Trade for a Daily Profit Target, Drive a Porsche

I've spoken about trading once a day and then stopping and I have spoken about trading in HFT mode. Today I'd like to take the next step and provide another alternative to consider.

My dad loved casinos. He wasn't a big gambler but he did love to gamble. His thing was roulette. He spent a lot of time in his retirement working on a roulette system. Ultimately, he did come up with a system that regularly made money. Of course it only made money because of his money management rules. The roulette table has either a 1 in 37 or 2 in 38 edge in favour of the casino so the only way you can compete is controlling how you bet - the only thing you can control.

I can use this same money management system in trading.

One of the components of his money management system was to stop playing when he had made a certain number of times his perceived draw down.

What we are doing with Kiki in parallel with the trial of FloBot using a demo account is to data mine our statistics to determine:

1. Is it more profitable to stop trading when a certain profit or loss level is hit every day?
2. Are there times of the day when we shouldn't trade?

The outcome of this could be quite useful. We are thinking that the solution for an electroniclocal is to trade a few markets simultaneously on the basis that we stop trading when a target amount for the day is reached. We have noticed that even on a losing day in our HFT trading model, there is a point during the day that the system was in profit.

The maths could look something like:

We trade 3 different markets with a daily profit target for each of only, say, $200 per contract. This looks as if it's easily doable on our current statistics. If all three markets reach this target then trading each with just a 5 lot would yield a profit of $3,000 a day. Not too shabby. We will need to further study the best daily stop loss for the system so that if a market hit a certain level of loss for the day it would stop trading.

An extra benefit of auto trading is that in these days of 24 hour markets, the volatility and moves in the market I follow may take place during a time zone when I'm asleep or stopped trading. While I am not comfortable leaving FloBot completely unattended, I have no issue with it trading while I am asleep as long as I have both internet and broker disconnects alarmed so I can awake and sort out any issues.

Kiki is a huge fan of this way of trading. She is a huge Nipponophile and would love to spend a year in Japan and she sees this as a way of achieving that. I must admit I am becoming a bigger and bigger fan of FloBot trading as we get deeper into it.

I'd love to get some feedback and ideas from anyone who is interested in going down this road. I think it opens up a trading career for people who may not like or be suited to discretionary trading.

Auto trading update from Kiki

I took great interest in reading all the comments from EL's post yesterday.  The reason he posted the FloBot trades, is because FloBot is getting close to working the way we want it to. Yes, it trades a lot and yes, there are losing trades and losing days. HFT isn't anything like EL's discretionary method, but that's OK, because there's still a high win rate.  Even after the broker commissions, it's still highly profitable.

EL thinks there will always be a place for discretionary traders but I'm not so sure.  I know I can't begin to compete with his years of experience so I'm relying more on programming and computers.  I also know that I wouldn't have been able to program FloBot without the rules of his trading methodology, because those rules forms the order flow and momentum which is the basis of FloBot's logic.

Where this all goes is anyone's guess. It seems a lot of the big money is auto trading, and I know I'm lucky that I can take advantage of this technology at a low entry cost. In the end we both think the best auto traders will be the ones with the skill set of both a discretionary trader and a computer programmer, because so much about context and the little nuances, gets lost in translation if the roles are split.

I'm planning to run FloBot live on the GoToMeeting website for those who might be interested. I'll let you know when and how in another post. Right now I'm working on the difference between the performance from back testing using eSignal data and live performance on a demo account using the broker's data feed.  I'm concentrating on 6E because it's the most active market in all the time zones. The broker statements from my Flobot account will also be posted.

Kiki

Slime Bowl XXL

Apart from the Steelers losing Super Bowl XXX and a few AFC Championship Games, I'd be hard-pressed to find a worse day in franchise history. It amazes me how the two most critical players from Super Bowl XLIII -- Ben Roethlisberger to Santonio Holmes in the corner of the endzone -- both got into such serious trouble in the offseason. By now, we all know the (alleged) stories, so I won't get into them again.

But we awoke this morning to news that the Steelers had traded Holmes to the N.Y. Jets for a fifth round draft pick. That's all a Super Bowl MVP is worth these days? Actually, that price seems way above market value considering Sanantone's frequent run-ins with the law and his Twitter followers. He told one Twitterer (or is it Tweeter?) to "go drink the worst thing you can drink and kill yourself." That's one way to keep a loyal fanbase. And now he's been suspended for the first four games in 2010 due to a second violation of the NFL's substance abuse police. Apparently, Sanantone likes to "wake n' bake" at his crib. Good riddance to that spoiled idiot.

