ElectronicLocal

Making $ with the ES and The Best of All Worlds

2012-01-30T15:21:00.003Z

This month will be the completion of a big project for me. I've been working on rationalizing my trading business into what makes the most money and the utilization of my capital, all with the least amount of screen time.

I've been tracking my P and L and use of capital and have come to the conclusion that I should do the following:

Day trade as a discretionary trader for a few hours a day or as much as I enjoy it. This will not only make the most money per $ invested but will keep my head in the game. If I would only trade for a few hours a day as a discretionary trader, there is a limit on my size - both for my own psychological deficiencies as well as the problems of trading size with my style in the less liquid markets such as the DAX. This will use a very small percentage of my capital as day trade margins are very small. I expect that this will contribute about 10% of my monthly earnings.

Autotrading a portfolio of different markets and different algos for the same markets. I will get diversification from both markets and the differences between algos trading the same market in different broker's accounts). My investment will be both in margin and drawdown and I will allocated about 25% of my capital to this and expect about 60% of my monthly earnings to be provided by FloBot activity.

Option trading will utilise the balance of my investment capital doing the longer term strategies I have spoken about. This will bring in about 30% of my monthly earnings.

The nett affect of this will be a lot more time to do other things I want to do. It also provides a great deal of more passive (less active) income.

I'm talking about this because I think that it is important to be aware of the many ways of profiting in our industry. Perhaps you start out as a discretionary trader, perhaps as an auto trader. But there are limitations of either capital or time and there may be other ways you can make the money you want to other than what you first start to do. Most of the guys on the FloBot Workshop were discretionary traders who either wanted to add to their incomes by diversifying into auto or were wanting to switch to auto to earn more than they could as a discretionary trader.

Traders have been complaining bitterly about the ES. While the ES has much reduced volume and volatility, there is still plenty of money to be made in it. Although I like other markets better, the depth of the ES provides a lot of benefits for trading size. But adjustments need to be made. We are in Transitional markets and I've dropped the range bars to 3 points for today's trading. The results speak for themselves. Same methodology, I just adjusted my glasses.

Tough Trading?

2012-01-27T14:55:00.000Z

The Transition continues. Lots of changes in the market, still. There are a number of people telling me how tough it's been this year. Yes, some markets are suffering from the way that the transition is going but others are not. You can't be just a one trick pony in these days of electronic markets.

I wake up early and part of my morning routine is to scour the overnight news and the overnight markets as well as the Forex Factory's economic calendar. All this, to get a handle on what markets I should focus on for the day. I turn CNBC on while I'm doing this - I switch to music later - so I can see what subjects are interesting people.

From all this, I pick what I will focus on. I am a trader. Not just an ES trader or a DAX trader or a Crude trader. If it has volume and volatility I can trade it. Being market agnostic is important for longevity in this biz.

Longer Term Trading

2012-01-26T14:36:00.002Z

There's been a few questions during the last week or so about longer term trading. As I said before, I use options to trade a longer term time frame. I use both debit and credit strategies, depending upon what I want to do.

The pic below shows the $RUT (Russell 200 index - cash market index not tradeable) that I trade options against.

The market is right at the 127Fib point and can either break out or turn back down. My best guess is the down but that's what it is - a guess. I can do a lot of things here but I favour a Put Butterfly: BUY 1 840 Put, SELL 2 780 Puts and BUY 1 730 Put - All march. This is a fairly aggressive position and looks like this:

If I put the position on - it's morning here in France and the options market won't open for another 7 hours or so - it will be be a position that I have to manage and adjust. It's not a set and forget trade. I can make money by time decay as well as by a drop in volatility. The position also is biased for the downside and I can make money like that too. So I have 2 out of 3 possibilities of making money: The market doesn't move or the market moves down. I can take a decent move up before I adjust so the trade is a good probability trade for me once I decide to put it on.

To be continued......

Wednesday is Fed Day

2012-01-25T15:36:00.000Z

The market anticipates comments from the Fed that U.S. interest rates will stay low for a long time. There's a press conference today in line with the new Fed policy that mirrors that of the ECB.

The DAX chart - 3 point Renko - is a biz as usual type day. The last two trades were outside in and the last trade was a double down of the second last one. The stop on the trade was the high to the left at 6409.5.

Just Another Day at the Office

2012-01-24T15:50:00.001Z

Today's chart is the Euro future: 3 tick Renko box. I really do prefer the Renko nowadays for my discretionary trading as the charts are so clean and the noise is filtered.

The second and the third are outside in trades and the last trade on the chart was is still open as I write this.

The extra cyan lines are regular Bollinger Bands. They are good to use for outside in trades.

Trading what is moving

2012-01-23T15:11:00.004Z

I'm a trader and I trade what moves. I need volatility to make money, so I go where the action is. In the pit, we traded "our" market. We belonged to a "crowd" - guys who I stood next to every day and against whom I competed. If our pit had a quiet day, that was reflected in my earnings.

Moving upstairs, the world became my oyster again and I could trade what was moving.

I am an advocate of 1 chart and 1 market until a trader masters his craft. After that, be a trader. Trade. Trade what is moving.

Today I'm showing my Light Crude action. A good day, whether you traded the London or U.S. morning.

Challenges

2012-01-20T14:37:00.000Z

One of the challenges of today's markets is that there seems to be more periods of consolidation between vertical moves. Of course it depends upon your timeframe but there definitely seems a lot more pauses in activity.

This brings with it the requirement for discretionary traders to stay focused while they are waiting for a trade to develop. The old saw: "Being flat is a position" comes to mind. It's hard to do if you have the mindset of trying to make a daily profit target.

You can take from the market only what it is willing to give. Forcing trades will not make the market play nice.

This morning's (London time) Light Crude chart had a good early move and then nothing good for 6 hours. Without some sort of computerised assistance in identifying that the trade was setting up, the second trade was hard to catch.

EXITs Stage Left

2012-01-19T14:22:00.001Z

I've had a few emails about EXITS. We've spoken about exits a lot. If you put EXITS into the Google search box on the lower right column of this blog you'll get a list and links to the posts.

Where to EXIT is dependent on your style. I trade in the direction of the trend. Whether I'm All Out or Scale Out, I like to take profits as I go, buying pullbacks and exiting at the peaks of thrusts. Others may want to hold onto the position until they identify that the trend is over or until a specific optimised target is reached.

There is no right answer. You can use a trailing stop of some kind too. It depends on style. It depends on back testing. You can use an indicator that hooks back such as a CCI. There are a myriad of EXITS. Its a matter of marrying your style, your perception of risk and your trade management plan. Back testing will show you what meets your profitability and emotional requirements.

The 3 point Renko DAX chart below uses a secondary invisible data feed to help manage trades. You can see the entries and exits. These are the result of Walk Forward Optimisation analysis. This is hugely useful for both discretionary and auto trading alike.

Great Trading Year Ahead

2012-01-18T14:49:00.000Z

With all the problems ahead of the world, there will be plenty of volatility to go around for day traders. Stories such as this one from the Sydney Morning herald and my own observations, makes me think that this year will be even better than 2011 for trading.

The transition in the markets continues. Moves are more sporadic as news, rumours and HFTs push prices around in a less rhythmical manner.

My discretionary trading is moving more towards Renkos to get rid of yet more noise. Stops need to be closer than intra bar with these types of charts.

Today's Light Crude continued to pay and pay. The EL methodology is to buy pullbacks in the direction of the identified trend. It's really simple. Simplicity is important in trading as otherwise you have ambiguity and with ambiguity is impossibility to backtest. The dotted lines are simple ATR dots that can be used as last resort or runner exits. There is a Keltner and Bollinger that can be used for exits too. The FloBot version of this discretionary trading is just as simple. The first arrow in a new direction corresponds with my identification of the change of trend.

Walk Forward Optimization

2012-01-17T09:09:00.002Z

WFO analysis is the key to back testing both for discretionary and fully automated trading. I want to pick up on what I was saying in yesterday's post and am reprinting what I have said to my FloBot Workshop guys.

Autotrading requires a template of activity and my previous post tried toprovide that.

All algos need “tuning” to the current market volatility. Theshorter the periodicity timeframe, the more often reoptimization is needed. For example, analgo using daily data may need reoptimizing once a year while an algo using 1minute data may need optimizing every few days. Using range bars improves thesituation because there is less noise. Everything is curve fitting to a degree.Maybe not real curve fitting but fitting the algo to what I am trading. Curvefitting is when the tailor creates a made to measure suit that only fits oneman until he eats a little too much and gets fatter. It then fits no one. What I do is not like that.

How often do I need to reoptimise? The Walk Forward Optimizationanalysis tells me that. The biggy is, what and how to optimise so as not tocurve fit. The answer is that the basic entry picture remains locked to the bigpicture and only exit criteria are optimised so as to keep with the current marketvolatility. In maintaining synch with the current market, there are two issuesin the reoptimization: how much historical data to use in the IS and how muchOOS to look at. As I said in the post, IS can be 28, 21, 14 or even 7 days witha 7 day OOS. I repeat this every 7 days if that is what the WFO analysis showsI should do. Every 3 or 6 months, I do a major reoptimization to check thatnothing much has changed. The WFO analysis is a critical part of theautotrading regimen. It’s not just a design process. It’s part of the tradingprocedures.

I wouldn’t use more than 4 to 6 months of data for doing theinitial optimizations as the markets are changing too much with both the waynews is released, rumours, economic situation and HFT activity. Using very olddata is counter-productive.

Finally, you need realistic expectations with autotrading. Youcan’t expect to be profitable every day. The WFO analysis provides a patternand statistics and what my expectation is that, if I have done the analysis ofthe WFO correctly, my trading pattern going forward will be similar. Myyardstick for profitability and drawdowns is based on monthly achievements, notdaily ones.

So there are two issues in the training:
1. Creating an algo that can be robust in it’s picture recognitionfor entries – you know those pictures because they are what we did in thewebinar a year and a half ago, and,

2. Creating exits. Exits can either be static that relies onregular re-optimization to keep them in synch with the market or dynamic usingtechniques that adjust the exits to the market volatility as it changes. Orexits can be a mixture of both.

In my own trading, I only trade for a short time every day to keep my eyein. I KNOW that fully auto is the way to go in today’s markets as I no longerwant to sit in front of a computer all day. I accept that the algo will have abigger drawdown per market than I would achieve manually. I benefit by the trade off that I don’thave to sit there all day and that I can trade many markets simultaneouslywhere the overall drawdown is reduced by the fact that I am trading aportfolio of algos and markets where on any one day one algo may have a drawdown but otherscan be profitable.

Getting a Robust Algo

2012-01-16T16:04:00.001Z

I'm working with the 21 guys that attended the recent FloBot workshop. BTW, the videos are now available. They come with mentoring so you get a lot of feedback and guidance as you work towards that robust FloBot.

Some of the guys have created some amazing stuff. It's funny how we all watch the same movie and get our own ideas from it. There's a few of them already in SIM with their versions of Flo. I'm pretty impressed, particularly with one guy that has been working with me for over a year. It looks like he's really found his niche with his algo. The amount of time and effort he put in was considerable.

The steps to go through to create your own algo are fairly simple though time consuming. Each step is dependent on the previous one. The goal is that at the end of SIM you can be as sure as possible that you have a robust profit making FloBot.

The steps are:

Decide on your entry rules
Do an optimization to find the correct inputs for the entriesand exits using 4 to 6 months of data or more
Do a walk forward optimization analysis using the above resultsbut optmizing only the exits. I usually use 28 days InSample and 7 days OutOfSample but I try21 days IS, 14 days IS and 7 days IS if 28 days does not provide good results.
Once the WFO passes your tests (what you think PLUS 80% of theOOS periods are profitable enough) you have a model ready for SIM testing
Load only the IS data that was the same as the good IS WFO andoptimize the exits as you did in the WFO but with this lesser data.
SIM trade, reoptimizing after each 7 days if that was your OOSperiod.
Once you are satisfies with SIM, consider whether to go live on1 contract.

The purpose of all of the above is to see that if you do an optimization over the, say, last 28 days and then trade that model for the next 7 days that you are likely to be profitable with acceptable drawdowns.

Without the WFO analysis, it's still just HOPE. I also strongly recommend the SIM as you need to see how things turn out using live data. What I want to see is how Flo reacts intra bar. An algo in backtesting has to guess whether the High or Low of the bar happened first and whether the guess is correct impacts the way that the algo operates. Seeing this in SIM may require a change in the periodicity used.

Friday 13th

2012-01-13T15:38:00.000Z

I had a great dinner at the Lahore Kebab House last night. Great food if you're a lover of Indian food like I am, and are ever in London. The main branch is in the East End of London, which has historically been the home of the largest group of immigrants at any one time. At the moment it's Indians and Pakistanis. 50 years ago it was the Jews and there are still some remnants of Bagel houses and a couple of Kosher restaurants there, which I also love.

The pic below shows the last part of yesterday's Light Crude trades by Flo. The exits in autotrading can be improved considerably by using market action as revealed by the math of indicators rather than just straight dollar stops and targets. By making the exits more dynamic it's possible to capture more of the move, if that is what you want. This is different to more HF trading, which only looks for the setup and captures a set amount counting on an extremely high win rate. It all goes back to designing the algo to fit your goals.

Go Flo

2012-01-12T17:26:00.001Z

Flo worked while I played. I'm liking this style of trading more and more. As long as Flo can keep making more than I can spend, she'll be right, mate!

Light Crude is one of Flo's favourite markets. Actually, she has a lot of favourites: those that pay her to play. As for me, I flew into London, picked up my new car and went to visit my Mother. Tomorrow, will be Lunch with Mum and then dinner with a couple of my favourite women, Kiki and Candace, at a great Chinese restaurant near Elephant and Castle. Luckily, I get to eat more Chinese food on Saturday when I catch up with a mate in London's China town. Reminds me, it's getting close to that time of the year when we wish Kung Hei Fat Choi.

