Thursday, March 27, 2008

StockTickr Interview Reveals How We Use Automated Trading

I'm sliding under the table to you some excerpts from a recent interview that our Director of Trader Education, Jamie Hodge, gave to our good friend Dave Mabe of StockTickr. You'll understand after reading the entire interview how to win against today's market that's eliminated many of the information advantages traders used to have and how to trade where the greatest odds of winning exist - below is a slice of the interview.

Reprinted with permission:

Q: What single lesson did you learn along the way that has helped you the most in your trading?

Never become complacent – especially when you’ve been "gimmick trading" all of your career. I refer to any trading practice that can become extinct from a rule change or system replacement as gimmick. The prime example was SOES (Small Order Execution System). Once the SOES phenomenon started taking root, the big boys were already laying plans to do away with it and replace it with a “better” system. One that would allow more shares and faster executions, one that would put the advantage back into their hands. They succeeded in ’01 when they replaced it with the supermontage, and thus SOES became relegated to the history books.

The gimmicks were fun, but I feel that with my current style, there really isn’t anything that could impact it adversely (barring me breaking all of the rules and/or the market just sitting there). In other words, as soon as I was hitting my stride with one of my old styles, then it would end and you’d have to start all over with something different. What I’m doing now has longevity, and so over time, as I improve I should really be able to achieve some nice velocity.

Q: What's your exit strategy for winning and losing trades?

Anything that I trade these days is generated from alerts fabricated thru Trade-Ideas with the use of The Odds Maker. Not to say that I won’t trade anything else, but I’d say 95% of my signals originate from the TI engine. Most of my hold times are short, my typical hold time is probably 20 minutes. As far as exit strategy it’s pretty simple, once I’m in a position, I stay in it until it’s time period has expired or I get stopped out. If a poiion is approaching its time limit and it’s still moving for me, I’ll tell the Bot (Trade-Ideas Automated Trading System available through select brokers like Assent, TD AMERITRADE, and optionsXpress) to ignore the exit signal and then manually adjust my stop.


In addition to StockTickr's main service as an online trading plan journal and trader networking site, Dave's very popular interview series lets you peek over the shoulder of some very successful and well-known traders to see their daily routine in detail. He's managed to land quite the A-list of interviews with some special people indeed. A major 'get' for him was certainly Dan Mirkin, our own Senior Managing Partner.

Want to read the rest of the interview that asks such questions as, How do you recommend established discretionary traders get their feet wet in automated trading? How many strategies do you have and how many do you deploy on a given trading day? How many automated strategies are you comfortable trading simultaneously??

Be sure to visit StockTickr and sign up for his interview RSS feed or make the site a regular visit in your internet travels.

Tuesday, March 25, 2008

Strategy Session: You Rob a Bank Cuz That's Where the Money Is

The same principle applies to the market: Trade where the odds are.

Last week I discussed a unique approach to determine where trades with the highest winning percentage exists.

Read here to fully understand this approach which relies on the power of The OddsMaker to determine whether going Long or going Short in the market makes the most sense.

My purpose here is to dig deeper into the strategy I started in the previous post and show you in simple steps how I got to a very good strategy with high odds of winning in the market today.

A Strategy's Ingredients

Let's recall what basic strategy I described last week:

  • a Min Price of $10
  • a Max Spread of 25 pennies
  • a Max Distance from Inside the Market of 0.1% (helps avoid the presence of trading on bad prints when backtesting)
  • a Min Daily Volume of 250,00 shares/day
  • a Min Current Volume of 3 (meaning stocks should be trading 3x average volume at the moment of the trigger event/alert)

Recall that this strategy, as is, was not practical in real life - it traded over 1500x in 3 weeks!

So we add additional filters based on a theme we want to test in the market. The purpose of the theme is to further discriminate against the stock opportunities and arrive at a clear - biased result that contains a high winning percentage.

Stating Your Theme and Adding to the Mix - The Strategy

My theme is simply: Does fading uptrending stocks after a short-term price and volume 'pop' produce winning trades?

To test this theme I added the following additional alerts to my strategy:

  • a Min Volume 5 Minutes filter of 200% (i.e., 200% higher than usual)
  • a Min Up 5 Minutes filter of $1 (i.e., up at least $1 in the last 5 minutes)
  • a Min Up from the Open filter of 5% (i.e., up from the Open by at least 5%)

Ok. So then I run The OddsMaker with the following position management rules (the same ones I used last week); namely,

  • Go Short with each alert opportunity
  • Exit the position if it goes against me $0.40
  • Trade anytime during the market session
  • Hold each trade for no more than 20 minutes

The alert I've chosen in my strategy is a simple Heartbeat alert that simply tells me the moment all of the filter conditions are met - nothing else required.

