Many, many years ago, when first looking into investing, the books I read were mostly
about buying stocks for the long haul based upon a review of the underlying fundamentals.
However, I'd classify myself as a trader as I don't really look at fundamentals, but look
at what happens on a daily basis. My preference is to day trade, that is, get in at the
beginning of
the day, and get out at the end of the day. I like to get out at the end of the day because
I've noticed the instruments that I trade tend to gap up or down on opening. That can be
nerve-wracking. I havn't studied Single Stock Futures enough to use them to minimize the
opening gap risk.
I've analyzed markets through various technical analysis methods such as moving averages,
stochastics, trend-lines, linear regressions, and other interesting analytical mechanisms.
The randomness of the markets are such that you can't rely on these only. Indicators and
visual charts work together to set an appropriate entry and exit points. Some of these are
hard for a computer automated solution to perform. Well, I've realized I need to finesses
some of these algorithms to only get in to position a few times a day and ignore a lot of
the noise that exists.
But I've wanted to trade the noise as well, also known as the ranging randomness. A
bunch of tools come into play on this. And this is where Market Makers make their bread and
butter.
I've been looking at ways to play the markets without really caring if the markets are
ranging or trending. Two references have come to light over the last couple days of my
research that help to refine my thoughts.
The first is an article called "Applying Pit-Trading Techniques to Electronic Trading" in
the November 2005 issue of Technical Analysis of Stocks & Commodities. The article
describes the art of playing the spread. The author, Clem Chambers, claims that "the market
pays for liquidity". Liquidity is supplied through limit orders. By supplying short and
long limit orders, one can play the spread. He also says that "if the market is wilder than
you like, invent your own spread and trade outside the market's spread". This is something
I'm going to try.
My trading is kind of high frequency in the futures with either a profit fill order or an
new entry order every 1 point level in the es sp mini. No mater what price is doing in the
es at each 1 point level I have short and long orders pending---------buy to covers, sell to
covers, new long orders, or new short orders. As price moves up and down on a daily basis my
ratio between my short and long positions constantly changes.
If we have a day like yesterday then my long side positions are depleting and my short
side
positions are accumulating---------I started yesterday at about 72% to 28% longs to shorts
and at the close I was sitting about 81% to 19% shorts to longs.
As priced moved about during the day I made profits mainly from the long side, but I also
had numerous short trade 1 point profit fills anytime price moved lower. Every 1 point of
emini movement which ever direction is giving me a profit and also at the same time an
accumulation to one side of my position or the other. Thursday was an extremely high
frequency trading day and I had more r/t's that day then any other for this system that I
use-------several hundred r/t's in one day is high frequency enough for me.
That was suppose to be 72%/28% shorts to longs prior to the Thursday news
selloff-----then
at the end of Thursday I was at 81%/19% shorts to longs. At the lows of Thursday I was at
one point sitting around 58%/42% shorts to longs with the big spike down. How this all
played out Thursday would take a long time to explain as I had short side position
buy-to-covers down every point to 1180 and new long buy orders down to 1190 sitting for the
overnight session. Once the price started tearing down I was clicking off orders like a
madman-----fortunately I use xtrader which was rock solid all through the price movement.
I trade this way for the ability to be neutral day after day and not having
a "need" for the market to go one way or the other to be profitable. You do need multiple
accounts that are cross-margined and starting this type of system is the crucial part. If
you start this system correctly you will have your cost basis of the longs and shorts
spreading farther and farther apart, to a point where the two sides cost basis are outside
of the boundaries of the daily trading range. This creates the perfect situation as big
trend days or multiple trend days do not hurt you in any way.
The repetitive and continuous 1 point profits on both the long and short side all through
out the day are the profit accumulation strength of this way of trading. Yes range or choppy
days are really good for this as both sides of the trade end the day with nice gains and a
further spread of the sides cost basis.
I will try to take advantage of extreme moves like Thursday to let the shorts run a bit
as
they did below the 1180 level and my longs only had accumulation orders down to 1190. When
price was moving back up after the 1170 lows, I put the needed longs that did not get added
in at 1176 to 1180. 1171 to 1189 was missed for the longs since I did not have standing
orders to accumulate below 1190. I never have standing long orders on for more then about 8
to 10 points below the current price levels incase some news event hits. Thursday I had to
add 19 price levels of long orders and this did not happen until the 1176 to 1180 levels as
I wanted to know what exactly had caused the big sell off. The short side was covered for
the ones that did not have standing buy-to-cover orders between 1172 and 1175, so that came
out about the same as if I had just had standing buy orders all the way from 1179 down to
1171.