The chart below is pure Flo and only shows part of her lovely day.

Leave it to Beaver

2012-01-11T15:34:00.000Z

There was a very popular TV show when I was growing up about an American family. Beaver was the nickname of the younger son. I don't think I can remember what the title of the show had to do with what went on, except I think the show as about what Beaver did. Anyway, I'm back in London tomorrow until Sunday so I will be leaving my trading not to Beaver, but to Flo and her clones. I'll post charts and comments.

Today was another unremarkable day. When designing an algo, one of the criteria is the old saw: Do I want low volume and high markup or high volume and low markup? That is, do I want lots of trades with small profits or a few surer trades with higher profits per trade? Both ways can work. The chart below is a high win rate larger profit algo's trade this morning. This algo didn't trade the last couple of days. Today it did and hit the ball well. Sold 1.2768 and covered at 1.2727. That's $509/contract after commish. Do that on a few markets a couple of times a week and.....

Oyl Bidness

2012-01-10T16:31:00.000Z

I used to love watching Dallas, back in the 1980s, when it was all the rage. Everywhere I went in the world, people were watching Dallas. Restaurants and theatres were empty on Dallas night. He just loved the "oyl bidness". I'd been in Texas in the 1970s and really identified with many of the people on that show. I loved Texans, especially the women, who were very friendly and had hair about 2 feet high above their heads.

Light Crude was really good in the London morning but hard to trade in RTH. I stopped trading it after giving a little back.

Will My Setup Work For The Next Trade?

2012-01-08T05:45:00.000Z

This is the question that a trader needs an answer to. Without an answer to this question, you are whistling in the dark. All you have is hope and fear, and that leads to losing.

So whether you are a discretionary trader or an algo trader, testing is mandatory if you want to be CP. And the testing has to be right. What is "right"? "Right" is taking a large sample size in an objective (not subjective) manner of how you enter and exit trades, so that they can be measured.

This process involves, guess what?, a Trading Plan to start it off. Not just any kind of TP, but a very specific one. A description of how you trade that you could hand to another trader and he could make the same trades you did.

Once you have that, you have something to test. Without that, you are guesstimating and that is like that famous old (now dead) comedian, HOPE. which is what happens to most traders that don't have a TP. They're cactus as we say in Oz.

The most secure way of testing is by computer. Run hundreds of trades through it so you have a good sample size and know what to expect. Part of the output of your testing should be an equity curve so you can see at a glance how the sequence of trades looked. Having a walk forward result in your equity curve is a plus.

Chart below shows how well these Renkos cut out noise. The fact that they don't have wicks is the price we have to pay. They work best with the most volatile markets.

Numb3rs Again!

2012-01-06T11:49:00.002Z

Trading is a numbers game. A game of probabilities. Getting that concept is an important part of getting to CP. The trading stool has three legs: win rate, average win, average loss. The rest of the statistics are made up out of these three (that number again) prime numbers.

Mastering these statistics is what it's all about. You can trade 1 contract for 9 hours or 9 contracts for one hour, it all comes down to the numbers.

The issue for a discretionary trader is to be rule based enough so that the statistics that are produced mean something other wise you are whistling in the dark. Having a repeatable methodology means that you can have an expectancy that gives the confidence to stick to a TP. Sticking to a TP means that you can increase size as the market gives you it's money to use against it. Increasing size means that your hobby can become a business.

It's all in the numb3rs.

The markets replay and replay the same pictures. The trade below is one such picture.

This is a 5.5 point range bar of the DAX, but it could be any intraday chart. There was a monthly U.S. jobs report out at 1.30pm London time. See the Cyan rectangle. The market digested the news and then broke down. The previous low to the left, an hour before, was where the stops were and they were taken out by the big guys who covered their shorts there and took the market back to support at the EMAs.

Until the breakdown, the market was in an uptrend. The change of trend is not one move. The break and the pullback and the subsequent thrust was the change of trend. By selling at the pullback to resistance in the direction of the new trends you get the best trade location and the least risk on the trade. Note the oversold market at the point where the big guys covered their shorts.

Putting this trade into a rule based TP and back testing it gives very specific numbers that can be relied upon. Using the technology to do the grind work means that in 20 minutes you can do the work that used to take days or weeks. Then, taking the next step and using the algo to make the entries is not such a big step.

Euro Is Still Doing Its Thing

2012-01-05T17:18:00.000Z

The fundamental difference between a discretionary trader and an auto trader is- the EXITS. Hybrid trading is discretionary trading - the auto entry is a discipline enforcing mechanism to stick to trades in your TP, identify them instantly and execute them without delay. Using the computer for this purpose can shorten many peoples' journey to CP. No analysis paralysis. No off piste trades. Less screen time needed to go to live as the entries are locked in. Consider this option when you are deciding how to trade. The technology is there and does help considerably.

The Euro was doing it's thing. That market is like an Everready battery - it just goes and goes. The outside in LONGs made money. The second of them at 13:18 London time was the more usual, giving a second pullback before it took off. Had I waited for the second pullback on the earlier outside in, I would have missed the trade. Usually I'm only 50% sized on these and can double down if I can get a worthwhile price.

Three Ways of Trading

2012-01-04T11:36:00.001Z

It's my number "3" again.

Whether you want to be CP in Discretionary, Hybrid or Fully Auto trading, there are challenges and achievements. However, the challenges and achievements are different in each case and a trader should, IMO, choose which road to go down on the basis of his own DNA, financial considerations and expertise.

Whichever you want to do, takes time to learn, just like going to university for any other profession. Doctors can take 10 years to get the needed skills. There is the famous 10,000 hours concept of achieving mastery.

Certainly, learning to do all this by myself did take at least 10,000 hours for mastery as a discretionary trader.

However, there are shorter roads. Specialization!

As a discretionary trader, one can find a single trading picture and gain mastery over that one particular setup. If mastery takes X amounts of time, specializing could take as little as 1/10th X.

If you become a hybrid trader and automate your entries then the time could be less, say, 1/20th X.

Going fully auto could reduce the time to, say, 1/35th X.

Of course the starting point for all of this is learning the basics of trading. I'll go deeper into each in the days to come.

The Euro was the flavour of the day. I had a little later start as I'm still sore from skiing over the holidays. Kiki was here and the daughter of a friend of Mrs EL and we had great weather and skiing. I'm about 20 minutes from a great ski area with miles of pistes.

Back to the Euro, all I had to do was pick my sell spots. It never looked like changing trend. And watching the trend is what it's all about.

It's a Whole New World

2012-01-03T19:41:00.003Z

Happy New Year Everyone!

It's a whole new world. Yes it is. We are still transitioning into what will become the new global financial and economic system.

We are currently in a world of uncertainty. No jobs are secure. No currency is safe. No investment is for the long term. Anything can change.

Jobs have been exported from the first and second world to the third world. The third world is trying hard to become the first world and looks to be on the way to succeeding. What happens to the first world is still to be decided.

We are in a world where all the banks went broke and had to be reinflated by governments. Places where we keep our wealth were allowed to become the customers at great casinos where the bank employees could gamble and if they won then received huge bonuses and when they lost, the loss was ours. Banks are places where we put our savings-our super mattress. Banks are places where the combined savings are lent to customers whose security is beyond reproach. Our savings should not be allowed to be gambled by the bankers on their own speculations.

The transition will continue until governments "get it". In the mean time, buy and hold investors carry all the risk. We day traders continue to milk the cow, day by day. The same cow that the bankers almost killed. Long term has become a week.

In 2012 this blog will continue its course of trying to bring Consistent Profitability to all. Since it started I have taught, mentored and helped several hundred people, many of whom went on to become traders or become more profitable traders. These were people who both attended formal training by seminar, webinar or DVD and people who read the blog and asked questions.

Those of you who have become traders, congratulations! I believe I have proved the hypothesis I made when I started this blog, teaching my daughter how to trade, that anyone can become CP. So many of you have!

After working with hundreds of people trying to become CP, I know that if someone has a back tested and forward walked CP trading plan, they can be CP as long as they are properly capitalized and trade within that capital.

This year we will concentrate on getting people to CP. If you are not CP, go back to the beginning of the blog and read. And then read what is to come.

We will be looking at two ways of getting to CP: Discretionary Trading and Fully Automated Trading. Both roads have their own advantages and disadvantages and we will explore them and find solutions to the issues that traders have.

Today's chart is the early DAX trading off a 3.5 point Renko chart. Renko charts are difficult to use in autotrading as the wicks are invisible. It's Flo driving. The first trade was a big loser and the other trades almost made up the loss. This algo has averaged over 4,000 euros profit per contract per month over the last six months with an acceptable draw down. There are losing days. In fact there are lots of losing days with an algo, but if it's robust, 90% of months can be green.

Blog Break Over the Holidays

2011-12-19T17:47:00.001Z

No blogs until Tuesday, January 3, 2012.

I'll be checking my email and comments, but may not be responding as promptly as usual.

All the best to everyone for the New Year. Let's make next year one to remember for all of us.

Happy Holidays

2011-12-16T06:48:00.001Z

Last trading day of the year for me unless...........

It's been my best year yet! I am truly thankful and ever watchful.

The markets are still going through transition as the profiles of the players in the market evolve. The demise of the floor has had a considerable impact. I have a number of ex-floor guys as students who are making their own transitions to become electroniclocals, much as I did many years ago. I guess the writing on the wall in London's LIFFE market was writ bolder and bigger and I saw it.

2012 will see me moving even more down the autotrading route. While I will always trade as a discretionary trader, until I can't, I can see the writing on the wall again. Whether it's me with less focus or the markets transitioning, I believe that going algo will make more money in the long run for me. The more sporadic ebbs and flows are well suited to algos who can lie in wait for the picture they are designed to trade. Running a futures portfolio will even out the draw downs and allow me to use more capital than I can as a discretionary trader.

Yesterday's DAX trading had just 4 trades and made 2924 Euros per contract. A great day! Not all days are like that. Plenty of losing days and weeks but the months seem to be green, at least so far. See the stats from yesterday. I try and not look at fully auto algo performance during the day as I don't want to override trades or switch the algo off when I see losses. I must admit that it requires discipline and a firm decision to accept and rely on all the testing I did. The trade off is I'm free of my workstation and can take my iPad and check that the Internet connectivity to my cloud is intact.

Happy holidays to all and I wish you all a Happy New Year and a year of Great Trading!!! Finally, to those people stuck in the MFGlobal mess, I wish for you that it all works out and hope that the regulators ensure that such an event can not happen again. But I won't hold my breath on that one.

More on Algos

2011-12-15T09:12:00.005Z

I had two questions to yesterday's post and thought they merited a post as an answer. The questions were:

Anonymoussaid...

Hi, what minimum level of Profit factor would you consider the system usable, assuming all other statistics are okay?

Anonymoussaid...

Hi EL,

I thought you liked high win ratios (70% or better). These algos have win ratios less than 50%. What changed?

Everything in an algo is a trade off. It's like a chair with four legs. If you cut an inch from one leg then it impacts the other 3 legs.

Profit Factor is just one metric. Remember that Profit Factor is:

(PW * AW) / (PL * AL)

Where

PW = Probability of a trade being a winning trade

AW = Average win size

PL = Probability of a trade being a losing trade

AL = Average loss size

I look at win rate, average trade size (not just average winning trade size), targets winning and losing trades, and, probably most importantly, how the equity curve looks on in sample and out of sample results. As a general rule of thumb, a PF between 1.3 and 2 is OK of the other metrics fit. I am wary of PFs that are too high asthey are usually the result of either too small a sample or curve fitting. That is not to say I reject it, but I look more deeply at the results. In the end, the SIM trading validates it all.

Nothing has changed in my desire for high win rates. In my discretionary trading it's a must. In algo trading I may buy a trade off by accepting a lower win rate if I get something for it. The issue is that the bigger the average profit is, usually the lower the win rate. So it comes down to the picture that a particular algo is designed for. Issues such as the average trade size become important. The smaller the profit, the bigger the impact of slippage. However, the higher the win rate the smaller the impact of slippage as slippage occurs on losing trades not winning trades.

As you can see, designing an algo requires answering many questions and making lots of decisions. What makes it easier is that you press the "go" button and have a whole bunch of statistics so you can make an intelligent decision. And if you have done the proper work including the Walk Forward Analysis, you have a good chance of ending up with a robust algo fit for purpose.

The chart below is a MultiCharts DAX chart running that algo. In the first 3 hours of trading there were 3 trades. 1 loser and two winners. I also have the ability to have the algo stop trading once a daily profit (or loss) target has been met. This can increase the win rate of the algo too. Operating an algo on this basis can be a good idea for many traders as it can ensure the probability to finish green on more days.

Going with Flo, More and More

2011-12-14T13:29:00.001Z

I create my algos by going through a fairly easy process. It's not easy to create a good algo, but having a process makes it easier.

I start with an idea. Eyeball the charts. Then I make a simple strategy to run in TradeStation or MultiCharts. If it looks promising, I refine it. I then run an optimisation. Below is one such result.

In addition to the rows of numbers, I draw your attention to the comment circled in red that the algo is a good candidate for Walk Forward Analysis. This is a TradeStation result and TS can produce WFO files to do the WF. After running the WFO, TS examines the result and creates a test. This is what it's result looks like.

Looking further into the WFO results, I can look at lots of stats including the ones below.

Once I am happy and I lock in the inputs to use based on the WFO, I can look at the stats for the historical performance of the chosen inputs.

Looking at the Equity Curve, I can see a couple of dips.

As this algo will run as part of a portfolio of markets, I'm not concerned about the dips as I have accepted the draw downs flagged by the results.

