Tuesday, June 30, 2009

Trade-Ideas in Your Town: Chicago

Headed to Chicago for the rest of the week and weekend to meet several hedge funds and pal around with a long time group of subscribers/traders.

We're actually meeting at Rivers after the close on Wednesday to hoist a few as part of a impromptu Tweet Up. Hopefully I've got enough T-shirts. http://bit.ly/dhFhO

I'll be looking forward to my meeting with the folks at RealTick and stealing soap from the executive bathroom - a Barclays upgrade I hear.

Chicago is such a great place - and it's at its peak in the summertime. We've lined up a great stay and a wonderful hotel too. Should be fun.

If you are in the area, dear reader, leave a comment and let's meet up. We take these offers seriously.

Saturday, June 27, 2009

Trailing Resistance & Support Stops: TAS&C July Traders' Tips

Traders’ Tips

Eventually, luck runs out; skill does not.” Scalper68 (AlexD)

In this month’s Traders’ Tips, Sylvain Vervoort offers a 3rd trailing stop method, called a trailing resistance & support stop, which evaluates price movements or ‘turning points’. This 3rd trailing stop method most closely resembles the Trade-Ideas concept of automating the creation of a custom trailing stop based on a stock’s natural 15 minute volatility. Therefore our strategy this month, retains all of the settings from last month and an updated set of backtested results. Only a few additional filters are applied to make sure the strategy trades with good volume. 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, confidence factor, See Figure 3.

Description: “Modified ATR Volatility Stop Part 2”

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/19DiKt (case sensitive)

You can also build the strategy from Figure 1 below.

Trade-Ideas approached the Average True Range stop loss using a modified ATR, called ‘Trailing stop, volatility down’, based on the average 15 minute volatility of a stock. The modified ATR is similar to ‘The Wiggle’ we discussed in last month’s article.

Entry signals were created that went short any time a stock between 5 dollars and 50 dollars moved up 75 cents or more in 1 minute or less.

Figure 1 below shows the configuration of this strategy:

Where 1 alert and 4 filters are used with the following settings:
Running Up Now (in 1 minute or less), $0.75
Min Price Filter = 5 ($)
Max Price Filter = 50 ($)
Max Distance from Inside Market Filter = 0.15 (%)
Min Daily Volume Filter = 300,000 (shares/day)
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? For the stop loss we used one of the more advanced options available in the OddsMaker. Instead of using a traditional stop loss we selected ‘Another Alert’ as the exit condition called ‘Trailing stop, volatility down’. This alert is triggered when a stock moves down an amount equal to the average 15 minute volatility multiplied by the number of 15 minute bars we decide – in this case 2. For example if the average 15 minute volatility is 10 cents, this alert would not trigger until a stock moves down at least 20 cents.

Here is what The OddsMaker tested for the past 3 weeks ending 5/08/2009 given the following trade rules:
On each alert, sell short the symbol (price moves down to be a successful trade)
Schedule an exit for the stocks 30 minutes after entry
Start trading from the open and stop trading 30 minutes later
Set a stop using the alert, ‘Trailing stop, volatility down’, with a setting of 2 bars

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 3-week period ending 05/08/2009) are as follows:

The summary reads as follows: This strategy generated 228 trades of which 137 were profitable for a win rate of 60%. The average winning trade generated $0.24 in profit and the average loser lost $0.14. The net winnings of using this strategy for 15 trading days generated $21.70 points. If you normally trade in 100 share lots, this strategy would have generated $2170. The z-score or confidence factor that the next set of results will fall within this strategy’s average winner and loser is 99%.

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

-- by Dan Mirkin & David Aferiat, Managing Partners, Trade Ideas LLC
www.trade-ideas.com, david@trade-ideas.com

Other Traders' Tips Articles from TAS&C

Wednesday, June 24, 2009

Show Your Colors, Take Some Credit

With the recent website redesign comes a roll of new banners that hopefully convey the value we bring to the trade decision process. If you agree and one of these banners resonates with you, feel free to place them on your blog or social media outlet. They come in several shapes and forms.

Anyone who agrees to replace their old Trade-Ideas banners (which we haven't discontinued) and/or picks one to use on their site, will receive 200 credits towards the use of The OddsMaker (i.e., 200 x times to hit the 'Backtest' button and see results). If you're not a Trade-Ideas PRO subscriber who can take advantage of this offer:
  1. you should be, but
  2. let me know and we'll send you a t-shirt instead.
Check out the list of what's available here and thank you in advance for your support!

Just one of the many in the stable:

If you would like information on becoming a more involved affiliate, please email me for the details at david@trade-ideas.com.