There was a few good whipsaws in there during the sell off and recovery that had some
good
profit hits so Thursday turned out very profitable. I think I wore my mouse out that day
with all the frantic order clicking.
If price levels are trading down at the lows of my plotted fib levels, like around 1130
then
I would be at 35% to 65% shorts to longs. In this case I would have stops in place for my
long positions at all time for any news related events. The short side in this case would
have buy back orders down to the long stop level and then the rest would be able to free
fall if the news was very bad. I also do not leave all these longs on for the overnight
session when at the lower fib levels {I go to 40/60 or better at the end of every day
session}. I want to be properly hedged day after day so these type of rules must be followed
to protect all of the accounts capital.
I do have one other system that I trade during the day which is much easier to trade then
my
ratio trading and this system can run with the intra-day trends. This is a linear regression
line based system that also trades in both directions at times until strong trends are
established. If we have big trend days like Thursday and Friday up moves then I can take
advantage of this in a separate system.
I have separate short and long accounts for my ratio trading that are
cross-margined and separate short and long accounts for my linear regression line intraday
trading that are cross-margined. At times I may move funds between the ratio trading
accounts at the end of a week to keep the account balances in line with a formula I use
depending on what the current ratio is on that day. This is almost like having two
commingled hyperactive swing trades on in both directions at the same time----------- just
their position size adjusts over time in relation to the markets price movement. Swing
trades have fairly static cost basis though and my system has a very active movement of each
sides cost basis as each week goes by.
How many systems can have a 100% profit rate per trade, week after week for all closed
out
positions? This is the only way I have concluded to get an end of year profit factor or per
trade rate that is very very high.
Re last paragraph. Try to give consideration to using the way you determine to change the
cost basis over time as a strategy that could be applied to modifying orders for the purpose
of reversing holds on non closed out positions. Say for example you decide to close out;
then you could in the appropriate account "affect" a reversal instead of a "close out". I
feel that this is, in effect, a way to keep your stratey decision making the same and at the
same time continue to be in the market instead of sideling that capital until you later
rotate it back nto the balancing process that you do. It is the difference between
considering profits per trade and profits per available capital.
You do not fix things that are not busted. Terrific. There is still the aditional element
of
sidelined capital that you have.
I really recognize how you do keep a lot of capital working and chunck off steady profits
as
the directional nature permits. I do see you feeding that "taken profit" and subsequently
reapplying it. My suggestion is to do a "pseudo reversal" across accounts and utilize the
exit decision as a more powerfully leveraged decision (twice the financial power).
First off, the system does not need to do anything special on trend
days and that is very important or this system would have a big weakness in my opinion. If
you have a big price swing like Thursday then sure I will try to take advantage off this,
but I do not need to for robustness of returns.
What I was looking for when I started to develop this ratio non-linear trading method was
three primary points.
- I wanted to have a system that could return 3% a month or more on the account
balance.
- I wanted to not "need" the market to go any particular direction on a daily basis.
- I wanted a method that would benefit from growing position size and not be hindered by
this.
- I did not want the system to degrade in performance from an increase in position
sizing.
Running the short and long cost basis away from the current actual trading range is a
function of the way I trade all the intraday constant up and down 1 point profits that
continually accumulate----------you would have to watch me for 30 minutes to see what I am
talking about, then it would make perfect sense.
Quote from tradingbug:
I am currently working on an ES system that does a simliar thing. I look on the daily
timeframe to find what would probably be the most likely outcome for the day. Then I use the
30 minute timeframe to determine which way I should take my position trade and scalps. Then
I look at the 5 minute and buy pullbacks within my overall position trade to scalp within my
position. The key thing is determining when to switch ones position trade direction. You
have to get callibrated to the volume of the 30 min and 5 min timeframe along with an
absolute indicator.
I think its best to look at the big picture and try to firgure out how the small
timeframe
influences the longer timeframe.
Your ratio of fractal durations (30/5) is good (B+); for the same purposes, try using the
15
and 2 for a ratio of (15/2).. This will shift your timing ahead. What I mean it that you
will make the same set of decisions but they will be made sooner than before.