In the coming year, I will be relying more and more on my fully auto algos. I can get some good diversification with proper money management and believe that I'll work less and earn more.

Being More Confident With A Setup

2011-12-13T08:44:00.000Z

As discretionary traders, we have a trading plan that regulates how we operate in the markets. We have pictures that we trade with discretion. An important factor in our trading is having the confidence in our trading plan. We achieve this by back testing both manually and using an algo.

Having said that, it should not be forgotten that traditional technical analysis can be used to provide another level of information. By "traditional", I'm referring to charting a la Edwards and McGee, Joe Ross and others for chart patterns and trend lines. I've mentioned this before in the blog but I think that with all the technology we have at our beck and call, it's easy to forget the basics.

The DAX chart below has a couple of useful trend lines. You can see how the holding and breaking of the trend lines supports my trading pictures.

Hybrid Versus Fully Auto

2011-12-12T12:22:00.001Z

As we start the last week before the end of year Holidays, I'm thinking a lot of how to manage myself next year. I'm moving more and more towards automation and I expect that to continue next year.

Next year will see more of a portfolio methodology in my fully automated trading. I'll be setting up different algos on different markets with proper money management to make the portfolio of futures markets trade optimally and be balanced according to risk. I'll be sharing what I'm doing with money management, as I think that this has always been an important part of trading.

The chart below is a 3.5 box Renko on the DAX. The stops and targets are as Flo puts them out. When I trade this algo, I get all the entries, but quickly move my stops and targets to maximise my profitability. If one of the Flo entered trades does not get stopped because I moved the stop away, Flo will not look for any subsequent entry signals in the same direction until that particular open trade has been closed. This can have a double benefit on profitability.

For me, I'll keep hybrid trading along with my fully autotrading as I like to trade. However, using a fully auto portfolio of futures trading is where the future is. More about this later.

Algos and Renkos

2011-12-09T14:29:00.001Z

I've been working on resolving the issue with Algos and Renkos related to the fact that Renko bars don't have wicks, which means that stops and targets were problematic to backtest.

I've made some good progress as you can see from the chart below of the DAX today. The big plus for Renkos is the lack of noise in the charts. That same benefit was their downside as well. It was notable that the different charting packages each draw Renkos a little differently.

Twas the Days Before Xmas

2011-12-08T10:14:00.001Z

and it was as quiet as a mouse. Waiting for the ECB had a lot to do with it too. Volumes are very low. Only two trades this morning in the DAX. Adding insult to injury, eSignal dropped the Eurex feed for almost half an hour. I switched to the TradeStation feed into MultiCharts rather than the Market Delta/eSignal combination I usually use for discretionary trading.

Having complained about that, I'm really satisfied with the two trades so far today in the quiet market. Although "Greed is Good", I also think about: "Bulls make money. Bears make Money. But pigs get slaughtered."

I'm watching the MF Global affair unfold a little more today as Corzine appears before the U.S. House Agricultural Committee. We do need our industry regulators to get their act together and provide proper security to our futures trading funds. We pay NFA, exchange and other fees and don't seem to get much for it.

Scalping Mode

2011-12-07T08:54:00.001Z

Markets were slow this morning (London time) and I went straight into scalping mode. Same methodology but used 90 second bars. End of year, no MF Global customers, uncertainty, impending Euro announcements, all have paid their toll on volume. As traders, we always need a plan B. This is one of them.

I'll be trading until December 16 and then stop for the holiday period until January 3. Except, of course, if something major happens and the markets go mad.

Tougher End of Year

2011-12-06T14:05:00.001Z

The snows are coming to our mountains. We've had light touches further above us, but luckily no snow at our level. We're ready for winter now. The leaves have been blown and the snow blower is primed, skis are waxed. Bring on the snow!

I don't know if anyone else has noticed, but the last 10 days have been tougher trading. Maybe it's my rhythm or it's the markets that have changed a little. My win rate is down a little bit. I guess it has been a long year, but a good one.

The DAX chart is from TradeStation. I like their walk forward analysis very much, although it takes a long time to run an optimisation. I wish they would re-write for 64 bit 4 cores.

Made to Measure

2011-12-05T09:16:00.001Z

The chart below shows a trading system I use for the first couple of hours when a market starts its very active period. It could be the ES at the beginning of RTH or, as in this case, the first few hours of the DAX.

The system works off a very short periodicity. It can be manual, hybrid or fully auto. It trades the pullbacks in the direction of the trend as defined, in this case, by the CCI and the Order Flow Metric indicator. It looks for 200 Euro profit and stops at the extreme of the entry bar. I adjust the target any time I use it, to account for my perceived idea of volatility. Not too scientific but it works.

You can use other things you like to define the trend and order flow. My indicators are ones we used in the recent Workshop.

As you can see, I didn't get trapped and the results were 5 good trades. The idea is to be finished trading within the first couple of hours or so. Not always this easy but picking your market helps.

Jobs Report Trade

2011-12-02T14:37:00.001Z

The market has not been very interesting for the last 36 hours, but came to life again on the U.S. monthly jobs report. Traders got whipped a bit on the number but it was really bearish as far as I was concerned. But never mind my opinion, the chart showed what "they" thought.

My first entry had a bit of slippage as I was selling the break of the two EMAs, but it turned out OK as did the follow up.

We Deal in Probabilities

2011-12-01T08:06:00.001Z

The essence of trading is the probability of success. To know probabilities, I have to back test and collect live or SIM data. From these statistics I know what I could expect. However, as Clint Eastwood said, "if you want a guarantee, buy a toaster" as the markets can unfold in a different sequence to your historical data.

So why is testing any use? Well, what is it exactly that you are testing? What you should be testing is the actual picture you're trading. What is the probability that the picture, when traded, results in a profitable outcome? If you have a large enough sample size over a variety of market volatilities, the results have great value.

What is unknown is the order in which the losing and winning trades will unfold. This is what determines, among other things, what the drawdown of the "system" will be. If you add hard targets and hard stop losses then you add some more unknowns as the hard exits over a large sample will only provide an "average" good stop and target. As volatility changes, as day types change, these "average" exits will sometimes be good and sometimes not. This impacts both profitability and drawdown. Using dynamic exits related to market activity is the way to mitigate the effect of these variables.

Below is a DAX chart during U.S. RTH. Market was quite sloppy today but Flo managed to do quite well. This as a fairly short term algo, entering on a limit order and exiting dynamically at market. First trade was a loser and the others, winners. The yellow line is a 135 CCI which can be used as a filter.

All Change?

2011-11-30T13:25:00.001Z

There is some evidence that the world is finally paying attention to what is happening in the financial markets. The concerted action by the world's central banks is a major indication to me that it is intending to hold the line somewhere here.

We are far from being out of the woods as far as growth is concerned until the jobs situation is properly addressed, but I feel better that the financial system will be better cared for. What I want to see is some more steps to solve the sovereign debt situation so that the problem not just the symptoms are addressed.

The chart today is the ES 3 tick Renko with wicks. MarketDelta can put wicks on Renkos which is great.

Scaling

2011-11-29T19:35:00.001Z

I had a question to Friday's post. A guy wanted to know which of the recommended books on money management dealt with scaling in. I answered and then thought that the subject needed more information, so I'm posting on it.

Firstly, I don't scale in. At all. Apart from the fact that I am more short term, I don't want to worsen my trade location with a worse average price, larger stop loss and lower profit per contract.

The closest I come to scaling in is by "reloading". By this I mean that as I am scaling out and there is a proper re-entry picture, I'll take my position back to full if I had scaled out some. But the picture has to be as strong as entering a new position. I don't scale in because the market has gone my way. The math just doesn't work for me.

My initial entry will have a size - 25%, 50% 100% depending on the risk - how much it will cost for me to know I'm wrong. Keeping the risk per trade the same is important for me.

I've been playing with trying to put some sense in an algo that runs on Renko charts. A real challenge as Renkos have an invisible wick that hides possible stop hits and targets. So here's the Euro on a Renko chart with wicks so I can better analyse what is happening historically.

Sold?

2011-11-28T14:46:00.001Z

On the floor, the first reaction to a market pop like today was to sell it! But look at the title of this post. It has a question mark.

The question mark is because the markets have changed. The players have changed. The way they trade has changed. Markets feed on themselves more. It's more like pin ball game, as one set of big orders begets another set of big orders. In the "olden days", the locals and market makers (specialists) would pounce on the market and give it a lot of supply, satisfying the orders. No one group was that big that this strategy didn't work most of the time. On the floor, your friend the broker might give his local friend the nod to sell the last tranch of buying.

Not any more. The locals are gone. The specialists are gone. Markets are "managed" by pure order flow from HFTs, from hedge funds and other very big groups, often having to trade in the same direction for very short periods of time. So Newton's Law rules. A body continues until it is acted upon by an impressed force.

Where the market goes longer term is much harder to "predict". It's all money management and scalping. Everyone is a day trader.

Euro had a few nice trades today. The chart shows a final pop to the morning and then the negative order flow kept me out of trouble.

Money Management

2011-11-25T14:52:00.001Z

I was re-reading a couple of my books on money management. There are three that I could suggest as a starting point:
The Ryan Jones book, one of the Ralph Vince books, and, of course, Vam Tharp's books.

Many of the above are available on Kindle and would make a worthwhile week-end read.

Good money management improves how much you make with your trading system/methodology. It's as simple as that. It's all about position sizing. When to increase and when to decrease. In any one day, the risk per trade for me is the same, whether I'm trading a 25% position or a 100% position. However, how you manage your trading size as your account size grows will have a huge impact on your annual profitability. Naturally, that assumes CP.

One take away from Ryan Jones' book is that people start to use money management too late. They often want to get some profits under their belt before they implement a money management strategy. Jones says "do it now". A proper money management strategy makes such a difference that even a 3 month delay will cost.

No trades for me today. Back to charts on Monday.

Good Weekend.

Happy Turkey Day

2011-11-24T16:51:00.001Z

Day off for me. Tough Thanksgiving this year for many throughout the world. I'm thankful.

Plan the Trade and Trade the Plan

2011-11-23T12:12:00.001Z

My vision for the day was a down day and that worked at first after the Eurex opened. Then the major support on the DAX held and the market looked like it would bounce.

The trend changing is visible on the left side of the chart. EMAs were converging. Price broke through them both and I saw that we would rally. How far, I didn't know. The pullback to the EMAs did not hold so I couldn't find an entry there. I then got a higher low and a penetration of the EMAs again. This is where I should have gone long but missed it. I then looked for another entry point so created the Fav Fib lines. Price bounced down from them but I still didn't see an entry. Then there was the next pullback with the price rejecting the lows, CumVolDelta nice and strong. The Fib had held twice but would break on the 3rd try. it did. Price ran all the way to the next Fav Fib where I went short, having scaled a few times on the way up and reloaded as I went. The short was covered at the EMA and I was ready to start again.

The trade worked because I thought it out. My initial vision was short lived but the market clearly showed what was going on. Order flow was clear. Plan the Trade and Trade the Plan.

Kenny Rogers Said It

2011-11-22T07:31:00.001Z

"You gotta know when to hold'em and know when to fold'em". Like poker, how you go about exiting the trade is one of the secrets of CP and survival.

There are 3 possibilities: You exit at a profit, you exit at break even and you exit at a loss. Of course we all want every trade to go in our favour immediately when we enter it. That is our aim when we enter and see the order flow in the direction of our trade.

However, for that not to happen, all that is required is that more contracts come in to sell than there are on the bid, and the market ticks down. We use range bars in order not to be shaken out of the tree by normal fluctuations but we can increase the odds of the trade going into our favour by our trade location.

If I'm buying, I want to buy at support. What is support? Support is the area (not necessarily an exact price) where buyers have shown their hand and where we expect the buyer to be still waiting to buy. We monitor for the continuing activity of the buyer at that area. We want the buyer to remain unsatisfied and for the buyer and other buyers to auction up the market. We virtually front run the buyer and lean on his bid. If he disappears or is satisfied by sellers, then the price moves down to the next support. Where that support is, is what determines whether we exit the trade or weather the storm or even double down.

As far as exiting at a profit, we look for resistance. How strong a resistance we look for depends upon our trading style and whether we are happy to sit on a profitable trade as the market rotates in the direction of our trade.

Knowing where we want to exit when we enter the trade is an important part of the process, as we are making a determination based upon calculating the amount of possible loss versus our expected profit, taking into account our known win rate on that particular trading picture.

This is what it takes to make money consistently. The ability to make that judgement/calculation in a split second and act on it before the trade is missed. If you haven't done your homework to give you the ability to make the assessment then I don't think you are in the race, never mind winning it.

I had nice trades this morning (London time). You can see them on the chart below. The first, a buy, was my usual pullback trade that I entered as it bounced off the 33 EMA. My target was the thick red line I drew on my chart yesterday, just before RTH started. I had seen activity here and I marked the chart so I could sell yesterday if price came back up there. It didn't and I left the line there to remind me to expect selling today.

As price got there this morning, I initially had orders to exit at the line. When it got near, I could see that momentum was running out and moved my SELL order to take profits plus added a new SELLSHORT order a little below the line. I was happily filled on both. I covered some at 5657ish and the balance at the 99 EMA. The trade made about 62 points per contract or 1,550 Euros, all because I had done my homework. "The harder I work, the luckier I get!"

And then I bought it again.

I Just Love The Opens

2011-11-21T08:27:00.001Z

The open of a market is a great opportunity if you have structure built into your methodology. The centre of my universe is the 33 EMA and it represents the fair price at any one point in time. It acts like a support and resistance.

