and backtesting. It is called Futures-Trader and is made by Christian Czirnich (anwalt@czirnich.de) and can be found here. A very good piece of work.

Read more about systemtrading vs discretionary trading methods:
System Trading vs. Discretionary Trading: Part 1
System Trading vs. Discretionary Trading: Part 2

daytrading
FDAX

FDAX at 5000 FDAX from the other side

2005-10-06T15:04:00.000+02:00

So we are down now. Such quick movements downwards you allways see at the end of a big uptrend. The FDAX down almost 3.3% in two days. At the low of the day testing support at 5000. I wait with trading today.
A few nice charts to follow where you can see the US markets ended last night. The big uptrend of the S@P 500 has been broken as clearly can be seen by the broken trendline. Also the S@P broken throuhg the 200 SMA and closed below this level.

The NASDAQ making lower highs and testing the support at 2100.

The DOW Jones choppy during all summer. A confirmation of the fact that the uptrend this year was performed by the smaller companies (see Russel 2000).

daytrading
FDAX

End of the trend?

2005-10-05T14:56:00.000+02:00

The important US indexes closed clearly below their 50 SMA yesterday. Now a pattern of lower highs can be seen in the charts, see the S@P and the NASDAQ charts of the last three months.

Though the longer trend still being up, the trendline in the S@P chart of the last 6 months maybe a last rescue for the bulls. See last chart. Maybe the of this trend. But before we can conclude this we probably will see some testings of the 50 SMA and the 200 SMA.

daytrading
FDAX

Profit run

2005-10-04T17:39:00.000+02:00

It has been shown very often that it is wise to let your profits run. Every trader knows this, it gives the best results overall. Just the realtime implementation is so damned difficult. We know that too.

Today there was such a day. But there was something else too: my mind and my expectations. Not that I traded bad today, I gained in total 11 points which is very good but there is feeling I could get more out of the market today.I traded two times today and the first one was a loser and the second one a nice winner, but there you have it. When I was in this trade, I felt it would go in favour of my position, my position was good, but my memory was with the loss before. I was stopped out at my trail.

I have a timeframe for my trades. With this I mean that I am trying to make net profit during one or two days. There lies my consistency. If you use a bigger frame, say a month, a day doesn't matter that much as long as you stay profitable every month. Read this thread about trade consistency
So my second trade brought me a nice win. My target was not hit but later the day it did. This dilemma, choosing for a winning trade to maintain my consistency or choosing for a target to hit is an ongoing challenge which I probably never will solve.

The S@P clearly above the 50 days SMA but far below its years high. See chart. Where does the DAX go this year?

daytrading
FDAX

Fridays setup

2005-10-03T20:45:00.000+02:00

I am not trading these days. I am upgrading my hardware, which is necessary sometimes. I am also testing another tradesetup. For the moment it is enough to say that I want to trade another more sytematical tradesystem besides my futures.

daytrading
FDAX

Entries today

2005-09-29T20:32:00.000+02:00

My possible entry setups for today, 4 losses and 3 winnners. I performed 3 losses and 1 winner.

daytrading
FDAX

System trading vs discretionary trading (1)

2005-09-27T19:50:00.000+02:00

At the moment I don't want to make a predictions about the market direction. My firts three trades in a row today were losses, the last two winners, resulting in a net win. Markets intraday difficult to grab at the moment, the DAX jumping around.

I downloaded a trading analysis program; which allows you to analyse statistically trading systems and or your trades. I will have to test it a bit and report some of my results here. I never looked at these things thoroughly because I am not a system trader so, so these things never bothered me that much. Maybe I look at things a different way in a sense becoming more a systematical trader but I clearly have a long way to go.

Charts of the S&P and the DAX:

daytrading
FDAX

Jumping markets

2005-09-26T16:05:00.000+02:00

I got the feeling in the last days the markets, especially thr FDAX is just jumping around, moving either on bad or good news. The big gaps and the minor intraday movements confirming this.
Today it is up again after a bearish week to the former highs at 5000. Difficult to trade and I didnot.

daytrading
FDAX

Set back

2005-09-22T16:57:00.000+02:00

Last days I have a serious setback with my trading, losing some money and missing some opportunities. I don' t like off course but I have to manage it and see what next week will bring.