Tuesday, June 23, 2009

Data Traders Who Swing: Rejoice With Longer Term Filters

Trade Ideas Releases Start of New Filters Aimed at Longer Term Patterns & Trades

We added several new filters aimed at longer term data traders.

As of today you can now:
  • Filter stocks based on the size of a multi-day range (5, 10, 20 day range)
  • Filter the stock's position in that multi-day range (5, 10, 20 day range)
  • Filter the size of the stock's multi-day move (5, 10, 20 day range)

MinRange5DMaxRange5D5 Day Range

MinRange10DMaxRange10D10 Day Range
MinRange20DMaxRange20D20 Day Range

MinR5DMaxR5DPosition in 5 Day Range

MinR10DMaxR10DPosition in 10 Day Range
MinR20DMaxR20DPosition in 20 Day Range

MinU5DDMaxU5DDUp in 5 Days

MinU10DDMaxU10DDUp in 10 Days
MinU20DDMaxU20DDUp in 20 Days

Strategy Example

Here's an example strategy that puts these filters to work. This strategy shorts stocks up a certain amount over the last 5 days.
Short 5 Day Range
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. This strategy's results not backtested.
Thanks to everyone who helped us beta test these filters before their release. Please provide any feedback in the comments. Good luck!

Friday, June 12, 2009

Mailbag: Bot Trading Manages Risk at the Open

The Open and its frenzied activity can reward as well as punish traders. The difference between these two groups comes down to experience certainly, but also the insight and quick decisions that new tools (especially automation) can bring to bear.

From the Mailbag (Support Forum) came a question about such topics that I want to answer here. First the question then our response:
Mean Reversion and poor fills:

I'm using a mean reversion strategy that looks for stocks with spreads >9c. I have been automatically placing limit orders at bid+1c at the open, and have been getting killed by adverse selection.

If the stock moves up, I only get 1/10 of my order, and if the stock moves down, I get the entire order. I did learn that I'm making my time the order is in force too long (2 min) - losers move down in that time span, and will automatically fill my limit order.

So if I tighten the TIF (Time in Force) to 10 seconds, I probably won't get filled on as many losers.

But there's still a big problem here:
  • Set limit at bid - only fills on losers
  • Set limit at ask, or market order - Lose 9-19c per trade (1-4% on stocks from 6-9 dollars!)
So if there's a stock with a large spread, how do you trade it profitably?
Our Director of Trader Education, Jamie Hodge (jhodge@trade-ideas.com) responds:
For as long as I can remember, either myself, or other traders I know have engaged in mean reversion off of the open.

Whether it be manual, or robotic, one rule has always held true, the larger the spread, the larger the reward, the greater the risk. There aren’t many trading rules that have stood the test of time in light of recent market activity, but this one has.

As a manual scalper of yester year, I would run from large spread stocks as well as thinly traded issues. Today, with the assistance of robotic execution, I welcome the big and the thin.

Here is a snapshot of one of my strategies that I launch on the open every morning:

For this strategy the minimum spread is set to .40 and the maximum spread is $2.

[Editor's Note: this strategy runs from the open until 388 minutes before the close; each position entered into lasts only for 15 minutes or a stop loss - whichever comes first; Understand these backtest results from The OddsMaker in more detail by reading the User’s Manual: http://www.trade-ideas.com/OddsMaker/Help.html]

Fill rates can average anywhere from 10 to 30% depending on opening conditions, mkt gap, etc.

So, looking at the daily summary, on May 11th, 12 signals were generated off of the open, so I more than likely was filled on 7 or 8 of the 35 possible trades.

From a statistical viewpoint, it doesn’t matter which orders get filled, they all have the same probability of working out.

The same strategy may also be flipped and run for shorts with favorable back test as well. Typically I’m bidding or offering a nickel inside, that’s where you want to get hit on a large spread stock.
I hope this helps.

Wednesday, June 10, 2009

Automated Trade Ideas in Your Hand: You Set Our Course

Trade-Ideas on your smartphone: iPhone or Palm Pre or Blackberry

Who wants to trade on such a confined space? On the go . . . making so many decisions with so many distractions?

Trading actively and manually doesn't seem to make much sense. But supervising fully automated trades with automated risk management controls (what we call 'gray-box' trading) does make sense.

We are looking into the possibility of creating a Trade Ideas application for the iPhone and or the Palm Pre. We hesitated at first as we did not see exactly how it would work - and in many ways, it doesn't. But then we thought about automation. Many traders who use our Automated Trading Robot like to track what is going on without sitting at the computer.

No - not the golf course (not necessarily) (and BTW what a cliche!)

Let's start with just the bathrooom, or at the lunch table, or the skilled barista who knows you by name.

