Tuesday, April 28, 2009

Here's How to Trade Long on % Down Stocks: Traders' Tips

He was utterly fearless but never reckless.  He could, and did, turn on a twinkling if he found he was wrong.” -- Jessie Livermore, American author, investor
In this month’s issue of Technical Analysis of Stocks & Commodities in the Traders’ Tips section, Sylvain Vervoort offers an analysis of trailing stop methods (specifically the Fixed-Percentage Trailing Stop) on a portfolio of 25 stocks for a backtest period ranging from 01/16/2003 until 11/10/2008.  Subscribers to Trade-Ideas PRO who use our event-based backtesting tool, The OddsMaker, already understand the different premise these tools use to find high probability winning trades.  

To recap briefly The OddsMaker doesn't just look at 25 stocks, à priori, to generate backtest results, it considers any stock that matched a desired pattern in the market, finds that stock, and applies the backtest's rule set before summing up the results into a detailed set of totals: win rate, average winner, average loser, net winnings, and confidence factor.
See Figure 3.  

As such we provide an alternative stop method for your consideration.  

The Wiggle

At Trade Ideas we use a custom stop that takes into the account a stock’s 15 minute average volatility multiplied by the relative volume (an indexed ratio of what the current volume is over its historical volume of the stock at the time a trade is made).  This measure is called the wiggle.

The wiggle can be further explained with an example of the stock NFLX.  NFLX’s 15 minute average volatility is $0.3306 / 15 minutes (a running 30-day average of 15-minute values).  If the relative volume of NFLX at the time of an alert is 1.5 (i.e., trading at 50% above what it normally trades at this time of the day of the alert based on accumulated volume of the day)
, then the wiggle is $0.50 (i.e., $0.3306 * 1.5).  Look up the volatility values of any stock at the 
Trade-Ideas.com Stock Research section.  Imagine using a $0.50 stop and attempting to stay in a GS short or long, chances are, you are right on the trade but get stopped out only to watch the stock do exactly what you thought it would - painful. The wiggle creates a customized stop out that takes into account the certain characteristics of each stock.

The wiggle is used in the following strategy, “Long on % Down Stocks” and is based on the Trade-Ideas inventory of alerts and filters found in our flagship product, Trade-Ideas PRO.  The trading rules are modeled and backtested in its add-on tool, The OddsMaker.

Description:  “Long on % Down Stocks” 

Provided by:
Trade Ideas (copyright © Trade Ideas LLC 2009). All rights reserved. For educational purposes only.  Remember these are sketches meant to give an idea how to model a trading plan. Trade-Ideas.com and all individuals affiliated with this site assume no responsibilities for trading and investment results.

Type or copy/paste this shortened string directly into a browser then copy/paste the full length link into Trade-Ideas PRO using the “Collaborate” feature (right-click in any strategy window): 

http://bit.ly/1WrpZ (case sensitive)

You can also build the strategy from Figure 1 below.

Figure 1 below shows the configuration of this strategy:

Where 1 alert and 9 filters are used with the following settings:

  • % down for the day, 3 %
  • Min Price Filter = 5 ($)
  • Max Price Filter = 40 ($)
  • Min Spread = 10 (pennies)
  • Max Spread = 150 (pennies)
  • Max Distance from Inside Market Filter = 0.01 (%)
  • Min Daily Volume Filter = 50,000 (shares/day)
  • Max Daily Volume Filter = 2,000,000 (shares/day)
  • Min Today's Range = 55 %
  • Min Up from Close = - 10 %
The definitions of these indicators appear here: http://www.trade-ideas.com/Help.html

That’s the strategy, but what about the trading rules?  How should the opportunities that the strategy finds be traded?  Here is what The OddsMaker tested for the past 4 weeks ending 3/16/2009 given the following trade rules:

  • On each alert, buy long the symbol (price moves up to be a successful trade)
  • Schedule an exit for the stocks 30 minutes after entry
  • Start trading from the open and stop trading 5 minutes later (or 385 minutes before market close)
  • Set a stop at $0.75 + the value of each stock’s wiggle

The OddsMaker summary provides the evidence of how well this strategy and our trading rules did.  The settings are shown here in Figure 2.