The overnight ES had established lower value by the time that Eurex was ready to open. I had the VAL of Friday on my mind before the DAX open. The market opened gap down and I was looking at that VAL and the 33 EMA. Surprise, surprise, the two coincided. The Renko chart shows the action very nicely. I sold every pullback and was finished for the morning after a couple of hours. It doesn't get much easier than this.

Equity Curves Matter

2011-11-18T06:25:00.001Z

Everything in life is a trade off! If I want the most delicious food and eat it all the time, I know I'll get fatter. If I drive fast, I risk a speeding ticket. If I want a low draw down, I'll make less money. If I keep my stops tight, I'll get stopped out of potentially winning trades. And the list is endless.

Eyeballing the equity curve of a simulation may be a quick way of paging through a large number of simulations. It shows a lot.

But here comes the rub. Any single equity curve or simulation represents the position of only that combination of the unfolding of the number of wins and losses in a row. I can have a nice algo with a 70% win rate and have the losers grouped in such a way that the draw down is extremely painful.

Looking at what is possible and what is probable and where to draw the line between the two is necessary in order to set expectations of an algo's future performance (Disclaimers apply). Setting a stop loss for an algo is like setting a stop loss for a single trade. Knowing your drop dead stop is important in both. The charts below show a number of equity curve charts of a number of winning trading systems for the same symbol. Which one is "best" is quite a subjective judgement. Having firm requirements in your trading plan helps me make a better choice.

The charts below have a white and a green section. The GREEN is the out of sample performance.

The interesting feature on these equity curves is the drawdown that occurs a little way into the OOS (Out Of Sample). The issue for algos is like anything in trading: discipline. Would you keep on trading an algo if it goes into a drawdown a short time after it goes live? If the answer is "NO" and you had done the proper work to create the algo - backtesting and walking forward - and you don't believe that you could sit through the drawdown then fully auto trading may not be for you. However, Hybrid trading is a different thing. More as this series of posts talking about algos for fully automated trading continues.

The markets were quiet in the London morning. Volume was lower too. The trades paid, but not a lot. I guess I've been spoilt.

Grand Old Duke of York

2011-11-17T12:31:00.001Z

There is a children's nursery rhyme called the Grand Old Duke of York that comes to mind when looking at the stock indices price action over the last few months, both inter day and intra day. The lines from the rhyme I'm referring to are:

Oh, The grand old Duke of York,
He had ten thousand men;
He marched them up to the top of the hill,
And he marched them down again.

And when they were up, they were up,
And when they were down, they were down,
And when they were only half-way up,
They were neither up nor down.

If you grew up in the U.K. or Australia you probably remember the rhyme. Our markets have been marching to the instructions of the Grand Old Duke of York. There seems no real reason for the volatility except perhaps fear, greed (the usual two suspects) and the need for many funds not to miss the boat. And, of course, the algos.

I'm seeing this after I wake up at 4 am London time as the days unfold, as well as from day to day as the market digests news and rumours. It's important to only trade the trend of the chart you are trading from, not any ideas of what you may think is happening as your inspiration is probably not in synch with the trading chart. Having no outside bias is important, although a vision about the way the market might unfold for the next few hours can be useful.

The effect of the intra day volatility is "opportunity". This can be seen if you untoggle a Market Profile for any day and watch the rotations of the TPOs. A goal of earning the day's range in points, while quite ambitious, is doable. So if someone's ambition is to take only a few points out of all that rotation, making a plan to do just that and achieving it must be even more doable. The way to achieve a goal is to set one and then design your trading campaign to hit it.

The chart below shows two trades. The first one is at 8.34 am NY time and the second is at 8.41 am. Both lasted only minutes and each made the 1.5 ES points target of the TP. Someone not yet trading full time can find trades like this outside RTH, make the trades and then go to their regular job. $300 with 2 contracts. A great way to get to CP.

Renko Trades and MFG

2011-11-16T08:12:00.001Z

I've been following the MFGlobal saga, as have most traders . I'm sure that we have not seen the whole story yet. The sad thing is to see the shabby way that the futures customers are being treated with the funds still being held by the liquidator. The issue of segregated funds has always been a touchy one with me. I have always feared a trader taking a broker down, with me being in the same segregated bucket as he was.

I never imagined that the auditing of the segregated account was so non existent, as it obviously must have been if funds are missing. Daily accounting for each trader's funds should be mandatory with independent exchange auditors making daily spot checks. Nothing will prevent every breach but a strong audit framework will surely make people think a lot more if the risk of getting caught is higher. We pay all sorts of regulatory fees that are included in the round trip costs of trading and it looks to me that we are not getting what we have paid for.

On a different note-

One of the guys in the Workshop loves Renko charts to trade from. I trade them from time to time and have also worked algos on them.

Renkos are a different challenge for an algo, as there are no wicks and the high and low of a Renko chart are not the real high and low of the bar. That means that in real time or SIM, you could have been stopped out of a trade but not stopped out when you run your back testing.

Also, they can be more pessimistic, in that your target could have been met in live or SIM but not met in back testing as the wicks remain out of the algos calculation.

Renko back testing needs a lot of manual intervention and eyeballing to try and get it to be more realistic. It's a very subjective process and not too scientific.

Nonetheless, I like trading Renkos as the charts are so clean. I was trading the DAX this morning and here are some of the trades. The first trade was leaning against the low buying tail or candlestick low rejection of yesterday. Notice how well the MomDots help trade management.

Timing and Stops

2011-11-15T07:15:00.001Z

Trading is about timing. When I put a trade on I am trying to catch that optimum point where I can be "sure" that the market will immediately go in the direction of my trade.

That's a really big ask! If that was my expectation (and it is NOT) then I would be expecting to divine future market direction and the exact moment when the price would move in that direction on a basis that it would depart from my entry and continue towards my target without coming back through my entry price. As I said, a big ask.

I think of trading like driving a really powerful sports car on ice with summer tyres. Lots of wheel spins and slides before I get traction to go in the direction I want to go. In the mean time, I don't want to hit anything that wipes me out and stops me from getting to my destination. But I do want fences around me to stop me from going over the edge of the cliff.

But where to put the fences? Without fences, blowing out an account is in sight. Fences too close and the fences are the cause of the crash.

My solution is to stay in a trade until I know it's wrong. OK, what does that mean? Well, if I'm taking a trade with the trend, I'll stay in the trade until the trend changes. If I'm trading against the trend - Outside In - I'll stay in the trend until I get a pullback against the trend and I see that the trend is resuming. I wrap all that in a drop dead stop, so I don't make a career decision on one trade.

The Euro futures trades this morning were all in the direction of the trend. Down! At no point during those trades - see the screenshot - did the trend look like it was over. I didn't cut any of them at a loss. Should I have? Do you? Taking unnecessary losses is one of the causes of not succeeding, both discretionary and algo. Like the guy on the island said: It's the Plan, it's the plan.

Is Paying For Education Worthwhile?

2011-11-14T07:10:00.001Z

There was an interesting comment to the blog last week from a poster who said he benefited from all the free stuff in the blog, but was questioning if it was worth paying for education like the Workshop.

He wrote:

EL, I have been following you for a long time and I think the free information you provide your readers with on a daily basis is great. I know it has helped me a great deal but reading this post really has me wondering how this workshop is worth $5,000? It seems kind of obvious and basic, particularly if you have been following this blog for any length of time. I too have hundreds if not thousands of strategies that show 63% profitability. I also know that if I add more filters and backtest more I may be able to get one of them to 65%. I considered joining the workshop but then decided not to mainly due to the fact that no indicator, book or seminar has been worth any dollar spent so far. I know I would be pissed if I spent another $5,000 to learn how to write an algo like the one you posed above. I know for a fact that your algos have losing days and I think it would be instrumental for you to post those as well. Its clear you are trading standard deviations masked in EMAs, and CCI triggers. Is that all there is to this entire blog?

Firstly, thanks for the comment.

Let me start out by saying, I agree that no indicator that I have found or seen is worth paying $5,000 for. I often buy bits and pieces I see if I want to look at them, paying up to a few hundred dollars if it's good. My last such purchase was Pete Steidlmayer's VOLUME STRIPS software, which I am looking at. I don't know if it will be any use or not yet, but I certainly thought it was worth $350 to find out and to learn something new from the person who has been a proven innovator.

Back to the comment. Some people can work things out for themselves and prefer doing that. I had to do that because I had no source of deep knowledge to teach me, although I was a member of CompuTrac and I did go to a number of seminars from people like Steidlmayer, Dalton, Larry Williams and a few others. I always learned something.

For me, the purpose of education in trading is to learn something I did not know, to learn how to do something that would take me a long time to figure out, or something without which I would probably lose a lot of money before I learnt it for myself.

The attendees at the workshop and those that will buy DVDs of it will get not only the knowledge that has been transferred during the workshop but the mentoring and assistance that I give them afterwards. The Workshop has two parts: the delivery of the material over the week and then 3 months putting it into practice. In addition, the trade logic and easylanguage code I supplied meant that re-inventing the wheel was not necessary.

The Workshop was full of material that took me years to figure out. The support that the attendees get is based on 45 years of trading. All short term day trading is trading deviations from mean or return to mean. How you do it is not all that simple, otherwise most people would be making money rather than losing. We have a dozen basic pictures to trade and a great many variations and nuances within those dozen pictures. Also money management is another part of trading. I hope you have read those posts too, because that is an important part of trading.

Today was biz as usual in the DAX. That means it took no prisoners. The highlight of the morning (London time) was the Fib to Fib trade. As you can see, I had several bites of the cherry as I know that the way to eat an elephant is one bite at a time. Those food metaphors really mean is that I am a very short term trader and don't hold a whole position for a long move. I scale and reload or All Out and reload.

And Here's One We Made In The Workshop

2011-11-11T12:38:00.001Z

We made a lot of progress in the Workshop so far. We worked Saturday to Tuesday. We had guys from all around the globe, stretching from California through Venezuela, Russia to Australia. A great and diligent group intent on moving their trading to the next level.

We are in the hands on portion of the Workshop. The guys are working to put into practice what they have learned. I added a couple of extra hours for tomorrow, Saturday for Q & A, and we have our final session on Sunday to address any issues that the attendees have discovered during their testing.

On Monday we created an algo to autotrade. We wrote it using the ES as our model for picking the trading pictures we wanted to capture. I then reconfigured that exact algo - same trading logic - to trade my favourite DAX. I decided to break my day into two and below you can see the London morning version (DAX trades differently after about London noon when America wakes up). Today it had three trades: two winners and a loser with an overall green day.

This algo has an expected win rate of about 63%. It's still a work in progress because it's missing a couple of filters, BUT IT IS TRADEABLE. The process of creating an algo, as the attendees discovered, is an iterative one. We create something that works and then improve it. We test and test and retest until we create an algo with the profile we want. We start with the trades we want to capture, how much we want to make, what our risk pain threshold is and use that as our goal in building the algo.

Fit For Purpose

2011-11-10T09:57:00.001Z

The recent indices markets' activity reminds me of the joke about the old lady who gets knocked down by a truck. The driver stops, sticks his head out of the window and looking back yells: "Watch out!". The old lady who is not hurt, but is lying on the road, yells back: "Why? Are you coming back?"

Investors are having a tough time because indeed the truck runs over them and then comes back and does it again.

Today's market was one of those. The overnight ES was quite weak and after the RTH close, continued the weakness shown in RTH. During the European session, the wind changed as the ECB and Italy acted. The news and rumors turned the market around causing a violent rally taking the ES from it's session low of 1218.00 to over 1242.00 in a very short time. Talking of shorts, it looked like the shorts were caught and that fueled the rally.

In the Workshop, we saw how to create an algo and then how to optimise it and make it robust so that it's fit for purpose. I very strongly emphasise that an algo must not just look profitable in optimisation and forward walking. It must be tradable, and the test for that is the SIM trading. The whole process of creating an algo is time consuming, as the testing must be rigorous. As any weaknesses or omissions are found in the trading logic, the creator needs to make adjustments and then retest. There must also be a protocol to both monitor the algo's performance and to keep it profitable.

The trades below are the Hybrid trades based upon one such algo. Tuning the algo to specialize in a specific time of the trading day is also a worthwhile thing to do.

Focus on DAX

2011-11-09T17:06:00.005Z

I'm an avid DAX trader, as you all probably know. It took me a while to get back what I lost trading that contract, all those years ago, but it was worth it. The tick size of 12.5 Euro (0.5 points) is fantastic for a contract that can move 2,500 to 5,000 Euros during the 14 hours of the day that it trades.

More and more Americans are joining the party and volume has been climbing steadily, although a 300,000 contract day is still at the top end of, or even above, normal.

The fact that the DAX trades for 14 hours a day means that it is available to traders from all over the world in all different time zones. It is an extremely volatile market, but once it is mastered you don't need many good trades in a day in order to hit the goal of even the most ambitious trader.

Caveat Emptor: DAX takes no prisoners and even a CP trader would find it worthwhile to SIM it until they find their feet. My cost of not SIMing was considerable. I didn't SIM, as the technology was not up to it back then.

The trades on the DAX chart below are fairly representative of what can be achieved using my methods. A lot of it can even be automated and Hybrid trading the DAX is a great help due to the volatility. Flo enters on limit orders, exits on limit targets that I post manually and I stop myself out manually when I am wrong. No slippage is the result.

The Workshop Day 4

2011-11-08T17:46:00.001Z

We are happily progressing in the Workshop creating algos to trade either Hybrid or fully auto. Not much to say today as I was not trading.

Charts will resume tomorrow as well as some more videos when there is something interesting to show.

To Mars and Back

2011-11-07T17:46:00.001Z

As you know, I'm a big proponent of testing and SIM trading. Looks like I'm not alone in the belief that practice can make perfect:
http://www.bbc.co.uk/news/science-environment-15574646

We are in Day 3 of the Workshop and I'm having fun. It took a couple of days to get the traders through a lot of the information they need to be able to create robust algos. We are in the throws of that now and have done some good work.