The OddsMaker Results

Here's a picture of what I saw when I ran the results:





(to fully understand what all the numbers mean, refer to The OddsMaker Manual)



From these results I observe first that the overall number of trades is manageable at 36. Next I see that 20 of those trades achieved success (the average winner being $1.0395/share!). What's nice is that there's a healthy ratio of my average winning trades over my average losing trades - an almost 2.5x difference! This explains why my net winnings over the 3 week timeframce are so good at $15.00.

The daily log of my P&L tells me which days were profitable and how many trades I made each day of the test. The only dark cloud I see is the last day of the backtest results. Does this red day indicate a turning point in the usefulness of this strategy? Could it continue or go back to green like it did on March 18? If I decide to trade the strategy then my position rules still apply and I know clearly what my stop loss (i.e., average loser value) will be!

That's an example of how to test a theme with such a revealing tool like The OddsMaker. Test your themes in the market, know their odds of winning based on your position management rules, and get better answers and better trades out of your precious capital and time!

I look forward to reading your about your experiences in the comments!

Related

Interested in automating a trading strategy like this one or one that you design with even better odds? Consider opening an account with optionsXpress and fully automating these strategies with the specialized application for OXPS by Trade-Ideas called the Robot. Details on the tool and OXPS' special pricing can be found here: http://www.optionsxpress.com/trade-ideas/index.aspx

Footnotes

  • Link to other Strategy Sessions
  • Remember that these set-ups are sketches meant to give you an idea how to model your own trading plan. Use this 'as is' or modify it to your own liking as many others do. Know, however, that Trade-Ideas.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, alerts and all other features are for research purposes only and should not be construed as investment advice
  • See this video on our Collaborate function to learn how to open these strategies inside Trade-Ideas PRO

Thursday, March 20, 2008

The Key to Finding a Winning Strategy in Any Market

Are you tired of being spoon-feed trades without knowing how to come up with the ideas on your own? Many traders fall into the trap of being fed the fish but never really knowing how to go about fishing on their own. This post and next week's aim to fix that.

The Words that Would Not Go Away

I've had a mental breakthrough recently about something that Dr. Brett Steenbarger lodged into my mind during one of my Chicago visits at his office. How could he have known that this thought would percolate in my head for so long?

Well I finally am able to pour it out by applying his trading approach to the suite of tools we offer here at Trade-Ideas - using The OddsMaker.

Creating and Testing Themes in the Market

The market is always giving answers to traders. If you don't ask the right questions, it sounds like gibberish. It's just like the scientific method of problem solving. Create a hypothesis and test to see if it is correct - in a trader's case it's about creating an opinion about certain patterns and testing if the market is rewarding such patterns. For example I might have the opinion that jittery market conditions brought on by the fear of investment bank failures means that normally positive, momentum like moves will revert back to the mean. I therefore will look and see if fading 30-day highs with certain position management rules (e.g., hold time, stop loss amount, etc.) is being rewarded by the market. But I'm getting ahead of myself.

The First Step

The first step in testing such a theme means starting with broad questions and eventually adding layers to get to specific biases that (when tested and backtested) reveal advantages and odds for profitable trading - like the example above. Using a tool like The OddsMaker makes this exercise much easier in time and capital saved. I start with a description of a trading universe extremely general but with high volume and:

  • a Min Price of $10
  • a Max Spread of 25 pennies
  • a Max Distance from Inside the Market of 0.1% (helps avoid the presence of trading on bad prints when backtesting)
  • a Min Daily Volume of 250,00 shares/day
  • a Min Current Volume of 3 (meaning stocks should be trading 3x average volume at the moment of the trigger event/alert)

This strategy represents a large universe of stocks. Using The OddsMaker lets me trade all of them using data from the last 3 weeks, so I decide to see which side (Long or Short) is more profitable to trade under the following position management rules:

  • Exit the position if it goes against me $0.40
  • Trade anytime during the market session
  • Hold each trade for no more than 20 minutes

Here's what The OddsMaker reported for each side (to fully understand what all the numbers mean, refer to The OddsMaker Manual):