The results (last backtested for the 4-week period ending 03/16/2009) are as follows:


The summary reads as follows:  

This strategy generated 291 trades of which 229 were profitable for a win rate of 78.69%.  The average winning trade generated $0.42 in profit and the average loser lost $0.44.  The net winnings of using this strategy for 20 trading days generated $72.78 points.  If you normally trade in 100 share lots, this strategy would have generated $7278.  The z-score or confidence factor that the next set of results will fall within this strategy’s average winner and loser is 100%.

Understand these backtest results from The OddsMaker in more detail by reading the User’s Manual:  http://www.trade-ideas.com/OddsMaker/Help.html

Related Articles

Previous Trader's Tips articles

Friday, April 24, 2009

Trade-Ideas: Why Won't You Make Me Rich?

We receive on a regular basis from individuals the comments, demands, requests, supplications, and sometimes the pleas for the keys to making them great wealth.  A recent message seemed breathless in its desire,

"Basically What i need is a collaboration...and a system trading platform based on historical data......What time to trade....how many....what amount per trade...and what types of symbols...or trade strategy......2000 per entry....must still be a one day wait......then next morning....I can ....trade again...my whole purpose is to get me to 25,000....so I can day trade as .....i want to get there as fast as possible...from 7,000...any suggestions....for a collaboration...or a window specic filter....or limt ...time or otherwise....when to get in and out??///...."


The answer is no.  Not going to happen.

But rather than be dismissive, I explain why here:

"What you ask for, I cannot give you."

Tuesday, April 21, 2009

Be in 2 Places at Once to Nail Your Next Gap Trade

The market is expected to open lower this morning for several reasons (all from my Twitter feed this AM):
  1. SmallCapInvestOil: prices languished near $46 a barrel Tuesday after renewed doubts about the health of U.S. banks sent crude and stock markets tumbling.

  2. alansmurray: Caterpillar and DuPont earnings raise fresh concerns about economic weakness. http://bit.ly/IjQ7S

  3. SmallCapInvest: Stocks are expected to open lower for a second day Tuesday following a string of disappointing earnings reports.
Given this news I will set up 2 strategy windows.  The filters for each strategy would profile the kinds of stocks I like to trade based on price range, volume profile (e.g., ADV, higher than usual volume, etc.), and volatility (e.g., ATR, etc.).  

The 2 strategies differ in the following ways but be similar in their approach: each will alert to specific stock activity/trade in the same direction as the overall market.  I achieve this by using the market direction filters: http://www.trade-ideas.com/Help.html#WSF_MinQqqq5

One strategy window will use the "Recent Gap Down Reversal" alerts: http://www.trade-ideas.com/Help.html#GDR to find the stocks that gap down and then fill the gap and continue to rise.  The overall market filters for this strategy will be positive - meaning that the Qs and/or Dow and/or S&P must be up at the time of the stock alert. 

Another strategy window will use the "False Gap Down Retracement" alerts: http://www.trade-ideas.com/Help.html#FGDR to find stocks that gap down, try to rise and fill the gap but then fail and wind up trending down below the original gap amount - like a reverse cup and handle.  The overall market filters for this strategy will be negative - meaning that the Qs and/or Dow and/or S&P must be down at the time of the stock alert. 

I'll leave you to design the strategies given this description and you'll be ready for today's open or another day that points to the same opening pattern.

I'll post again with the results of these strategies later.

Good luck.

Monday, April 06, 2009

How to Evaluate Backtesting Programs

I came across this request for information on my Twitter tube:
"Evaluating backtesting programs: MetaStock, Traders Studio, Ami Broker, Strata Searc, Ninja Trader, Trade Ideas. Any thoughts?", @milktrader

Each of these applications and even others not on this list, like WealthLab Pro or DIY Excel, will have advantages over the other.  Some major, some insignificant. It all depends on the type of trader you are.  If I started praising how good The OddsMaker was, you'd assume I was just trying to sell you something.  Allow me to be more indirect and subtle.  I'll just list the items you ought to consider when you choosing a backtesting tool.  I'll let you decide if The OddsMaker is right for you.