It was funny. In the midst of one part of today's presentation, my wife looked out the window and there was someone on the farm that looked like they were stealing our mushrooms.

I stopped everything and zoomed out across the back field and it was an old lady with a plastic bag of my chestnuts. I didn't know who it was until I got there, so I had grabbed a pitchfork out of the barn in case he was bigger than I am. The elderly lady was a neighbour from the nearest house south of our property.

I asked her to come to the house next time and say hello before wandering around in the woods, so neither of us got such a surprise. Anyway, she apologised and offered to return the chestnuts, which I gallantly refused and parted as neighbours.

Back to the Workshop.

Workshop Starts Tomorrow With A Full House

2011-11-04T15:25:00.000Z

I'm looking forward to tomorrow. I love these training sessions as I see traders change the way they think about their trading during and after the training.

We have a mixture of traders attending this one, but no girl traders. Kiki was disappointed. Women can have great intuition that makes them great traders. I'm surprised there aren't more of them trading. Our group is part previous webinar/seminar attendees, part DVD students and part blog readers. All have in common the fact that they want to trade. We have a lot of ground to cover. The curriculum is almost 70 slides long and starts from the very basics of the EL methodology, working through how to trade it on a discretionary basis and then how to convert that discretion into Hybrid trading (auto algo entry with manual trade management in accordance with a TP) and then fully auto trading.

I finished my preparation for the Workshop at about 5 am London time and was ready to trade when the DAX opened. Candace started her last cull of the material and we'll do a last check early Saturday morning here in France.

Lots of news around today. The DAX has had a range of about 240 points - a 6,000 Euro value, and it did that range about twice so far. Lots of opportunity.

G20 Day

2011-11-03T15:49:00.003Z

The day in London started with a lot of volatility. As you could see from the ES chart, it was sold off during the Asian day time. The G20 meeting started, with Obama, Sarkosy and others talking and the market went right back up and then surpassed yesterday's RTH close.

I was scalping more than trading today due to the volatility. It was as if the Bots were reading the Bloomberg and Reuters news feeds. Oh, they were! It was much safer to take lots of quick profits rather than trade a whole swing from peak to trough.

The ECB rate decision was a non consideration as no one thought that a new ECB president would do anything on his fourth day in the job. Greece was still the number one topic there as the G20 actions are predicated on what happens in Greece. Then the ECB cut rates and the Greek Prime Minister offered to resign.

Glad I'm an electroniclocal. Hope this volatility continues for years.

The ES worked its way up with me taking very small pieces out of it until it finally hit a VAH resistance and offered me a short trade.

Greeks and Gifts

2011-11-02T14:56:00.001Z

Greece, the craddle of civilization, now has an immense impact on world financial events, far beyond its economic contribution. The fear is that the Greeks will not be bearing any gifts to their government and voting "yes" in the referendum, if it takes place, risking an implosion of Euroland.

The issue at the moment is uncertainty. While I learned at school that "nature abhors a vacuum", it's a fact that the stock market abhors uncertainty. The bigger uncertainty is: what is a safe store of wealth in today's world? Is my bank safe? Is my broker safe? Is holding the Euro safe? What about dollars?

My conclusion at the moment is a bit of a cop out. I am hedged half into Euros and half into U.S. dollars. If the world comes to an end financially, perhaps the U.S. is most able to cope, so dollars are a must at the moment even though the dollar has been devaluing hugely since 1971 when the U.S. went off the gold standard. We all should have known what was to come. Germany went off the gold standard in 1914 and it was not all that long before it took a truckload of deutschemarks to buy a loaf of bread.

Workshop Attendees: Your invitation for the Saturday and Sunday sessions has been sent out. Check your spam folder if you haven't seen it.

It was a great day in both the DAX and the Euro. Both these markets get blown about by the events. Here's the Euro trades in the middle of the day. Finishing earlier today as I'm heading to the airport to collect Mrs EL.

MF Global Day 2

2011-11-01T15:16:00.003Z

When I started trading in the morning (London time) it looked like the world was ending and that the stock indices would go to zero. Selling was coming from everywhere as the the real world imitated art: Margin Call, the movie. At the same time, it looked like the Greeks might unravel as a referendum had been called. And then the Italian bond yields started going up as "they" started looking for the next weakest to hit.

As the ES opened in RTH, after a little more follow through, "they" started covering some shorts and there were a few nice long trades. People find it difficult to buy into what, until then, had been a strong downdraft. But that's why we have TPs. Having the discipline to following my well tested trading plan is my best protection.

Daylight Savings

2011-10-31T16:04:00.000Z

I hate these two weeks of the year when the time difference between the U.S. and Europe is an hour out of whack. Here in Europe we put our clocks back on the week-end and the U.S. will do it next weekend. I don't know why it is but it puts me off; the rhythm of the overlap between the two time zones makes a difference to how the markets trade.

We start the Workshop next weekend and I'm finishing my prep. Candace is coming down today to finish the stuff she's been working on and make sure it's all integrated into the program. Mrs EL gets back on Wednesday. It's been too quiet here this last week. The lady who comes in to help keep everything here in order has been especially chatty, as I think she feels sorry for me being here alone. It's been a busy week so my batching went OK with Mrs EL on the other end of the phone.

The MF Global news was all the talk this morning. The Euro gave a few nice trades early London time as the guys rebalanced their books. Love the opportunities with all that's happening in the world.

And The Beat Goes On

2011-10-28T17:09:00.000+01:00

There was an interesting interview with Sarkosy yesterday. It reinforced my view that there really isn't a workable plan yet to resolve the Euro crisis. What is evident is that the Europeans are determined to keep everything afloat.

What does that mean to a day trader? More volatility!! There will be more rumours. There will be more fix attempts. The meetings that were held resulted in a holding action, to hold the status quo without an implosion until something more permanent can be done. What the cost of this fix will be is still unknown, but it will cost Germany buckets of money and probably other countries too, including China.

The result of all this is that billions of dollars, euros, etc have evaporated. This money has and will continue to disappear from the wealth of the world. It is not being redistributed. It's just evaporating. We're all having to reinvent the way that we store our wealth if we want to maintain and increase the real value of our assets.

In the meantime, the Chinese will have to play a bigger part in any solution to the existing world economic problems. It has been said that China holds about 60% of the world's currency reserves. It has to continue its policy of vendor financing to keep its customers buying from it.

And The Beat Goes On.

Balance

2011-10-27T17:08:00.001+01:00

Firstly, all November Workshop attendees should have received an email today. If you haven't, please check your spam folder.

Again the open of the DAX was very important. Markets that open out of balance, due to overnight activity elsewhere, provide great opportunity.

Before the open, I drew in my Fib area and was ready to sell it the first time it come into it. It did that on the open and I sold the hesitation as the candle turned red. I covered as it hovered just above the 33EMA and then went long as it failed to touch it.

I exited the trade as the price went overbought. Again, it hovered. This time above the red Fib line and I went long again as it started to move upwards, taking out the previous high. The ES had been very strong and relentless during the Asian session.

As I have written before, the increased volatility is part of the so-called "new normal" as we go through this transition. How long the transition will take, I don't know, but the volatility will eventually abate somewhat. In the mean time, we should enjoy what we have. Trading the more volatile markets can be more rewarding than the less volatile ones, if you are a day trader. It's like wrestling, using your opponents weight against him.

The November 5 Workshop has just one place left, so if anyone is still thinking about it you'll need to pull the trigger to take the trade. We'll be concentrating on one Inside Out trade and one Outside In trade. I've asked each attendee how much money they want to make in the beginning as proof of their CP. I will then help each trader to create their own TP, tailored to their own needs and requirements using one or more of the menu of tools that I will provide, so that they have a short road map to their goal. Using the technology will compensate for a host of psychological issues that people have.

This is not a sales pitch as we're almost full, but this workshop will be very unique. My aim is to have everyone to CP very quickly and have created a curriculum with exactly that in mind. Just over a week to go before we start. I can hardly wait.

Today's DAX trades are the ones we will be looking at under the microscope in the workshop. The trend was up all morning but it still gave an opportunity to take a few very high win rate outside in trades. Newer traders favour Outside In trades as there is that instant gratification and looking back over a chart they look easy. I've made it simple by creating a set of rules that I have back tested. It becomes easy after you have done the back testing yourself and "believe" and have trained that muscle memory.

BTW, my comment on the European "solution": the emperor has no clothes.

Modes

2011-10-26T15:38:00.003+01:00

We are getting bursts of volatility during the European day as the news and rumours come and go. Still no real clarity on what will happen, although Merkel got permission from her Bundestag to do what she wants at the summit.

Often days like this are what in Market profile terms is called a Double Distribution Trend Day. Mixing the action between outside in and inside out trades is necessary in order to maximise the profitability of a day like this, unlike a proper trend day.

Volatility

2011-10-25T15:58:00.000+01:00

The Transition is continuing as I have written now a number of times. I keep reminding myself of this as the markets react wildly to rumours, news, hopes and the activities of the HFTs.

As someone said not long ago, this is the new normal. At least for now.

Traders must continually adjust to the changes that are taking place. It's an evolution, not a revolution.

The stock indices have a lot more noise. Experimenting with longer range bars may help, but that has a price. As I have written, my stops are far away and that is a must for me in these markets. I stop myself out well before my hard stops are hit when the market tells me to.

The trades below show the importance of discipline. The first trade was fine. The 2nd and 3rd were small losses or scratches, 4th was OK, 5th and 6th went nowhere and the 7th was a nice pay. I don't know which trade will be my pay day. I know over time I will make money with a high win rate. So I have to take every trade in my trading plan and manage it. If I cherry pick, I'll pick all the bad cherries and miss the good moves.

Black Gold Has A Price

2011-10-24T16:00:00.000+01:00

I'm batching this week. "Batching" is what they say in Australia when a guy's other half (wife, girlfriend) is away and he has to fend for himself. Luckily, I have Sammy to keep me company. She's about 13 years old and is a great dog. She's a Parsons Jack Russell Terrier that we rescued from Battersea Dogs' Home about 8 years ago. Mrs EL is in London catching up with Kiki and doing a bunch of things that have been added to her list of "to do's". Candace comes down here in a week to help prepare for the Workshop. Slides, curriculum, sanity check and so on.

We heat with Oil here in France and after just filling up our tank, discovered we have a lot of sludge built up since the tank was installed. The house goes back over 90 years so there could be any amount of sludge there that stopped the furnace from working last week. A guy came today and pumped out the 3,000 litres of diesel I just bought, filtered it and cleaned the tank and then put the diesel back. Glad I had a reasonable day trading today.

Today I sold the DAX on the open. Why? It was too far from the 33 EMA. What a simple trade with a simple reason. I did validate the trade by seeing some resistance on the overlapping Profile and that the Big CCI was overbought, but my Prime reason was the distance from the 33 EMA. Easy to put this rule into an algo.

How did I know I was "too far"? Back testing! I know that price will eventually go back to the 33 EMA and I "know" that, currently, an open more than 60 points above the 33 EMA is too much.

In this case, I had almost instant gratification. but often it takes more work for it to "revert to mean". I was also looking for a Fib resistance but couldn't find one. My 27 point profit on the trade made my day. You don't need lots of trades every day. Just a few, perhaps only one.

Friday On My Mind, Again

2011-10-21T15:50:00.001+01:00

I was itching for the DAX to open this morning as I wanted to sell the Fib trade. I did, I did. Getting these on the open can be very rewarding sometimes. My size in the DAX means I have to scale out in 1's as the liquidity, especially at 7 am London time, is not brilliant, often only 4 or 5 a side. In this case I got only part filled with a 2 lot so my trade management was quite restricted. Like a duel where you only had two bullets, not like in the American West where Colt invented the Six Gun. You could do a lot more damage with a Six Gun.

In any case, this morning I had only two bullets. I covered the first for 100 Euro profit and the second half way up the first green candle. I was really pleased after the lows were rejected as demonstrated by the hanging man candle (buying tail).

The DAX is a great contract if you want a volatile market outside American RTH, but deep pockets are a pre-requisite. My 5.5 point range bars take a lot of the noise out. I've tried a lot of range bar settings but have never found a better one than that which was recommended by a trader in Australia over a decade ago. Thanks Frank! I spend a bit of money on my own education and I always learn something new. I'm good at taking something someone has shown me and turning it into something else that makes me money.

Anyway, my two lot trade turn out to be managed correctly. Had I had a larger position, I would still have held the last third until about the 17th bar and covered at the 33 EMA as the market was in a definite uptrend as per the CCI and EMAs. This was an outside in trade for a quick profit to take advantage of the imbalance when the market opened.

I just loved the Easybeats in the 60's.

BTW, there is a new link to the indicators I use. It's located towards the top right column of the blog.

Biz As Usual

2011-10-20T16:05:00.002+01:00

Morning in London was quiet until there was a pop in the DAX mid morning and then it went quiet again. I was glad of the trades I bagged.

RTH in the ES opened with a flurry. Lots of volume. The HFTs were fighting amongst themselves. It was very visible today at the open.

I had 4 good trades in the ES in RTH. The first two were a bounce off the Fib support as order flow turned. The third was a double top against what was a cave in the profile when it happened, as was the fourth up against the DVAH as well.

There should be a break out later in the day if people start thinking about the news here in Europe.

How Do You Eat An Elephant?

2011-10-19T15:49:00.000+01:00

The answer is, as the saying goes, "One bite at a time".

Some traders have problems reaching CP because they go too fast. If you go back two years to the first posts to this blog, you'll read that the basis of what I taught Kiki was to go slow. We created a series of building blocks in the TPs so that she could progress slowly, building on past success as she progressed.