There are three threads here now: this one; the clininical hypnothreapy one (crying..etc)
and the trends stuff that collectively show how persons who are able to entertain with a
depth of understanding and can get past being "too smart" and really be able to consider how
one "grows" to be able to, optimally, take out of the market what is being offered by the
market.
The salient ingredients involve:
- Knowing concurrent independant trades are required; the trades must be able to run
independantly of each other so no netting of positions is taking place.
- All measures of performance are focused upon return of total leveraged capital
being in
the market at all times (Thus, edge trading is passe and not a possibility for makng money).
- The mind and its growth, maintenance and repair is a 24/7 obligation based upon the
fact
that there is no alternative. Your subconscious mind works all the time and, particularly,
when you sleep. Its function is to "organize" your immediate past EXPERIENCE into the
subconscious belief system your life has given you. Imagine going from "edge trading" to
continuous seamless trading where coordinated independant accounts continuously extract
money as price change occurs.
- Knowing that all sensory inputs are continually paired with the emotions (and the
biochemical generation of what "greases" the
facile operation of the mind and/or blocks you from thinking about that which endangers
you).
Today both my short and long side made booked profits, but what was
todays direction------ a little down, some sideways, a nice move up, a little down. My
system picks the direction of the market on a macro basis by the ratio----------the higher
the daily price levels the more the short side is accumulating positions and just the
opposite when the market moves downward. Of course I look at these ratio's in relation to
where I have my daily chart fib levels plotted.
On strong intraday trends I am playing one side heavier then the other side based on the
indicators I use. At the end of each day though, if I have played the long side real heavy
intraday, I must make sure my ratio is in line just prior to the cash session close. For
instance, yesterday I had to close out extra longs to be at my proper ratio right at the end
of the day. Actually there has been numerous days in the past several weeks where I have had
to close out extra positions because of very strong trends running to the finish of the day.
There is several different techniques that I use to move both sides cost basis away from
the
current trading range-------- but the primary event that moves the cost basis up for the
shorts and down for the longs is the way I trade all the constant intraday up/down 1 point
profit covers---------some of this is done with the play of position size at these levels
and some of it has to do with what gets covered when---------but 1 point of profit is the
minimum I take per trade when handling the intraday repetitive trades.
See the "direction" of the day is not always clearly defined or what is the primary means
to
collecting profits day after day. Daily direction is at times the wrong focus or the wrongly
weighted focus for a trade system--------- again I have to comeback to the power of the
repetitive and constant intraday price movement within each candlestick and within each
intraday trend.
I really do not know of specific references for this method, it is just
what I have gravitated too from frustration with the limitations of linear based
trading----------getting into a trade with a target and a stop, then "needing" the market to
go a specific direction to claim profits for that individual trade. Apparently this is what
some traders call non-linear trading, so maybe under NON-LINEAR in google there is some
additional ideas for this--------not sure though?
It is wonderful to see someone using an unconventional method successfully - especially
on
these boards. This technique itself has been around for a while though. The following was
written more than a hundred years ago (around 1895) by Charles Dow (founder, Wall Street
Journal).
"Catching the Fluctuations-
During a "Traders' market:, or a market without any pronounced trend one way or the other,
any active stock will move over certain points dozens of times. The plan is to place a net
that will catch these daily fluctuations. Buy 100 shares of, say, St. Paul, at the market
price, and 100 more every half point up or down, but don't hold more than a 100 at a time at
the same figure, and don't accumulate more than 600 shares altogether. Treat every purchase
as a separate transaction, and whenever a profit of one point net is shown , sell that 100
shares, buying back on a one point reaction, When a purchase and sale are both indicated at
the same figure, do nothing - simply hold that 100 shares, but for convenience assume that
100 has been sold and 100 bought. If St. Paul should keep on going up without a reaction,
you would thus always be long 200 shares. Don't get frightened because of a temporary
downward tendency. The fluctuations are what bring you profit. Great care must, of course,
be taken not to work this system on the bull side if the general trend is downward, or on
the bear side if the trend is upward."
Several variations of the above general method are being used in the ES market. An
Exchange
member of CME I met last year was using a very similar method and doing as much as 8K to 10K
roundturns per day. He, though, viewed his method as an attempt to 'make the spread'.
See the "direction" of the day is not always clearly defined or what is the primary means
to
collecting profits day after day. Daily direction is at times the wrong focus or the wrongly
weighted focus for a trade system--------- again I have to comeback to the power of the
repetitive and constant intraday price movement within each candlestick and within each
intraday trend.