The markets clearly in a downward movement after FED's, most of them breaking important moving averages. See the charts of the S&P 500 and the DAX below.

daytrading
FDAX

Back to Basics

2005-09-21T22:28:00.000+02:00

No trades done today in the future. No data in the morning.

I wrote a short article for my website about the average duration time of various futures on the EUREX. I based this on a study performed by Gregor Dorfleitner: How Short-termed is the Trading Behavior in the German Futures Markets?

I placed a ticker to the top of this page.

Back to basics. Keep it simple stupid! And so on:

Every day, we get faster computers, smaller iPods, and cell phones with more functions. Humans are drawn to complexity. Complexity is associated with progress. And progress makes us feel safe, and even powerful and omnipotent at times. But complexity can also be a distraction. It's much better to keep things simple.

from Innerworth. Register to this site, its worth reading it.

daytrading
FDAX

Daytrading vs going overnight

2005-09-20T15:58:00.000+02:00

Busy trading this morning. Not that you could expect a lot of movement with the FED probably raising rates today. Though I don't trade news I cant't miss the importance of the decision.

Yesterday I refered to this blog. One of his articles has an interesting subject, the common believe going overnight is a risk. Though it is a risk, it can lead to a big loss while you can do nothing about it, a surprising outcome of his study performed with the SPY's over many years. His conclusion:

If one had bought the SPYs on the close over the past 12 years and sold them on the next day's open, they would have made 143 SPY points (plus, they would have also received all the quarterly dividends). And had one bought the SPYs on the open each day and sold the position on the close, how would they have done? They would have lost money! How much? A little more than 67 points. Yes, in spite of a solid upward move in SPY prices, the intraday move--on a net basis--was negative! All the gains, and a great deal more, came from holding the SPYs overnight. And then a good chunk of these gains were lost while the market was open.

So no daytrading anymore and get rich sleeping?? No.In bearish periods you win nothing. Can You wait the period no matter how long it lasts? It is also not the conclusion of the writer:There are many successful daytraders and they are succeeding for a multitude of reasons, including shorting the market at appropriate times

daytrading
FDAX

FDAX and S&P today

2005-09-19T16:36:00.000+02:00

The S&P ,as asked in my last post, finding support at the daily 50 SMA last weeks friday, at least for the moment. See encircled chart below.

Today the FDAX opened lower with a gap of 100 points but retracing in the morning more thzn 50%. Nerved about the FED??

Today I came across an interesting tradingblog from Larry Connors, CEO and Co-Founder of TradingMarkets.com. His articles are more than worth reading. An interesting point of his blog is his studies performed over years. Later more.

daytrading
FDAX

Daily chart S&P

2005-09-15T12:21:00.000+02:00

The S&P making a lower high this week, also making a rebound to the upward trendline (encircled). You don't see that in such a classical way. The question now is will the 50 SMA act as support. We will see.

daytrading
FDAX

TImeframes

2005-09-14T12:43:00.000+02:00

Somebody asked me if I use the same time frames for my futuretrades and my position trades. So when an upward trend is existing in the daily charts, will I only go Long with the future?

I use two time bars on my charts, the 15 min and the 60 min. If an uptrend exist in the 60 min chart would I only trade long with a futurecontract? This would be in general a wise setup. In general because most of the time this strategy isnot working.

Why not?

Movements on the market are never lineair, are never straight up or down in a line. There in every bigger trend opposite movements and these can be very big by itself. On the DAX movements of 100 points in a two days trend are quite normal but within these days short positions can the best to trade. In fact this is a matter of risk management and moneymanagement, two most important keywords in trading.

Read more about timeframes here

daytrading
FDAX

5000 on the DAX, not anymore

2005-09-13T11:59:00.000+02:00

I asked myself on 22 July , Will we see the 5000 on the the DAX? We did but after reaching these levels we have to see if todays movements are are just a temporarily setback or the beginning of a bigger movement downwards. I got the feeling the markets wanted to push up to these levels during the last months and weeks. We got there and we enter a new phase, maybe and probably going lower from here. The DAX now almost at 4900 losing almost 120 points in two days.

For stocktraders I recommend Trade Ideas Their tool is to alert you on certain stocks on preset conditions. Their site is full of tardersinformation and stuff to use. I will try to use it for futures and could use some help by it.

daytrading
FDAX

VOLUME

2005-09-12T22:02:00.000+02:00

I have written about Volume in trading before, concluding that volume doesn't matter that much in futuretrading. But now I read a truly good contribution about the influence of volumeon trading from Brett Steenberger. His conclussion is in line with mine observation. But he is empahsising the importance of who is trading in combination with volume. I have to study his insights to fully understand what he is saying and will come back to this later.