This iterative progress is an important tool in reaching CP. By nature, we traders are very impatient. We want it now! That works against us in the long term. Our motto is "when all else fails, read the instructions". It doesn't seem to work like that in trading. A trading plan (TP) needs to be built from the ground up. In different steps as the trader perfects different aspects of it and gets the belief to have the discipline to trade it.

Having said that, the goals need to be very specific and measurable, and above all, be realistic.

BTW, those of you who are still thinking about attending the November Workshop, you'll need to make a decision by the end of the week if you are new to EL, as we need time to courier you the EL Theory DVD Set so you can bring yourself up to speed before the Workshop.

The workshop will be working on two main trading pictures that the attendees will be tailoring to their own needs. One is an inside out and the other is outside in. Each attendee will end up with a set of trading logic and trading plan that has back tested as profitable. We will be working together on the rules to put into place with the aim of keeping the TP profitable. Of course part of the responsibility of the trader is compliance with the TP. The best motivation for this is success with the TP and that is why I advocate trading in SIM until the TP has proved itself to you. The stats below is for an almost 5 month period using a 6 tick range bar and 1 lot for the ES. It's a very specific TP and achieves great results. This is a TP that I scale for as many contracts as I want because of the depth of the ES market.

A TP can be tailored for a very specific picture during a very specific time of day.

None of the above is new. This blog has the same sentiments in it over and over again, perhaps in different words. But the problems traders have that they email me about are mostly the results of not doing what I've written above. Putting all your smarts into your TP is the road map to CP. Executing in compliance with that TP is the engine to CP.

Trade ES Starting From The RTH Close

2011-10-18T15:41:00.000+01:00

I don't trade much after lunch in RTH. By then I've been at my screen over a 12 hour period (often not continuously). However, I do look at the charts, especially Market Profile, when I start my day at about 5 am in France. There are lots of you out there who trade in that time zone - after RTH - so I thought a few comments may be useful after looking at the charts from the Close of RTH on 16 Oct up to about Lunchtime in London (about 7 am NY time).

This is the Profile:

I have broken out the TPOs of the current 24 hour Profile so you can see the half hourly action.

Price closed yesterday at the end of RTH at 1194.00 ish. Had I been trading starting at that time, I would mark out the key points on the Profile chart:

I would expect price to rally back to 1196.50, the bottom of the VA of the split of the last distribution. It did just that but much later.

I would watch for what happened at the low of 13 Oct - 1193.25, and,

1191.00, the TPO VAL of 12 Oct.

The next point is 1187.oo which is the Volume VAL of the same day.

The market action at the close of RTH looks like that continuation down is likely and I'd enter on the break down with good volume. I then have a series of places to cover, buy and sell at. I need to look at what happens at these key areas. My bias is down until I see good buying coming in. That did happen at the Volume VA low, twice.

Planning the trades out in advance is one way of not being surprised.

Looking into the Future

2011-10-17T15:46:00.000+01:00

It's lunchtime on Saturday here in France as I start writing this. I woke up early, as usual, but not to trade. I watched the Formula 1 qualifying at the Yeongam circuit in Korea. We then made a few runs to the local dump to get rid of the rubbish left over from our redecorating efforts which was completed, not by me, on Thursday evening.

I'm writing this post as a look into the future. I know I will scalp the ES on Monday. Scalping is a different thing for every trader. For me, scalping nowadays is trading off a 30 second or 1 minute charts or even a 0.75 range bar chart, for 1.5 or 2 points, not ticks. I re-enter on pullbacks of the trade is still intact.

I know I will make money, not because I am full of myself but because I have a trading plan that has been backtested up the wazoo and that if I get any sort of volatility will enable me to get a pay day unless do something stupid.

This supreme confidence is built on backtesting and then trading in SIM to prove the TP and develop the muscle memory and then proving the SIM with live trading. After this process I know I will be profitable. I do need to watch for any changes that require an adjustment of stops and targets.

If you look at the chart and go long when the candles go green, scratch if the momentum doesn't continue but take profit at 1.5 to 2 points and a stop at 2 points. Of course I override when I see that the trade should be exited as the order flow is waning. Simple TP. The smarts have gone into the algo that makes the bars change colour.

In my opinion, this is the way to CP. You risk only your time and lost opportunity until you have proven yourself. The risk is only the transition risk from SIM into live.

Those of you who are in email contact with me know that I usually do my correspondence at around 5am here in France. The view below is from my work area at about 7.30am this morning. Mont Blanc is just around the corner to the right behind the hill.

I've had my sauna and been working since about 4.30 am today. Not much market action, yet, although there were a couple of good moves during the Asian timezone. I'll start my scalping now.

Saturday, on the week-end, was the second anniversary of this blog. I'm pleased to say that not only did Kiki reach CP during the blog, but a host of other readers have emailed me that the blog has helped them achieve that milestone. I guess it's not a milestone because to most, the distance is not a mile but is like the distance from the Earth to the Moon. Congratulations to all who are CP. You are in the best business in the world. And now, it is a business for you! You deserve credit for all the hard work you put in. The harder you worked, the luckier you became.

It's now Monday. This is how things went this morning (London time). It was a quieter than usual morning. Market was strong overnight and started that way in London until the German Chancellor made a comment. SOLD!

Why Algos? Auto? Hybrid?

2011-10-14T15:44:00.000+01:00

The chart and stats below are my morning DAX trades, reduced to a 1 lot basis.

This is why I why I advocate algo trading. All the smarts went into designing the TP and converting my trading rules into the algo. Not a big deal in Easylanguage or RTL or a host of other pseudo languages.

If you look at the third trade, the losing trade, you can see what the difference would be if you hybrid traded this trade: NOTHING. I don't think that I would have traded this differently had I wanted to maintain the trade targets I had on the winning trades. Had I shortened my targets for all of the trades, I would have had more entries and exits and I would have avoided much of the 556 Euro loss on this trade. But I would have had to pay attention and maybe I would have missed exits or otherwise mucked up the trade.

Choosing between fully automated and hybrid trading is a calculated choice. Lots to be said for both ways of trading. However, I mitigate many of the downsides of autotrading by how I design the algo and how I conduct and manage my optimisations. Knowledge transfer of this information and techniques is one of the purposes of the November Workshop.

Everyone who has signed up, start thinking about what you want your algo to do. What frequency of trades, what win rate, what max drawdown, and any other stats that are important to you. I will help each attendee to build an algo that meets their requirements so knowing what you want is the first step. Just saying "I want an algo that makes the most money" won't cut it because it may very well be that you cannot trade THAT algo as its negative performance metrics are unacceptable to you. The algo has got to fit the user.

What It Takes To Increase Your Size

2011-10-13T15:28:00.000+01:00

The title of this post is a little racy but the subject matter is of great importance to most traders.

After a history of being a losing trader, you finally find the answer you have been looking for. You work hard and achieve CP in SIM. You then get to the next milestone of achieving CP as a 1 lot trader. You open the champagne, throw the party, buy all the magazines with the best sports cars and try to decide on the colour.

You then realize you have another issue. Size matters. Without increasing the size you are trading, you can't afford the car, the house and the life you are after. This is perhaps the last type of hurdle you have to surpass.

I have been there and done that. I have mentored people who have been there and done that.

My considered opinion is that this is a hurdle because of the early history of losses. That memory is deeply embedded in our psyches and it takes specific work and concentration to overcome it.

The first step is to develop a deep belief in your methodology and your ability to be consistent. The way to do this is by backtesting and by being consistent. Once you have achieved that, increasing size a tiny step at a time is the way to go. The first couple of steps are the most difficult because if you were trading 1 lot and are now trading 2 lots then it's a 100% increase. If this is difficult, go back to SIM and validate the size as CP and then go live, repeating the SIM to LIVE steps each time you increase you size until the increase would not be so large a percentage.

These three milestones: CP in SIM, CP LIVE 1 lot and CP with size are three distinct phases of trader development that need to be managed.

Today was the usual rock 'n roll. The chart you are looking at is the type of chart I mark to decide what type of trades I want to trade. I then create a TP and an algo to catch those trades and back test for the right basic metrics.

I was trading the ES and the DAX. The chart below is of the ES. Notice the Fib level held for quite a while. Look at your charts and you can see what happened next. It was odds on to happen.

Backtesting

2011-10-12T15:57:00.001+01:00

Backtesting is an operation that requires quite a lot of consideration before you start.

Firstly, what exactly are you backtesting for? Backtesting or optimisation can be just an exercise in curve fitting if the process is not carried out correctly. The definition of the entry picture and trigger is one issue, but the more importantly for backtesting are the exits, both stops and targets.

How you exit really determines the robustness of your algo. Volatility is changing day to day and hour to hour. Expecting a measured best target and stop to survive these changes in volatility and still leave you consistently profitable is a big ask.

Targets and stops need to be engineered to fit market activity. Yes, a hard wired stop and a hard wired target has a place in testing but only at the very preliminary stage when the entry is being validated. After that point, specific market related exits, both stops and targets, need to be engineered in order to add robustness to the algo.

These comments apply to a fully automatic algo, not to a hybrid (manual trade management) algo. Trading hybrid is easier in terms of algo creation than trading fully automatic. Also, a hybrid trader should make a lot more money as a percentage of drawdown than a fully automated algo. Of course, fully automated has other advantages to balance this disadvantage, the main one being that you don't have to sit there and make decisions. The key to hybrid trading is to backtest in order to find a high win rate first (or all) profitable scale out point and build on that with your trade management.

Patience paid off this morning in the DAX. The idea is to design your TP to catch the trades you want. Using an algo forces this discipline by requiring me to be very specific in my entries. I can still muck up the exits, but I fight that by scaling out. The MultiCharts algo can be fully automated. My MarketDelta algos are still under construction. I have them working as markers signaling trades at the moment and am working towards automation.

The chart below shows the ES signals on the MarketDelta chart. The first pullback was a losing trade. I was waking up and missed them. The next two trades were scratches and the third took off. Using an algo, even for alerts, validates trading pictures and makes sure I don't miss too many trades.

Strange Morning in Europe

2011-10-11T15:55:00.002+01:00

It was a quiet and strange morning in Europe as "they" were waiting for the vote in, of all places, Slovakia. Slovakia is the other half of the Czech Republic on the border of Hungary. They are deciding whether to pay any money towards the Greek debacle. As of the writing of this part of the blog, they are still deciding. The DAX chart below shows the break down, finally, after Eurex broke down (for lack of activity?) for an hour or so. We're doing some decorating here and I was carrying wooden planks upstairs at the time so let my software manage my trades.

Algo entries are great on days like this, when things are so quiet and it's hard to sit there and keep concentrating. There are a bunch of VB and volume indicators on this chart, some of which are used in the algo. The MarketDelta version gives signals that catches the moves as you can see. Guys at the Nov 5 Workshop will have a lot of tools to choose from for their TPs and algos.

Less Risk, More Profit

2011-10-10T15:47:00.002+01:00

The key to trading has been to take less risk to make more profit.

Sounds obvious, but it is amazing how traders try and guess or predict where price will go without any empirical evidence. I don't know about you, but I think it's pretty hard to predict. What I do is to make a deduction from the evidence before me as to what "they" are doing so I can join them. Trying to do what King Canute showed couldn't be done is a no win situation.

I'm a fan of Sir Issac Newton and Leonardo da Vinci, both alleged members of a secret society, but to me, members of a small group of men that made discoveries that have had a huge impact on the world's understanding of itself. Newton's Laws of Motion are the basis of trading as I have written once before.

So my business is to detect the trend of the prices of the chart I am trading from. I then wait for a hesitation (pullback) in that trend and trade the subsequent thrust back in the direction of the trend. "A body continues in a state of rest or uniform motion unless acted upon by an impressed force". Those were the words I learned at North Sydney Boys' High School in my physics class. I had to say them over and over like learning the times tables until they were embedded in my muscle memory. I remember them today and what I am doing in my trading is find ways of seeing the order flow so I can judge an end to the continuation of the uniform motion. I'm looking for the impressed force that is acting against the trend to stop it.

There are lots of tools available to us today with all the modern technology. Electronic trading allows us to slice and dice instant information so we can see "their" footprints that are as fast as the speed of thought. When I was on the floor there was a huge pit full of traders making trades and then verbally reporting the trade to the observer: "34 trades", who had a reporter with a key board typing the sales into the computer that then appeared on quote screens around the world. I first saw prices being reported on the Sydney Stock Exchange. In those early days there was a gantry with a chalk board running the whole width of the trading floor with all the stocks listed. Next to each name were 4 boxes. The middle 2 were the bid and ask and the outside 2 were the numbers/mnemonics of the brokers who were bidding and asking those prices. Trades took place almost by appointment.

The chart below is anther way of looking at "their" footprints. It's no better or worse than the other ways I use to detect the order flow but it may talk to different traders more loudly and clearly than other ways. This chart is a 30 second chart and moves very quickly - it acts a lot like a range bar. To help me see things instantly, I have dropped the indicators and PAINTED the BARS. Green bullish, red bearish and cyan neutral. The coloured bars are not signals but tell me a trading picture is setting up. I can only trade with the trend. This algo is one step away from fully auto.

We'll be looking at ALL the tools I have during the workshop so that the attendees can build themselves a trading model that fits them, both discretionary and algo.

In your search for a trading methodology/trading plan, the starting point is to take a chart and pinpoint on that chart all the trades you would like to have caught. The next step is to find the tools to catch them with a high consistency. Nothing is 100%, or close to it, but a methodology that shows you when you are probably right and probably wrong is what you are after. Then, by wrapping it in money/trade management, you have a business.