Very interesting comment here. I have found that when my position trading bias changes,
it
can change into either a reversal OR congestion. If its a reversal, the position trade works
out great and I continue to scalp in the direction of the reversal. If its congestion, then
I can scalp a little in my position biased direction and the day will still end up a little
positive as I am essentially buying down and exiting when a more favorable swing comes in.
More often than not I can wait in a lateral trend to exit my position trade at a minor loss.
After congestion comes a BO and then the whole process above starts again.
A net position {if you picked the right direction that day----IF!} will rarely
on a daily basis beat a system that literally profits from almost every single gyration of
price movement during that day. There is more potential POINTS of profit stored in every
single candlestick and every little fluctuation of price movement then there is in most
trends from beginning to end during the day. Price moves so erratic through out the day that
every little fluctuation has the potential for profits and the only way I have found to take
advantage of this, is to be in both sides of the market at all times.
I pull off any extra contracts that I played intraday just prior to the close
to be within a formula of the ratio I need to be at for the current price level at that
decision time. So yes it is a formula that I use to get my overnight position set properly
for the ratio at the current price level when the market closes.
Several years and bigger then what you have listed. Started this with a 70,000 account
with
bigger spacing between the levels I would play. Over time I am now playing every es point in
both directions just at different ratios.
As of right now both sides of the system made some very good booked profits
today-----------the short side made some money the first part of the day, then the long side
did very well up to the close. Now the short side is profiting again with the earnings news.
To safely start this trade from scratch, I would say that a 100K
account could trade every 4 points of es movement. Over time and with the account size
increasing you then move to 3 point levels, 2 point levels, etc. The turning on and the
start point for this method are critical for immediate success.
I hit 100% to 0% shorts to longs for a period of time in the overnight for my ratio
trade----------the china currency news run-up finally touched the price level for this to
occur. I may hold off adding any longs until the es penetrates 1135 with the lack of clear
news out of GB.
When at the bottom of what I have projected of the current range for my ratio I would be
35
to 65 short to long-------- I never go below this and then I keep a stop for the long side
all the time when I have 40% or more longs for news spikes. When at the lower levels of my
price range when the longs are heavier, I will close everything down just before the close
on Fridays at 50 to 50. Sunday night I will rebalance everything back to the proper ratio
once the market reopens.
Where you start this trade from {price level} is very important and yes one side goes
into
the negative on the very first day if that was a heavy trend day. This trade is best started
where the 50 to 50 price level is {right now I have 1160 to 1170 as the range for where my
50/50 is located}. As every little up and down movement of the es is making 1 point profits
then the two sides cost basis are adjusting away from the current trading
price-----------this is very powerful as the 1 point accumulations are racking up minute by
minute. When you start trading for 1 point from .25 to .25, and .50 to .50, and .75 to .75,
and .00 to .00 on both the short and long side at the same time the profit accumulation
affect is very fast.
You can't start this trade with a small account size in the beginning-----------the
minimum
would be a 70,000 account and then the spread between levels traded would have to be wide in
the beginning weeks of trading.
Not necessarily----------If you were to start this trade and the market traded in a tight
range or was choppy for several days then you would have the perfect situation. Your long
and short side accounts would both be building up profits as the trading price stayed in
lets say a 12 point range over these start up days. Yes at any moment there will be one side
of the trade with positions in the negative, but you are hedged by the other
side--------------so the rapid and repetitive profit hits are outpacing the amount of loss
from the side that is "technically" negative {not a realized negative}.
To focus on the side that is negative will mask your ability to comprehend the amount of
realized profits from all the 1 point accumulations. This is the aspect of ratio trading
which is difficult to "see" unless you watch this realtime. I will give you a better example
later----------------have to go meet friends now.
My company developed a high-efficiency market depth processor for stock/index arbitrage.