Elements of Comparison
  1. Which asset classes can be backtested? Equities? Forex? Options? Etc.
  2. On what basis of time is historical price information used in the backtest? To the nearest 5 minute candle? 1 minute candle? Time & Sales tick data?
  3. Must the trader know the universe of stocks to be backtested a priori? Or can the backtest be applied to a pattern or event (vs. a predetemined stock or basket of stocks)?
  4. What windows of time during the market can be backtested? Morning session? Lunch? Afternoon session? Trader-defined periods/Anytime?
  5. What options are there for backtesting the exit condition? Price (i.e., stop loss, profit target)? An alert or event?  Time in trade (i.e., a hold for 5min or 5days)?
  6. How well does the output inform your next possible trade? (i.e., does it provide a win percentage, net gain amount, average winning trade, average losing trade, confidence score, etc.)?
Ok.  Here is how The OddsMaker would score:
  1. Equities, Indices, ETFs. No Forex, no option contracts.
  2. Time & Sales tick data
  3. No pre-knowledge of specific stocks needed. The OddsMaker is an event-based backtesting tool.
  4. Trader-defined periods/Anytime
  5. All items mentioned
  6. All items mentioned plus a daily detail report
Go and judge the other apps based on these elements or others you can think of.  Then give The OddsMaker and each other application a score (say 1 to 10) on how well they answered to these elements. Give a 10 to the application that scored the best.

What kind of trader you are depends on how much significance or weight you put on certain decision criteria.  If I had 6 criteria or elements of comparison among backtesting applications and gave you a dollar to spread among them, in what order would you list them with the first item getting the largest share of the dollar and the last item getting the least? Once you do that take each application and score them along each of the elements of comparison.

Now you have a way of scoring each application.

Take the weight of each criteria and multiply it by the score you give that application for each criteria.  Add up your scores and the application with the highest number is your choice.

Friday, April 03, 2009

Disinfect Your Connectivity Virus with This Fix

This morning we received a couple of calls and IMs about a lack of connectivity to our site and through Trade-Ideas PRO.  This was the first time something like this has happened in over 3 years, so it got our attention.

It turns out it has nothing to do with Trade-Ideas, thankfully.

A Plot Right Out of a James Bond Film

There are 2 explanations for some of the connection problems:

The first comes from Norton, the Antivirus people:
The C.o.n.f.i.c.k.e.r worm, sometimes called Do.wn.an.dup or Ki.do, managed to infect a large number of computers. Specifics are hard to come by, but some researchers estimate that millions of computers have been infected with this threat since January. Current users of Symantec’s Norton security products are protected. Users who lack protection are invited to download a trial version of Norton AntiVirus 2009, Norton Internet Security 2009 or Norton 360 Version 3.0. If you are unable to reach our web site, you may be infected. In that case you will need to get to a computer that is not infected, download our specialized Conficker removal tool and run it on the infected machine before installing new antivirus software. 
Nice. (If I were the paranoid and cynical type (or if we were in a James Bond movie) this would be a doozy of a marketing tactic:  Create the disease, make a mint on the cure.) Crazy Russian kids?

A second explanation comes from some research one of the heads at Trade-Ideas did in getting answers from Registry.com folks.  He thinks that there might have been an error on their part in 1 or more DNS servers that resolves IP addresses and names while managing internet traffic. Perhaps for the same reasons as above.  This is spectulation for now.

Our Chief Technical Officer explained to me thusly:
"Our store is open, but there's a bad wreck on the freeway, so a lot of people can't get to us.  Our servers are fine, but some people experience difficulty reaching Trade-Ideas.  If someone has a problem, please ask them to install the file below."
Do You Have A Problem Connecting to Trade-Ideas?

Here is the file to download and install: 

Leave a comment if you have any questions or want to share any experiences.