RTH opened with the market in a bullish mode. My envisioning was for an up value. I wasn't disappointed and went long at the first arrow on the first pullback, not waiting for the thrust. I started scaling as I didn't know where the market was headed and where the move would stop. It's not hard to see those higher volume nodes and congestion where I took some off. The dotted red lines are ATRs and act as support and a marker to consider bailing. I hit the magic 5 handles profit within half an hour and my day was made. The rest was cream. I looked at the daily charts for resistance and bailed the balance as it neared the 1181.75 high of 28 Sep. I'd had 3 good pushes. I was tempted to stand in front of the train and fade it there, but went for a lie down until the feeling passed. There are old traders and bold traders but no old, bold traders. Although I did reload half way through the move, I find it hard to re-enter after completing a trade like that. So I switched back to the DAX that I had been trading in my London morning. The 30 second chart is only good for me when the market is moving very fast.

The EL Methodology

2011-10-07T16:01:00.003+01:00

I want to recap a little here as we hit the end of the second year of this blog.

Thank you for all the feedback from you guys that have achieved CP through reading the blog. I just provided the methodology. It was you who did all the hard work. Congratulations. Some of these emails are in the Testimonial section of the blog. It should be inspiration to all who are still on the road to CP. Keep going, you can do it as many others have.

What I do is really simple and easy to learn.

I identify the trend using the tools you see on my chart. I then wait for a pullback in that trend and enter on the thrust back in the direction of the trend. It is that simple.

What happens next is that either the order flow is strong enough to take the market further and give me a profit, or the order flow fails or hesitates enough to shake me out of the trade.

I qualify the entry and the order flow using the same tools that you have seen here in the blog. I can filter trades out using those tools. Sometimes the filtering filters out good trades, but mostly not.

I have a number of exiting techniques, but mostly exit all or part at what I call the first logical scale out point - the first resistance.

This is the inside out trade. I also trade outside in which is fading the trend. This is a less usual trade for me and I only execute it when there is something to lean against in the context. It is typically fading an overbought or oversold market. The Gap trade is an example of this type of trade.

I have mechanised most of these entries using my algos that I call Flo or FloBot. I have also fully automated some of these strategies in a fully automatic FloBot. I activate the right algo to match the price action.

Everything I do is in this blog, but if you want to save time and effort, there are just a couple of places left for the November 5 Workshop where I will teach all of the above including how to create and use an algo to both enter and exit trades in both hybrid (algo entry with manual trade management) or fully automated, including how to optimise with the greatest probability of obtaining a robust model.

The chart below is the ES and 1.30pm is when the jobs report came out. The first trade is an outside in trade, OverBot and against the Fib and also against some high volume in a previous overlapping Profile. The market sold down to the other Fib you see marked. This greater volatility is skidding price a little more through the Fib area than usual, but I had made the adjustment and left it to breath a little more. This series was also a Gap trade. The 3rd trade was right into the jaws of the Fib, but orderflow was strongly down and I didn't believe that it would hold a second time - it was used up. I was rewarded for my analysis.

Thank You Steve Jobs

2011-10-06T16:05:00.000+01:00

I think it was the latter part of 1979 and I had been trading GOLD for a while that I heard about a group managed out of New Orleans by a guy called Tim Slater. It was CompuTrac, the first computerised technical analysis group. It used a computer to chart and analyse the markets. It sure beat drawing my charts by hand. And there was this new thing called "technical analysis". The computer age had arrived for me. I joined.

I'm not sure now, but I think I was member two hundred and something. Other members were George Lane who invented Stochastics, Chaikin, Bressert and many others whose name is part of the technical indicators we see in all the charting packages today.

They mailed me a bunch of stuff in a big envelope, including the specs of a computer. It was an Apple II. Problem was that I lived in Sydney, Australia and there were no Apple dealers there. PCs didn't exist. Worse still, we used 220V electricity while the U.S. used 110V.

Another challenge was that I needed to collect futures daily data every day by modem from Boca Raton, Florida. I had to find something cheaper than a phone call, as phone calls were hugely expensive in those days. I had to set up packet switching through an Australian gateway.

Anyway, after a few phone calls to New Orleans, I got the names of a couple of Apple dealers in New York City. I ordered my Apple II computer, a major effort as credit cards were still in their infancy too.

Weeks later, a big box arrived at customs in Sydney. It had my Apple II, which came with two 5 1/4 inch floppy drives capable of loading 32k each. By the time I was ready to switch to the "IBM Compatible", I was running 5 or 6 Apple IIs every night and had a printout of charts about 6 inches high.

That's my Apple story, thanks Steve Jobs. You invented my first tools that started me on my road to technical analysis and trading profitably.

Here's an ES chart for the pre-RTH Eurotime. I've had quite a few questions about trading the ES before people in the U.S. go to their jobs. Yes, there's plenty of volume. The chart below shows my MarketDelta chart with more of the new things I'm using and that I'll show people at the November Workshop. They can be used in both discretionary trading and in algos, as can all the stuff we will be looking at in the workshop.

How Strong Is The Order Flow Before RTH ?

2011-10-05T16:14:00.001+01:00

As I have written before, there are many styles of trading.

The one I want to talk more about is the shorter term trading - some call it scalping but it's not just for 1 tick.

It comes down to what I have also called the first logical scale out point and is that price which I am pretty sure that the market will get to, taking into account the order flow I see when I pull the trigger. This can be just a few ticks or a lot more.

This judgmental, subjective call can be made on a number of basis: volume breakdown, cumulative volume delta shape and direction and context, momentum both short and long term, how far from the EMAs the entry is, and so on.

In making this judgement I want to be sure more than about 75% that I will hit that first logical scale out point. I then have the option of being all out, or actually scaling and at some point moving my stop to break even plus a tick. This will depend upon the context and/or the closeness of that first exit.

The pre-RTH period has lots of opportunities if you are looking for a market in that time zone. Today's video shows a nice sequence.

Styles of Trading

2011-10-04T16:08:00.000+01:00

I find that I am trading bigger, but for smaller profit per contract in today's volatile markets. I'm scaling out less and am all in and all out more often than before. I think it's a product of the whippyness I see.

That doesn't mean that it's the best way to trade. Scaling out allows me to capture a larger move without a re-entry if I want. But I think that the current character of the markets has made me react in the way I have. I'm re-entering and making my profit on a full position but it's a little more work. Using Flo to enter makes it less arduous but my trade management needs to be sharp.

The balance between all out and scaling out is really a psychological one I think. We all like to take profits. But if you add reloading the scaled out contracts then I think that scaling out is the better option, just harder to do, at least for me, in the current context.

The transition continues as reality is slowly sinking in. I believe that there is still quite a lot to unfold as the current crisis is managed, for better or worse, by the various governments and agencies.

The ES RTH open was a bit confused as you can see from the left of the chart below. After about 10 minutes the sellers won and gave me my first RTH trade as the big CCI confirmed the other order flow indicators down. Once the EMAs widened, I was looking for more shorts. I got caught a little on the second last trade on the chart, which cost me just over 2 handles. The final short on the chart was a short based on the overbought and VB divergence. The rubber band had just gotten too tight. These are the trades I double down on as I can, at the worst, scratch the trade. My TP allows for this trade and I have back tested it extensively. Programming this trade into Flo means I can trade it hybrid or auto too. There are a couple of important techniques for this trade that I will show at the November Workshop. It does need to be shown in real time.

Trading the ES Today

2011-10-03T16:16:00.000+01:00

The video today is as it says on the box, trading the ES today. It's all about reading the order flow. "They" leave their footprints. It's up to us to see those footprints and walk in them as they are created.

The video below shows a number of today's trades and my thinking behind each trade. This is what I teach to students and what we will be doing in the November Workshop and learning how to use an algo to achieve instant trade recognition, instant trade entry and for those that want a full algo, trade and money management.

Patience, Patience and More Patience

2011-09-30T16:22:00.000+01:00

There are a number of ways of trading. One way is to trade anything that looks like a trade, another is to pick the high win rate pictures and be patient until they arrive. Its a matter of how "tight" you want to play, to use a poker expression.

You can trade, say, 30 times a day with large size looking for a small average profit per trade to make you green for the day. Or you can aim for surer trades and hit it with a bit of size and make an emerald green day. Both styles are valid but making a conscious decision which one to trade is important so you know how to create your TP. The pic below show some of my more patient trades today. Look at the pictures to see the elements that make them a high win rate picture.

The TradeStation chart below shows a sequence of those "surer" trades. The market broke at the first trade and allowed me to trade a whole series of pullbacks until the market became oversold - see the 135CCI, below -200. That was my signal that I had to wait for a new picture. Maybe there can be more trades after that oversold but they cease to be "sure" (high probability = high win rate) trades and my TP meant I had to pass on them. There are enough trades every day so I don't need to be impatient. When I translate that trading plan into an algo, I transfer those same rules and require the pullback entry to be filtered out if the market is oversold or overbought.

Making Adjustments

2011-09-29T16:03:00.000+01:00

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.

The Right Tool for the Job

2011-09-28T16:57:00.000+01:00

We have a host of electronic tools available to us now, at a cost that is comparatively very low.

Whether you are using MarketDelta and its best of breed volume analysis or MultiCharts and TradeStation's best of breed automation, the testing tools mean that there is no excuse for being surprised in live markets.

One tool I'd like to mention is WalkForward Analysis that is available in bot MultiCharts and TradeStation. At the present time, the functionality of this tool in TradeStation is superior. However, the speed of MultiCharts and the data availability of MultiCharts is currently way ahead of TradeStation.

Having said that, traders who haven't used Walkforward Analysis
(https://www.tradestation.com/education/university/school-of-strategy-trading/video-tutorials) and who have access to the TradeStation page linked here might see something of real value.

WFA is one of the techniques we will explore in the November Workshop.

Another interesting tool is MarketDelta - probably the best discretionary traders charting package. I've been showing DAX charts using MarketDelta not only because I like to trade the DAX but also because many U.S. traders have "discovered" this market. It starts trading in the middle of the U.S. night so suits many people who want to trade at that time. It goes on 'til the close of the NY Stock exchange. The trades below show how clearly the order flow can be tracked. This chart above shows the U.S. RTH first couple of hours.

On the Road to CP

2011-09-27T16:10:00.000+01:00

OK, you have got the aims of your trading plan defined.

I want to earn an average of $300 per day as a first goal.
I want to work from 9am until Noon, NY time
I want to trade the eMini ES
I want to be a very active trader looking for quick profits
I will put $25,000 into my trading account
I need a win rate of more than 65% to trade in a relaxed manner

Now lets get to the next bit. How do you achieve these goals?

Firstly, you assemble your tools that you can use in your trading plan, either on a discretionary basis or in your algo.

The ones we will look at and choose from in the November workshop will include:

33 and 99 EMAs and how to use these two very important metrics - a trading methodology in itself
the large and short CCIs, defining trends and triggering trades
Pullbacks and how to use them
First Hour strategies
Several Order Flow tools: Pressure Indicator, Order Flow Metrics indicator
HH and LL
Wrapping money management around a system to make it more profitable. VERY important

We test to see what combination(s) of the tools are profitable generally. We find the best maximum stop loss and best logical first scale out target to use as the basis of further developing the trading plan.

I then teach the techniques of how to bring the tools together to create the trading plan that meets the requirements as set out above. We then include in the TP what the trader must do to ensure that the TP stays as profitable as possible, a maintenance mode.

The TP needs to be specific enough for an algo to be created from it. We then create the algo logic rules.

The ES was climbing all the London morning. Plenty of pullbacks to trade as it motored north. Flo was in her element and I didn't have much to do but watch.

It All Starts from "How Much Do I want to Earn"

2011-09-26T16:31:00.001+01:00

As I was working on the program for the upcoming Workshop on November 5, I thought that I should share in this blog some of the information that we will be working on, at least to the extent that it can be in a blog.

We will be starting with a blank page and ending up with a bespoke trading plan and algo logic rules for each attendee to match their particular requirements.

To find those requirements, we start from the title of this post: "How Much Do I want to Earn"? Once we answer this question, the next one is: What hours do I want to trade? We then ask: Which market do I want to trade? And then: How much risk capital will I use?

These questions set us up with some metrics that we can use to start off working on or Trading Plan (TP).

For example, my answers may be:

I want to earn an average of $300 per day as a first goal.

I want to work from 9am until Noon, NY time

I want to trade the eMini ES
I want to be a very active trader looking for quick profits

I will put $25,000 into my trading account
I need a win rate of more than 65% to trade in a relaxed manner

Once we have the answers to these questions, we can construct a trading plan specifically to meet these requirements.

The MarketDelta chart below has signals based on some new volume work that I'll be showing in great detail in the November workshop. The confirmation of the order flow and momentum is really clear and can be duplicated in both discretionary and algo trading.

As these markets become more technology driven, the discovering of what "they" are doing has become easier with all the tools available today. I have attempted in this blog to get my readers to think about what is happening rather than trade indicators as squiggly lines. We are trading order flow. Our tools help to reveal it. Order flow's footprints are there for us to walk in. Those of you on the road to CP will find the journey shorter if you use the available technology to do the heavy lifting.

ES rallied in Asia, pulled back in early European trading and then rallied strongly ahead of RTH. It topped at around 1150.00 which corresponded to the bottom of the buying tail of the Sep 13th Profile and then sold down ahead of the RTH open. The chart below shows the key points. The order flow is readily identifiable with the tools we use.

Algos for Discretionary Traders

2011-09-23T15:39:00.001+01:00

I have had a few emails asking what use is an algo for a discretionary trader.

The main benefit, and there are many, is that with an algo a discretionary trader can test an idea.

I get lots of ideas, some good and many useless. Just eyeballing a chart does not really do it for me. I want to see the numbers. For example, how much of a larger stop loss do I need on an entry that is further from the 33 EMA? What about the target? Does it need to be closer?

The algo can give me these answers, which I can then fine tune at the right edge of my chart after having the basic information, rather than putting my money at risk blindly.