  • SHORT: 792 / 1500 = 52.8% down $0.01 in 20 minutes; Average winner = $0.3099, Average loser = $-0.2391, Net winnings = $94.34, Best = $4.79, Worst = $-0.40; Casino Factor = 100%
  • LONG: 579 / 1500 = 38.6% up $0.01 in 20 minutes; Average winner = $0.295, Average loser = $-0.2492, Net winnings = $-42.44, Best = $3.98, Worst = $-0.40; Casino Factor = 0.01%

From these results I observe that the net winnings over the last 3 weeks are greater on the SHORT side. The market is telling us the path of least resistance (i.e., to profits) rests with the shorts. But this strategy still needs work. We cannot expect to trade 1500 times as the denominator above records.

The trick is to add more filters that further define the profitable universe in which we want to trade.

Next week I'll finish where this strategy is going. Today's point is simple - let the technology work for you in pointing out where the greater odds exist. If a trader chooses to go long, s/he knows their contrarian stance and can adjust risk parameters like stop losses, position size, and other variables accordingly.

Wednesday, March 19, 2008

Answers from the Many Questions DTI Traders Asked

Yesterday I participated in a great day of trader education organized by Tom Busby and the folks at DTI and sponsored by optionsXpress.

My presentation discussed the best way to develop a theme about the market and test whether and how much profits can be made using our backtesting tool, The OddsMaker. It was a great discussion and it gave me personal satisfaction that I am finally able to put into practice advice that Dr. Brett Steenbarger gave me many months ago. Tomorrow I will start a small series on how I'm using The OddsMaker in this way.

Below are some of the questions (and my answers) the group asked during the show:

Q: [11:35] Zoo the new guy: If I already just opened an OXPS (optionsXpress) account may I use the discount?
A: You are referring to our special pricing subsidized by OXPS for new customers. If you recently opened your account there, you can also take advantage of the available discounts: http://www.optionsxpress.com/trade-ideas/index.aspx

Q: [11:35] tony ho: Does this system include training?
A: Everyone who subscribes to Trade-Ideas receives a one time training session with our Director of Education, Jamie Hodge, for one hour. To make the best of this hour we always suggest everyone first read the blog and watch our video product demonstrations here (there's even videos specific to the optionsXpress platform): http://www.trade-ideas.com/VideoHelp/Menu.html

Q: [11:36] Morgan @DTI: this can auto-trade a strategy in an OXPS account... correct?
A: Yes, thanks to our partnership you can auto-trade the strategies you develop in Trade-Ideas PRO and backtest with The OddsMaker.

Q: [11:37] Ian N: How fine-grained is your historical data - to the minute?
A: Our data includes all of the tick data for all the stocks on all of the exchanges. We maintain historical databases of this information and add to it every session. We then compare the historical averages for every stock's behavior to the real-time activity of the stock during the market session. http://www.trade-ideas.com/DOSA/

Q: [11:33] John Du: Does your scanner automatically make trades, or just advise about them?
A: The Robot is our application that automates the strategy that you create with Trade-Ideas PRO and backtest with The OddsMaker. Trade-Ideas PRO and The OddsMaker advise a trader on which strategies are performing well in the current market.

Q: [11:33] Mark Jo: where do you get the data feed for your program?
A: We receive all of our exchange data from an institutional vendor - a relationship we've maintained for the last 4 years.

Q: [11:24] John Du: Can you use the OddsMaker to optimize the scanner?
A: Yes you can! That will be the topic of tomorrow's post

Q: [11:20] Steve Th: will it filter the futures market as well as cash?
A: At this time we cover equities and equity derivatives like ETFs, indices, etc. We do not cover the futures however at this time - nor do we cover Forex.

Q: [12:08] burt st: please dont take me as rude but --- why do you mess with teaching this and why are you not rich enough from trading to mess we yahos like me ? thanks.
A: Trade-Ideas tools still promote independent thinking - it does not replace it. A trader still has to uncover what's working in the market by modeling the different alerts, filters, and position management rules. The value comes in the ability to model any pattern and ask better questions of the tools - like: What happens if I hold this stock for an additional 10 minutes? What if I only trade the 1st 30 minutes of the market? Etc.

Thanks Again to DTI

Every day the Fed makes its regularly scheduled announcement on interest rates, Tom holds a free day of education on how to best trade futures, stocks, options, almost anything. His live trading sessions are the stuff of legend - he knows what he's doing. I haven't met someone who has seen him fall flat on his face. That's evidence of keeping losses miniscule more than any evidence of possessing a silver bullet or holy grail.