Supervising Bot Trading on the smartphone would include the following capabilities:
  • Alerts when P/L reaches a critical point in either direction.
  • 1-click ability to adjust positions (e.g., 1/2 a position, 2x a position) or slightly modify existing rules from the phone.
  • Halt trading, automation, and/or completely exit position(s).
So now we're looking at the various development kits. Any suggestions or comments from our customers and blog readers are welcome. Is there something (i.e., feature, capability, platform, etc.) that we overlooked?

Tuesday, June 09, 2009

This Strategy's Winners Are 5x Greater Than Its Losers - Explanation:

I gave a solid presentation to traders online in a DTI chat room this afternoon.

DTI offers educational services across all instruments but specialize in equities, commodities, and futures. They are lead by the talented Tom Busby and Jeanette Sims.

The format I used involved soliciting requests for favorite chart patterns ahead of my talk so that I could take such examples and model them during my presentation - very off the cuff and impromptu strategy configuration. Most of the time this usually generates sub-par strategies as measured by our backtesting tool, The OddsMaker - not today. Thanks to the group we stumbled onto unusually profitable strategies that I share with you now.

Here was the chart pattern request:
"buying above price consolidation/selling below -
more powerful off daily time frames"
It produced this strategy that caught $DIN in the mid-morning (a beautiful chart):

1 Alert: Running up (intermediate); Filter=2 (Ratio)
11 Filters: Min Price=2 (Dollars) Max Price=200 (Dollars) Max Spread=12 (Pennies) Max Distance from Inside Market=0.1 (%) Min Daily Volume=300,000 (Shares / Day) Min Current Volume=1 (Ratio) Min Average True Range=1 ($) Min Up from the Open=0.05 ($) Min Up from 20 Day SMA=1 (Bars) Min Consolidation=3 (Days) Min Position in Consolidation=100.5 (%)

and these backtest results from The OddsMaker:

The trade plan modeled for this strategy consisted of trading from the open until 3 hours before the close and holding each symbol generated from the strategy until the open 2 days later. A stop loss of $0.30 was consistently used.

The results?

The average winner was 5x the size of the average winner (even though the win rate was 1 out of every 4 alerts). That's still a good strategy: when I lose, I lose only $0.30, but when I win, I win $1.50. Hand it over.

Note that the daily summary of results which show the date, the day's P&L total, and the number of trades that day, reveals how the market rewards this strategy more recently than during the first days of the strategy. Viewed as a histogram I might consider being more aggressive with this strategy i.e., with profit targets and number of trades I take from the strategy.

I'll be keeping an eye on this strategy and may tweet some example alerts. Stay tuned and follow me @TradeIdeas.

Tuesday, June 02, 2009

VWAP Mashup of the Daily Trading Coach and Trade-Ideas

A Strategy-Session post.

The Daily Trading Coach

Dr. Brett Steenbarger is a trader's coach.  As essential as his experience getting the best performance out of traders is the way in which he conveys his wisdom in plain language - judge for yourself in his latest (his third) book on improving trader performance and decision making, The Daily Trading Coach: 101 Lessons for Becoming Your Own Trading Psychologist.

His lessons, culled from direct interaction with professional traders, continuously produces a fountain of important methods for controlling emotions, dealing with mental obstacles, as well as (like today) generating great trading ideas.

The Mashup

So here's a mashup of an article about trading ranges and VWAP appearing on his blog today with its corresponding Trade-Ideas strategy window.
Dr. Steenbarger's article: 

Trade-Ideas Strategy:

Below is a summary of the alerts and filters used.  Click on any of them to understand what the specific settings and definitions are.  
 Positive VWAP Divergence; Filter=3 (Minimum % up) Min Price=10 (Dollars) Max Spread=15 (Pennies) Max Distance from Inside Market=0.1 (%) Min Daily Volume=750,000 (Shares / Day) Min Current Volume=2 (Ratio) Min Options Volume=1,000 (Contracts) Min Position in Range=25 (%) Max Position in Range=95 (%) Min Consolidation=1 (Days)

This strategy is a short strategy: all opportunities are found when price decreases.  The trade plan that produced excellent results was a hold time of 15 minutes or a stop loss of $0.25 + each stock's specific volatility measure (what we call the wiggle - Google results here) - whichever comes first. Additionally the entire trading day is used to capture this pattern (i.e., no specific time of the day was specified to make trades). 

Here is the backtest result for the last 15 days for this pattern generated by The OddsMaker within Trade-Ideas PRO:

The summary reads as follows:  

This strategy generated 52 trades of which 28 were profitable for a win rate of 53.85%.  The average winning trade generated $0.41 in profit and the average loser lost $0.09.  The net winnings of using this strategy for 15 trading days generated $10.42 points.  If you normally trade in 100 share lots, this strategy would have generated $1042.  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 OddsMaker articles here

Previous Strategy-Session articles here