Amazingly, that wasn't even the biggest headline on Monday. Instead, we were all waiting to hear whether a Georgia prosecutor would file charges against Big Ben after a 20-year-old college student suggested he raped her in a bar bathroom. Although the prosecutor declined to press charges for lack of concrete evidence, his vivid and disgusting details of the incident that occurred in a 5-by-5 foot bathroom made me want to vomit. I'm wondering if public backlash against Roethlisberger might be more ferocious than felony rape charges.

However, District Attorney Fred Bright had a good suggestion for Roethlisberger that both he and his teammates should follow: "Grow up ... You need to be a role model for your team, your city, the NFL. You can do better."

I'll second that.

Where's the Exit Sign

Exiting a position at the right price is even more important than the entry. As I've quoted before, Pete Steidlmayer's famous words: "Just get the trade on and manage it".

However, in selecting exits, I have to take into account my style of trading. If I can't readily find a good exit strategy, my starting point is to go all out at the first logical scale out point and then look for a re-entry.

FloBot, on the other hand, examines all the trades within the parameters of its logic and can highlight the most profitable exit strategy. This can also mean that the model trades 20 or 30 times a day which I can't replicate manually. It's great for a FloBot but not for manual trading.

Using the MomDots for a manual exit also works for me. MomDots will keep me in a trade longer and that means that if there is a pullback I have already exited and can then also decide whether to re-enter. Using pure order flow is another method but I need to decide what sort of change I want to see before I exit. Looking at smoothed CVD or even raw CVD helps. Again, it's something I back test in the type of trading that is part of my trading plan. My trading plan copes with different volatility of markets. It's also different, for example, for the ES whether its RTH or before RTH.

As a discretionary trader, I use all the information in the context to fit my actions to where I am trading.

The complexity of all this is why auto trading has become so popular and will continue to be more so. The chart below shows FloBot's signals today in the Euro FX. The computer is programmed to give a signal each time the entry conditions are met. A new trade is not entered until the previous one is closed out. In fact, the way that FloBot is trading at the moment is to continually take small profits. This very much emulates pit trading by a local. This way of trading reduces risk and increases gross profitability as my entry conditions must be met each time FloBot re-enters. It is easier using a short profit target which is a more finite thing and then meeting entry conditions, than risking giving profit back due to less forgiving exit rules.

However, the commissions and fees trading from "upstairs" are much more than I paid when I was on the floor. There are a number of off floor memberships the exchanges are now offering that reduce these costs per trade for higher volume high frequency traders. At the present time, this seems to be the most profitable way to autotrade.

Space Access 10

I had a great time at space access. It was strange to be showing a space access regular the plastic model of the 75lb motor I'm having 3D printed in stainless and the CTO of Lockheed interrupts and asks for my business card. The motors is a 50 to 75 pound regen peroxide hydrocarbon biprop. I've ordered one from the 3D printer and I'll show pictures when I get it. This drawing shows 4 of these tucked into a 6" airframe:

For those of you that follow the blog that was actually the only 100% new picture in my entire presentation. I also talked about restarting my composite tank work that I started in 2006 at the very begining of the blog. (Go back and reread the first few months)

The Technical plan going forward is in several steps. Working on a smaller scale I can do 100% of this plan within my current budget.
1)Build a 4 engine gimbaled monoprop that uses irrigation tubing and HPR style recovery. I expect this to take two months to get ready for first flight attempt, this puts it in the middle of summer so first flight might be delayed until september as FAR in summer is miserable.

1a)In parallel test the bi prop motor I'm having printed.

1b)In parallel develop composite polyethylene lined tanks.

1c)Build some small canards for the 6" airframe and see if we can make it glide with tanks empty.

In no particular order do the following:

Trade out the mono prop motors for the bi-prop. (I'll Probably crash the mono-prop so its probably a series of mono-prop then bi-prop.)

Substitute the composite tanks for Irrigation tubing tanks.(or alternatively put one of Steves Flometrics pistonless pumps in instead of the composite airframe.)

Fly the whole assembly to 100K ft

Fly the vehicle to 100K ft twice in one day.

Seems like a simple list its probably two years work.
The first unpleasant step is to clean up my Garage so I can actually work on anything.