The market maybe in a reversal phase now closing below the 5000 level but well above the lower border of the the range 4965 and 5000.

daytrading
FDAX

2005-09-08T19:07:00.000+02:00

Markets in a pause again today, slightly in a sideways phase. Something else to expect of this weeks sharp rise? The 5000 being tested a few times. Meanwhile reading very good tradingblogs outthere, some of them being listed on my my website.
Some of them offer their technical knowledge about the market, other are treating more fundamental aspects of companies in the news, and others give insight in general aspects of trading.
Globetrader gave me a handle to adminiser my trades and my trading decisions in a very clear and in a straightforward matter. Essentially it gives an spreadsheet to administer and maintain my trades. I will use it.
BlogginWalstreet has a fascinating and surprising view for the direction oilprices will go. Oil in his view is not different from other tradeable goods like stocks. In the middle term speaking ( years) yes, but in the long run (decades) no! Oil win run out sooner or later and this will bring prices up.

I missed today a trade setup in the afternoon, There was just too much to do in here.

daytrading
FDAX

Data and data

2005-09-07T21:41:00.000+02:00

I performed three trades today. 2 losers and one winner, the last one being very good. Markets after two days of a sharp rise testing the 5000 but not breaking it defenitely. Maybe tomorrows data from the US can break this hurdle.
I have problems with interactivebrokers and their data backfill. After updating my internal computerclock my chart screwed up. I use SierraChart. which is not able to show me to right chart so I have now a gap of three hours in my charts today. It is difficult to start up the game again.

daytrading
FDAX

SMA

2005-09-06T22:32:00.000+02:00

Note the importance of the SMA in the BID CFD DAX chart of the last weeks. First testing it at A. Then breaking through and restesting with support at iB and C and finally going through making up a new trend. Yesterday and today there were some nice opportunities going long. I missed them like this guy. Quite amusing.

daytrading
FDAX

To Do after holiday

2005-09-06T15:39:00.000+02:00

Back at my PC I feel no need to trade. I just cant find the right moment to trade. I read my emails these the last two days (quite a lot of it though it is nice to see how quick I was in deciding ro read them or to delete them), answered some of them and updating and reading some blogs and websites.
Before I went on holidays I listed this blog to various bloglistings and but now some of them appear to be offline or showing errors, consequence of making succes? So I sent them an mail too.
I will now have to concentrate on my hardware now once again. I work at two different places but one of them is far from ideal. No backup, just one screen per PC (though two computers). I want at this place the same configuration as at the other place: an extra 19 inch screen. I need for that a 5200 GEFORCE FX videocard. It is the only videocard I know doing what I want. Help can given if You know a good alternative. With that I can run two screens with one mouse and mouse.
Then I really need to manage a backup here. I will do it as I know from my home place: writing a small DOS program which will start automatically at the moment when I want with the Windows build in task manager. I will then write it to a CD with a burning program, easy and controllable.
And then off course I have to trade. I decided during holidays to trade 2 contracts. I will see if this will change my attitude towards trading. It can be a risk. .

daytrading
FDAX

My thoughts and reasons about todays future trades

2005-08-22T20:48:00.000+02:00

I will try to explain some of my trades of today. I traded three times with a few points gain in total. One loser, one winner and one stopped out at entry after being in a small win position. The FDAX chart shown below is a Sierrra chart based on Interactivebrokers data. Shown is a 15 min candlestick chart with only the 50 Moving Avarage. I dont use indicators.

The FDAX opened higher with a gap. After achieving the high at 4960 very soon after opening the market reversed to test the openingsprice. I was very keen to watch this happen because one of my trade set ups is when on monday the markets reverse and go through the opening I almost trade this blindly.
Also this time: my first trade went short (late in the day) at 4985.5 just below the opening price. The opportunity of a (partial) closing cap a reason going short at thsi stage. The high at 4940 of the last weeks friday is a problem: it could and should act as a support lying very closely to my entry price. Another problem was the hourly 50 Moving Average at 4938 (not shown) backing up as support. Trading is not rocket science so I went for it. The entry was terrible, hesitating just a few seconds which gave me 4938.5 in stead of 4940 of the opening (slippage). My stop was at 4945 and I was stopped out at -6.5 points.