We
deploy it for interlisted arbitrasge trading - by human traders and machines. Basically, it
is high-frequency scalping. We developed it (as a part of our trading system) because market
data providers fail to delivery necessary quality of market depth we need, especially for
Island and Arca ECNs (we tried Reuters, eSignal, Realtick, etc - all they suck). Anyway, our
market depth processor has latency less than 1/10 of milisecond and it runs on a cheap
single-CPU PC with throughput up to 100,000 messages a second. For example, currently for
all Island stocks CPU load is less than 3%. Processing includes parsing direct feed, sorting
of depth (with optional aggregating) and sending it into a network for distribution. In
terms of money we have traders who quite often are making 5K a day because of the superior
speed of the solution. Machines are making 7-10K daily. To summarise : without high-quality
data (what implies minimum latency) high-frequency trading is impossible
To my knowledge, reference to high frequency *analytics* is mostly of interest to
academics
and researchers, who can now study market microstructure matters on a tick-by-tick scale,
which result in new implications for risk management, dynamic hedging, agents behavior, etc.
High frequency *trading*, however, is mostly of interest to hedge funds and banks which
separate their operations between low frequency ones and high frequency ones. Low frequency
usually implies heavier/deeper analytics. The edge is in the numbers, not in the trading.
High frequency implies more simple analytics, but the timing and the volume are crucial.
They rely more on market microstructure than on acurate solving of PDEs. Yet it does not
mean easier to execute. The arbs are risky because you can get stuck on only one leg, and
information can turn against you within a second. Unclosed arbs are your loss.
High frequency trades can go from statistical arbs (most commonly heard), to volatility
frequency trades/price mean reversals. Most simple arbs, like mergers, correlation triangle
arbs, and such, are executed at high frequency because they go vapor quickly.
There would be many other examples I cant think of at the moment. But that should give a
good picture. To my belief, HF vs. LF is not about how many trades you shoot per day, but
what your strategy is about. HF has been there for a long time. But it's only recently,
because of the required skills that distinguish them from low frequency/deeper analytics
trades, that a separation has been made. Mostly in hedge funds.
Of course information risk exists!
Information risk is why trading is "expensive". Homogeneous information explains
liquidity,
and heterogeneous information explains market frictions and trading gridlocks. The more
heterogeneous the information is, the highest the informational cost of a trade will be.
This informational cost is translated into the bid/ask spread. This is the basis of market
microstructure information models.
This is why most of day traders who think they can make money with "trends" get screwed.
While they think their trades only cost them broker commissions, they are actually affected
by a much higher cost: that of superior information.
Using limit orders on markets does not avoid you the cost of the bid/ask spread. Bid and
ask
quotes are values conditional to trades based on the information structure of the market.
Placing a limit order will only get you hit by traders potentially having superior
information, and leave you screwed with losses.
In terms of informational value, technical trading models are not far higher than placing
blind trades at random on a market on which vultures with accurate insider information or
arbitrage models are waiting for their lunch.
For 11 months. As we are acquiring experience we are adding different trading models. But
foundation remains the same - low latency of data feeds and fast orders execution.
Please be reasonable. Our approach does not tolerate the risk of this magnitude. It is an
arbitrage - the system takes position for a period of fraction of second and tries to unwind
it in another market as soon as we got a fil or partial filll. If it fails to unwind it for
profit for a reasonable period (usually 5 seconds), a stop order is issued. As a result
losses are pretty limited. So as you can see for our model speed is everything. That is why
we process market data in-house because other solution fail to meet necessary latency
requirements.
"My trading is kind of high frequency in the futures with either a profit fill order or
an
new entry order every 1 point level in the es sp mini. No mater what price is doing in the
es at each 1 point level I have short and long orders pending---------buy to covers, sell to
covers, new long orders, or new short orders. As price moves up and down on a daily basis my
ratio between my short and long positions constantly changes........"
Macro - are you still trading this? As best I understand your method of trading, it seems
to
be a short volatility (mean reversion/option selling, etc) type of strategy with a
martingale element embedded into it.
What do you do with the accumulating unrealized losers? It seems like in a period of
prolonged trending (accentuated by large directional moves), you can easily blow up (or
build substantial loses). I simulated your approach (from what I could gather) and it did
poorly in the late 90s and during the Bear market of 2000-2002 (as expected). You must have
some other signal you are relying on - pure position sizing won't give you a true edge. Like
with any martingale strategy, the drawdowns could be huge and provided no artificial limits
are hit (forcing liquidation) the capital requirements needed to withstand the drawdown make
the resulting returns unattractive. In terms of the mean reversion element, you can probably
do better by avoiding the costs associated with frequent trading (i.e. average down less
frequently). I don't mean to be critical of your strategy, just trying to understand it (and
sharing my concerns in the process). Thanks for posting.
