Thursday, 29 September 2011

Making Adjustments

The increased volatility in most markets has been great. While the character of each market has stayed the same, the change in volatility has needed subtle changes in stops and targets.

Intraday rumours seem to be having a bigger effect than usual. I guess that with all the things wrong and the changes that need to take place as this transition continues, people try and grab at anything to try and anticipate what's to come or to make sense out of what's happening.

My job as an independent trader is to keep reading what "they" are doing at any one moment and trade the order flow in their footsteps. No second guessing what they WILL do, just reacting to the NOW, the present tense.

The process of back testing should be a structured one. Looking for a drop dead stop over a large sample of data is an important part of it. I also look for the right drop dead stop for small sections of data, divided into different volatilities. I use the same basic methodology. What changes is when I exit and that depends a lot on the volatility. It also depends on whether or when I double down.

Using a simple algo does this job well. You don't need to be a programmer to do this with the tools we have available today. Most charting packages have some form of back testing using some pseudo language. Putting some form of structure around trading, even discretionary trading, is critical to getting to CP. I see it every day with students. One of the exercises I do with some students who need it is to ask them to score their compliance with their TP on a daily basis. 

We all go off piste at times and it usually costs us. Keeping to a back tested and proven TP is the road to CP so being reminded of this every day by marking every trade for compliance, is a good way of keeping discipline and putting focus on the TP. Of course it's all a lot easier if you use the algo to enter the trade.


  1. Tom,

    can you tell something more about how you take the data and you divide into different volatilities.

    I cannot visualize in my mind the range bar chart: how can you recognize that volatility is increased or not.


  2. D, you look at the number of bars, say, per hour or say, per day. The more bars the more volatility.