The second trade was done almost an hour later short. After the position gained a few points It turned at the 50 MA. In trade I then realised hat the setup at the 50 MA would have been a buy signal for me when not already short and I closed at entry

The third trade again was done at the 50 MA. The candle of 15:15 just opened above the support MA and closed bullish with nice white candle. I decided to go long at the next candle opening at 4945.5 which gave 10 points very quickly. I stopped trading for the day. .

daytrading
FDAX

Futures vs stocks

2005-08-18T16:50:00.000+02:00

Buying futures is easy and requires less money than buying stocks. Buying futures can be for various reasons, eg hedging, speculation or for strategic reasons, eg. China purchasing futures contracts to lock in the price it will pay on the open market while filling its reserves..
If you open a futere contract of the German index the DAX, you open a contract which corresponds with an amount of stocks in the German index DAX of about 4853 x 25 = 121.325 euro. The multiplier 25 is a constant which is different for every futuremarket and 4853 being the actual price of the index.
No suppose you could choose to buy this amount of stocks directly on the market or open a future contract. What do you prefer?
Soros would know the answer, he would allways prefer the stocks. Why? Because the price of the future differs from that of the underlying index due to volatility, during time of the futurescontract and dividend expectations, the future price usually being higher than the underlying.
So suppose after opening an contract the volatility drops to zero (theoretical but for the purpose of the comparison) till the end of the fututre contract, the price difference between the index and the future is a loss, so even without changing prices at all. The buyer of the underlying index didnot loose anything, on the contrary: though no price gains, he gained divend from his underlying stocks.

daytrading
FDAX

Trading, the internet and the media

2005-08-16T20:48:00.000+02:00

It is for sure that internet and the media had an big impact on the popularity of trading. Many try to make a living or at least make some money with trading. Internet has made it easy to acces the markets via an online broker or directly depending on the market organisation.

It is no surprise than that also tv broadcasters try to make money with programs or even complete cable net services about trading. Now to get more and more screenwatchers nothing seems to be untried (a phenomenon also seen in my country the Netherlands where programs will be broadcast about sperm donors and so on, christ sake). This seems to be the case with this program of CNBC too. What can be said? Will somebody be able to follow his recommendations? Isn't just too much and too fast for somebody investing his money? Is this real?

daytrading
FDAX

The edge

2005-08-16T09:34:00.000+02:00

I started trading again yesterday after a holiday of more than a week. The markets at the highest levels, the DAX almost at the magical 5000 level. OK allways difficult to start up again.
I got more confidence in my trading lately. I rememebered these words from a book I read: "finding your edge". I think I found my edge as a trader. How did I do that?

Well first off all I reckognised the unimportance of indicators in my trading. I got rid of them all. I only use the price itself and this liberated me from a whole lot of grail seeking hours. Secondly I started to monitor my bad habits. I sometimes lose my control and become impatient. I learned to wait to play my cards. Well I have a way to go from here. It is never over and it will never stop.
I read something else too: Trading is a game in which you play against the best players in the world. It is not an equal playing field as in sports where Juventus plays against Arsenal but not against some local soccer team. This may frighten you but this is reality.

daytrading
FDAX

Changing and adapting minds (2)

2005-07-25T22:54:00.000+02:00

I posted before about changing your mind and adjusting. Let me put it again with the words from this writer (adjusted by me):

Some of us think success and being right are one in the same thing. That is wrong . The truth is that it’s OK to be wrong; just don’t be wrong for long. In other words, cut those losses short.

Each investor must look at himself in the mirror and ask what is more important – being right or making money? If profit is the ultimate goal and not pumping the ego, be wrong but adjust.

I totally agree.

MAGAZINES I READ

2005-07-25T18:39:00.000+02:00

I read a lot about trading. Mostly from the internet and some books I got. There are so many good books available it is useless to sum up only some of them. Also magazines give some good insights in new and old trading methods and strategies.

Two of the best are Traders which publishes in german and english. The august item is just out and of special interest is an article about gaps. I am trading opening gaps on the FDAX, they occur so often so what else can you do than trade them? I am working on a article about trading these gaps. Other interesting articles:

An interview with Steve Nison, the the father of modern candlestick analysis.