Monday, March 17, 2008

Improve Your Trading Plan with this One Visit

I am just back from a great conference in Phoenix sponsored by optionsXpress. I learned alot about Trade-Ideas while interacting with the audience and our Director of Education, Jamie Hodge.

We added so many new filters and alerts to Trade-Ideas recently, I fell behind a bit on everything we can do. I also learned new tricks on helping others get their ideas from their head and into Trade-Ideas much more easily. Even the other sponsors at the conference got excited about the things going on at Trade-Ideas!

So the good folks at DTI and Tom Busby (who were also in attendance at the weekend conference) are inviting Trade-Ideas to present during their very popular Fed Day Live TradeRoom sessions tomorrow, March 18 beginning at 8:15 AM CST.

I will be speaking at 11:00AM CST.

Topic: How to Find a Profitable Strategy in Under 10 Minutes

If you are new to Trade-Ideas or an old hand in need of a fresh pointer or two (like I was), please register for this free event by clicking on this link:

Reserve Your Place - Register

I hope to see you there!

Related Articles:

Does Your Trading Plan Benefit from Continuing Education?

Friday, March 14, 2008

Trade-Ideas in Your Town: Off to Phoenix

As I mentioned a few weeks ago, the Trade-Ideas 'krewe' will be headed to Phoenix for an Expo sponsored entirely by optionsXpress (details). I am an advocate of these types of get togethers between companies and customers because of several benefits each party receives.

How Attendees Benefit
  1. Attendees get a chance for a deeper dive into a broker's offering, its pricing, its technology, and its partners (like Trade-Ideas! Yo!) - you wouldn't get near the same amount of information in a crowded exhibit hall with dozens of other vendors shouting.
  2. More time is allowed for question and answer both during the session and afterwards
  3. The sponsor is also more attentive of customer suggestions and open to resolving any customer issues - that's what can happen when there are no distractions from the other vendors.

How the Broker Benefits

  1. The sponsoring broker gets to control the message - no competing with dozens of other vendors shouting hysterically for attention.
  2. Brokers report getting better feedback with details covering the good and the bad aspects of their offering

If you are in the area, leave a comment - or stop on by. The drinks, as usual, will be on me. I'll have a recap of how this event and last month's San Diego event went when I get back.

Thursday, March 13, 2008

Strategy Session: Best Ways to Find the Tipping Points

New alerts and filters added recently expand the arsenal of ways in which any trading universe can be modeled in Trade-Ideas. We even created some sample strategies to show you how they are used.

Here's what we did:
  • Added bottoming tail and topping tail alerts.
  • Added new filters to find stocks based on how much the price has moved in the last 5, 10, 15, or 30 minutes.
  • Added new filters to find stocks based on the amount of volume they have traded in the last 5, 10, 15, or 30 minutes.

The tail alerts attempt to find tipping points where movement in one direction is exhausted. Not a bad thing to be looking for in this market. Here's a good definition of a bottoming/topping tail (for our own Glossary): http://www.trade-ideas.com/Glossary/Topping_Tail.html.

The price and volume filters let a trader define, "How much movement or volume?", over specific, short-term time frames.

Combine the new filters with the new alerts and you could model scenarios such as:

  • Show me stocks that are making a new 15 minute high after running up at least 70 cents or more with a surge in volume (say 200%) during the last 10 minutes: This strategy finds great opportunities for shorting exhausted stocks during a recent run up:

Strategy Session: Fading 15 minute highs 70 cents move up

  • The strategy below demonstrates the power of Trade-Ideas auto-invert feature known as the “Flip” button. The strategy with a single click shows me stocks that are making new 15 minute lows after running down at least 70 cents or more with a surge in volume (say 200%) during the last 10 minutes: This strategy finds great opportunities for buying oversold stocks during a recent fall:

Strategy Session: Fading 15 minute lows 70 cents move down

Footnotes

  • Link to other Strategy Sessions
  • Remember that these set-ups are sketches meant to give you an idea how to model your own trading plan. Use this 'as is' or modify it to your own liking as many others do. Know, however, that Trade-Ideas.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, alerts and all other features are for research purposes only and should not be construed as investment advice
  • See this video on our Collaborate function to learn how to open these strategies inside Trade-Ideas PRO