Chop Suey can be Sweet and Sour

I just love Chinese food. Before the great Oriental immigration to Australia that started after 1973, I'd been known to stop in Hong Kong overnight to eat Chinese. Now, you have some of the best Chinese and Thai food in and around Sydney.

Anyway, CHOP. You are in CHOP when you see  horizontal EMAs and greatly overlapping range bars. When this happens, I go into Outside In mode. Outside in mode is when I look to fade any move, small as it may be. I don't change the way I trade, but I put more emphasis on other parts of the picture. Momentum and VB are the main features. I'll try and trade away from the EMAs looking for the market to go back there.

If the volatility of the market you are trading drops, you have a number of choices, including:

1. Trade bigger size with tighter stops and closer targets
2. Trade Outside in trades only, fading the moves or picking tops and bottoms (these are usually lower probability trades)
3. Switch to a similar market with a larger daily range. An example of this could be switching to the DAX from the ES

As a trader, my job is to trade within the context that exists. I must fit the trade to the context rather than hope that the context will support the trade. The concept of envisioning what is going on is very important as it helps identify for me which mode I should be in. It's a natural part of my mental check at the close of each range bar. This has become part of my "muscle memory" and my win rate would be hugely less without this activity. It's like driving a car and knowing where you are.

You can use a few tricks to help you. The chart below shows an indicator - the 4th pane, the one below the VB, consolidates a lot of my rules into a red, yellow and green indicator that makes it quicker to see everything and not forget. As I get better at RTL I'm doing the same in MarketDelta.

Trade 100 times a day, Drive a Porsche

Lots of us really like trading the ES because of it's deep liquidity. When volatility drops off it makes it a less rewarding market to trade and also makes it frustrating for those of us that can only watch one market at a time.

There is a converse to waiting for the best opportunity and then hitting it with size, once a day. Its one of the buzz words of today - HFT (High Frequency Trading)- and its another way of trading. It requires less discipline in one way but needs different qualities, some of them technical and some of them managerial.

I get many comments and emails about the difficulty of focusing - its my main problem and the main problem for Kiki too. This was the last comment that asked about the focusing problem:

Anonymous said...

Looking at your chart seems so obvious entry points. But I know that is in hind sight. Doing it live is still a challenge as these opportunities come and go. I guess I get distracted a lot due to twitter/emails/internet browsing. I am not focused enough. Any advice

8 April 2010 00:47

My reply was:

Anon 0:47, Turn it all off except the music or switch to autotrading.

This was a trite but true suggestion as many of us are not capable of focusing intensely for long periods of time. I found it much easier when I was in the pit as there were fewer distractions. Technology has moved forward enough that the price of autotrading is within any trader's budget now. Maybe it's the answer for many of the people reading this blog.

Kiki and I have been working on this for a while as you know. The FloBot project has been going in the HFT direction. MarketDelta has not completed the final version of this functionality so we are using MultiCharts and upticks-downticks. We are still in the testing phase with a few technical issues still to fix - our logic engine is fine as you can see from the statistics in the screenshot below.

There is about a year's data being tested so statistically it should be good. However, there is one point to note: stops and targets should be changed when there are major changes in volatility, preferably from within the algorithm.

As you can see, there are lots of trades. Commissions in the simulation are $4 round trip and there is no slippage allowed for, as the model enters on limit orders and takes very small profits. This means that in live trading some trades will be missed - all winning trades - if there is no overlap between the range bars. How many trades will be missed and how it will impact profitability in live trading is unknown. This is one of the deficiencies of back testing that could be mitigated but not with certainty.

A thing to note here is that with autotrading you have to take the good with the bad. You get sideways choppy markets and most autotrading systems will be paying back profits to the market. There needs to be enough logic in the system to keep you out of most of the chop. But there is a price for this too. When the market takes off, you can be left on the sidelines.

Between the one trade per day as in yesterday's post and the 100 trades a day (slight exaggeration here) with autotrading, you have the discretionary trader which this blog is mostly about. How we use this discretion is what makes us CP. Its a harder road as we can all testify, but definitely an interesting one.

Today's Euro FX chart had lots of good trades and lots of chop too. When the EMAs are horizontal, it's chop. How do you trade this? Wait for the market to break out of the chop range. The price is a late entry but chop is often a coiled spring which will take the market a good distance as it has caught a lot of people who have to scramble to cover their positions.