A comparison of the game of poker and trading. I already posted about Trading, Poker and Zen. The book which I read then Zen and the art of Poker should every trader read.

The second magazine I recommend and read is Stock, Futures and Options Magazine. There is an online version too. The cover article is of special interest to me: Why Large Winning percentages are a bad measure for trading systems I am working on an article about a mechanical system for future daytrading, a system in which expectancy of possible directions is of key importance.

daytrading
FDAX

The 5000 on the DAX?

2005-07-22T21:53:00.000+02:00

No trades performed the last two days due to fact I had other things to do. The market consolidating above the 4800 level. Yeah I have to look very good, 4800. The danger here is the forming of a double top or a 2B top. Or are we going up again to the 5000? Don't see it is to high because the momentum and the move of the mast weeks is very impressive.

daytrading
FDAX

Changing and adapting minds

2005-07-20T21:35:00.000+02:00

The markets in a winning mood especially the FDAX which goes up and up, now we are at 4800. It is true what I read here he who fears change should be afraid. I would say:

He who cannot adapt and change his mind will never win.

I went long too yesterday evening.to close in the day a profitable trade.

It is clearly the Nasdaq which leads the pack.

daytrading
FDAX

Waiting, bull or bear?

2005-07-18T20:48:00.000+02:00

The day starting with some excitement but ending in a boring session during the late hours of the tradingday. Clearly we have to wait later this week to let the markets move again.

My first trade in the morning was long after breaking out at 4742. In a tick the FDAX moving 3.5 ponts up and I went long just to see my position coming into a nice gain. It then slipped away and ended in a loss. I was expecting a further mmove up, we are all bullish at the moment aren't we? At entry point it quickly moved south and let me behind with a loss of 5 points which isn't the way I like. but OK, my initial stop at the last high.

I then turned my position to give me a decent 10 points ending the day in a plus. The rest of the day in a laziness mood end closing at openingslevel. Where will we go from here?

daytrading
FDAX

Up and Up

2005-07-14T19:31:00.000+02:00

I don't feel well with the current bull trend at the moment. We didnot see any negative day the last week and the bulls are winning for months now. Though as a future daytrader I dont bother too much about this but it seems to me that there must be somewhere a reversal.
I am off course not the only one. This guy is in Chicago and is allmost certain about a peek top this week in the markets even leaving his positions unwatched. I wouldn't do that. How can he be so sure? If the techies on the Nasdaq still rise, well, some kind of panic buying is the result.
The author not certain too about this market and warning for a big reversal day

daytrading
FDAX

Wrestling with the markets

2005-07-12T20:54:00.000+02:00

Trading is not an easy job otherwise everyone could do it. Here is a guy who is, after asking himself whet kind trader he is,rethinking his exits when in a good trade. Exits are as important as entries. I am a liitle frustatad that I didn't finish my article about exit strategies yet. I hope to finish it one of these days. Lots to do.

This trader is wrestling the choppy intraday markets, which leaves him not much space to set up enough good trades. He gives some good advice: don't tarde too much but wait to right opportunities occur and read in the meanwhile a good book. There are days in which I just wait for hours and hours, doing other work or just waiting and reading.

The markets up again today. When will this bull rally which started last thursday be over at least for a couple of days?.The S&P at the moment testing the high of early march at 1225.

daytrading
FDAX

Testing higher levels again.

2005-07-11T16:52:00.000+02:00

The FDAX testing higher levels today again. It is at year high now. After trying the 4670 without much momentum today the market broke it and looking into new territories. I went long with it today.

A very good article about trading vs daytrading from Stephan Vita describes his experience with daytrading. He gives also a very interesting graph in which you can see the percent of NYSE Stocks Above 50 Day Moving Average. It seems that during time this percentage nver stays long above the 80% or below the 20%. It ios now at 81%.

Panic and business

2005-07-10T13:45:00.000+02:00

Thursdays terror bombs in London caused a sharp fall on the markets, eg the FDAX fall more than 150 points in a few hours during the morning. But in the aftrenoon the markets rebounced regained most of the losses of the morning and at the next day they recoveed to levels previous thurdsday. The S&P500 closing even higher then wednesday. See the chart below

The reaction of the markets and the expectations of various traders can be read here in this articele in the New York Times titled Initial Panic Selling Followed by a Numbing Business as Usual. Business as usual.

daytrading
FDAX