The second main benefit, and there are many more, is that I can mechanise my entries. The algo can recognise the picture faster than I can and execute the trade more quickly too.

The third main benefit is that if I have tested metrics, I can see when the market changes so that I can make my own adjustments. Different stops and first targets apply in different market volatility environments.

And the list of benefits go on. With today's technology, a trader doesn't have to be a real programmer to be able to use the technology to make it into his own personal holy grail.

When I woke up this morning here in France, I saw the ES rally had continued in Asia after the NY close. What were they thinking? My vision was still a retest of the lows and a probable break of them. I turned the Flo algo on that fitted with that idea. The morning trades were 3 for 3. Learning to use the right algo for the conditions is a great improvement on just one algo. Knowing that if I had picked the wrong algo I would still make, but not so much, was an important confidence building factor. Testing!!!

Outside In Trades

2011-09-22T15:59:00.000+01:00

We haven't discussed Outside In trades much in the blog. That was by design, as most new traders try to become knife catchers- a very risky business unless done with a tested plan.

As an ex-local, Outside In trades come more naturally to me, as that is what we did on the floor. When the rubber band was tight enough, we provided liquidity at a price.

Doing the same thing as a retail trader is more complex due to the invisibility of the pit - brokers and other locals - and the fact that it costs more to trade from upstairs than it does in the pit.

That being said, Outside In trades are a good weapon in my arsenal. I've referred to those trades in the context of doubling down. The theory is that if the market was overbought or oversold where I put the trade on initially then by averaging I'm getting both a better price and trade location. The governing factor is to know where price has to go for me to be wrong and that the amount of loss that would create is compatible with my trading plan. Back testing these types of trades is of course part of the process. I know what I can expect when I'm trying to catch the knife and I know what I am leaning against.

Notice the volume information not only in the footprints, but the volume breakdown and the Volume profile on the right. The high and low volume is what stops the market as it's either activity that caused the move stopping or opposite activity coming in that stops the move. These supply good exit info.Of course I also have an algo that trades these pictures.

In the mean time, economic and market transition is continuing. The U.S. and China are the main managers of economic transition and we, the traders, are the managers of our own market transition as the pits disappear and the algos take over.

These electronic algo driven markets feed on themselves and learning to cope with this self cannibalistic activity will be the difference between survival in the markets or going the way of the dinosaurs.

Afternoon delight:

Sale of the Century

2011-09-21T15:33:00.000+01:00

Come on Down!

The DAX opens at 7am London time, 1 hour before the actual stock market opens against which the underlying index is calculated.

The open looked weak, but then the market just moved up in almost a straight line- but lethargically. I saw this big cave in the Market Profile before the open and my vision was that the price should go there, so I was looking for a sell opportunity.

I didn't get it until price hit yesterday's VAH. I also saw tails on the candles indicating higher price rejection. "They" were selling the highs. So I did too. Especially since my fav Fib area was there too and a double top.

Where did I cover? At the opposite Fib. "From sea to shining sea" as the American national anthem says. The sale was around 5580 and the cover around 5520 gave me 60 points per contract or 1,500 Euros. On a 5 lot that would make a nice day. Patience and a trading plan.

Winter is arriving here in the mountains in the Haute Savoie. The first sign was that on the week-end my favourite cheese, Vacherin, had arrived at the supermarket's cheese counter. The cheese with a little caraway seed sprinkled on it, french bread (baguette) and one of my favourite red wines.....

The second sign was that our housekeeper, who lives higher up our mountain, said it had snowed on Sunday afternoon.

I can hardly wait for the skiing to begin. Looks like a better season is on its way this year.

Make 2 ES Points A Day & Charts Are Back!

2011-09-20T15:26:00.000+01:00

I keep thinking about a guy I've written about a couple of times: the guy in California that traded T-Bonds in the 1980s. He would look to make only make one trade in his size when the market opened and then hopped into his Porsche to go to the beach.

It's beginning to look better and better to me day by day. Maybe not just one trade, perhaps just trade for an hour and a half.

A simple Flo algo I have, does exactly that. It starts trading the ES at the open of RTH and finishes an hour later. The target profit is $87.50 per contract per trade. The win rate for the last 6 months or so is about 75% and the return is almost 4 times the drawdown over that period. Profit Factor is 1.47. The big number is $4,528.50 after commissions. These are hypothetical numbers, as I have only been trading this particular algo live for about 3 weeks.

Now $4.5k per contract in 6 months doesn't look terrific. It averages out at a little over 0.75 points after commissions per day. But it looks solid. And it's only working an hour a day. And trading 4 contracts would make a nice day.

The interesting thing is that by using this as a basis, scaling out half at the $87.50 target and using discretion with a breakeven stop, I can more than double that average profit.

The point I am trying to make with this post is that the starting point for designing your trading plan, whether as a discretionary trader or as an algo trader, is to define what you want out of your trading and then design and engineer the rules to meet those objectives, of course basing it all on a methodology that sits well with your DNA.

Designing a TP with a matched set of algo rules is what we are going to do with each attendee at the November 5 workshop. Each trader, if he knows what he wants, will end the sessions with a personalised TP and algo rule set.

I was leaving it to Flo today as I was busy working on the Nov Workshop program. The chart below shows the only two trades Flo found on this chart. She missed an earlier entry as the picture missed the entry requirements in the algo by a hair. That's fully automated trading. I would have made a little more with discretionary exits too, But I didn't have to watch the market so 12.5 points or $625 per contract wasn't too shabby. The high win rate gives me confidence to trade size.

The first trade was a late entry after the trend change, as was the second.

There are so many ways to use an algo, whether by a newer trader who uses it to make sure that he sticks to a back tested TP or by a more experienced trader running several algos on different markets or anywhere in between.

I truly believe that algo trading, either for just entries or fully automatic, is the Holy Grail of trading.

Important EL Algo Workshop Update

2011-09-19T15:56:00.001+01:00

Our new payment system is now operational. If you have been waiting to pay by credit or debit card, please go to the Sign Up page here. Lots of bureaucracy, but we have ended up with a very secure internet payment system.

A Wine Day In Haute Savoie

2011-09-19T15:17:00.000+01:00

The wine grapes have or should have been harvested now and the wine sales of September have begun.There was a special Sunday opening of our nearby super store today, just for selling wines and nothing else. They had sent out their catalogues about a week ago with the offering from about 2 Euros to 500 Euros a bottle. Many of these wines cost up to four times as much in London. If names like Margaux, St-Emilion,Pomerol,Fronsac and even Gewurtztramminer mean something to you then you know what I mean.

Although we have a local wine merchant who sells us wines from small vineyards, we couldn't pass up the big discounts that were on offer today. It was just like a Market Profile trade. Price had been brought down below the value area and it attracted buyers. We got there at about 7.45 am for an 8.00 am opening. There were already about 20 people ahead of outside the big, wide and high roller shutter leading into the store. By the time it was almost 8.00am, the area behind us was full and the French natives were restlessly awaiting the opening with lists in hand and planning their campaign to get the best deals that were only available in limited numbers. Some wines were in very short supply, only 300 bottles or 50 cases.

At 8.00 am the roller shutter started rising and the waiting crowd edged forward only to see a row of security guards lined up behind the roller shutter with their eyes bugging out in surprise at the sight of the eager crowd about to trample them. I hadn't seen anything like this since my one visit to a Target opening at 5 am in Minnesota on Black Friday and the opening of a Harrods sale in London just after Christmas.People were using shopping carts as battering rams and to block others from their deals. I made the "mistake" of being polite and allowing a woman to barge in front of me at one shelf and she cleaned out all of the particular wine I had wanted a dozen of. No good deed goes unpunished.

Anyway, there were plenty of other wines to choose from and Mrs EL and I had done a little homework the night before, so we did have backups.All in all a great morning was had and our wine cellar is looking a lot fuller. We have racks for about 1,000 bottles but room for probably 5,000 bottles if we added racks. I'm not good at laying down wines for the future although I really should, but I'm a day trader and such a long term trade would go against my DNA.

Does It Really Work?

2011-09-16T15:43:00.000+01:00

There are so many myths in our business about what works and what doesn't.

“It ain’t so much the things we don’t know that get us into trouble. It’s the things we know that just ain’t so,” said early American humorist Artemus Ward.

Of course there is a three step way of knowing for sure.

Firstly, I backtest it. If that passes, then I can SIM trade it and if that passes I can finally trade it with real money on small size.

Sounds simple, reliable and it makes sense, but there are many traders that don't do that. If they did, most of the traders wouldn't fail at trading.

We have the technology available at very low or no cost to do this. Yes, it requires effort and yes, I backtest and SIM trade many things that just don't work as I thought they would. Some only fail when I trade them with real money. But better that than throwing money away without a chance of success.

Simple Algo

2011-09-15T15:09:00.000+01:00

This is my basic algo's stats. By basic, I mean that there are no bells or whistles and that the profit target that the algo is based on is 1.5 ES points. It trades from 8am London to 9pm London times.

I can use this basic algo to auto trade or hybrid trade. The profit target is my first logical scale out point and with hybrid trading I exit part here and manage the rest of the exits manually. The important thing is that the profitability and win rate are here to begin with and allow me to take the rest of the trade to a more optimal profitability. For autotrading I re-optimise to find the best balance between profitability and draw down, but make sure I keep the robustness with walk forward testing.

If you are a trader looking for just, say, 2 to 4 ES points a day then creating a high win rate algo such as this may be an idea. The stats cover about 6 months of data and the required daily earnings can be tuned by the right number of contracts. The tight target brings the high win rate. This algo can be further improved by tightening the times of day that it trades.

Designing an algo means I start with a trade premise and this one is my basic pullback in the direction of the trend. I can make it more or less aggressive but it will impact my win rate but may be more profitable as an auto trader. The process is to always have in mind what the end result needs to be.

Starting with a blank piece of paper, I set out what I want to end up with in terms of metrics. The idea is not to necessarily catch all the trades that may exist. Only those that meet your risk and other criteria. The idea is to make money and tailoring the algo to your precise requirements is a good way of achieving that. It's not a matter of opening an optimisation and looking for the largest amount of profit the squiggly lines can produce in back testing. It's what it can make in real time with real money that counts.

Once I have a good basic algo, I can build on it and bolt on scaling out, break evens, and other actions to maker it more suitable for auto trading, but always from a trading point of view - market action.

Some of my early students are successfully implementing hybrid algos on their own - no real teaching by me, although I do pass on tips if asked. They use the basic stuff I showed them and use the algo for instant trade recognition and trade execution. The benefits they are reporting is being able to stick to their TPs and not missing a trade. Some of my other students are coming to the workshop. All the new people at the workshop get sent the Theory DVDs from last year's training to get them up to speed before the November workshop.

All you guys who are waiting for the new credit card button to pay, we are almost there. The bureaucracy is unbelievable. Anyone who can't wait, can bank transfer if they want. Just email Candace at candace@electroniclocal.com for instructions.

Occam's Razor

2011-09-14T15:18:00.000+01:00

Occam's Razor is the first expression, I believe, of the principle to KISS - keep it simple, then you're not stupid. It talks about the fact that the simplest explanation for an occurrence is the best.

In early times, it was taught that the sun revolved around the earth. Copernicus was punished because he disagreed with this teaching and said that the earth revolved around the sun. The proponents of the incorrect theory, introduced a host of extra rules and exceptions to try and justify their incorrect view. Copernicus' proposition was a simple explanation to all the observations and of course, simple was best and correct.

In our trading, we try too hard to complicated things. Order flow determines market direction. It has to. Liquidity providers take the other side of the trade but eventually they too have to join the direction of the order flow to cover.

Until their is sufficient order flow in one direction and a trend develops, markets randomly move around reacting to short term orders.

Our challenge as traders is to look through the noise and recognise the order flow that will give us a profit. We use a number of tools as well as relying on market psychology to unravel this puzzle. But keep it simple as the more complications you add, the more contradictions and analysis paralysis you will encounter. It is tantalising to add more and more to a chart in order to be "sure" but in fact has the opposite effect. The proof of this proposition is when I create an algo and add, say, 6 indicators that line up, I end up with very few trades in my backtesting and an algo that fails the walk forward test. Yet when I use the simplest of trading principles, I achieve my goals of win rate, profitability and robustness.

Why Double Down

2011-09-13T15:48:00.000+01:00

Doubling Down or averaging a losing position is strongly criticised by many people. I'm not one of them.

I'm not advocating to average every loser, but doubling down is a valid strategy to have in your arsenal of tools to use as a discretionary and as an algo trader.

A good example is from yesterday's ES chart.

The ES opened in RTH and I switched to the Dow Euro after I had a couple of nice longs in the ES. The ESTX50 trades a little differently from the ES as it's a European stock index.

I sold the Fib, as you can see on the chart, looking to buy back as it came back into the Keltner Channel towards the 33 EMA. It didn't happen as expected and I sold twice more as it powered through the Fib area and went overbought. By that time it was way too far from the 33EMA and I was confident of a pullback as eventually it always comes back to the 33EMA. I did have a drop dead stop.

I ended up with a 2020 average sale price and took 5 points out of the trade on the first push down. I covered half there as the price had broken through the Fib area and was looking for the price to then bounce and either take off or fail. We were far enough from the 33EMA for me to believe I could take a profit on the second half of the piece. In fact I was able to re-short the half that I had covered as the breakout failed, covering nearer to the 33EMA.

Another Trading Picture- In Oil

2011-09-12T16:07:00.000+01:00

Lots of things remind me about trading. The picture of the painting below which is in one of Budapest's museums is one of them. Kiki took the picture and it obviously hit a cord with her too.

The guy eagerly caressing the girl could represent the trader while the girl picking his pocket is the other market participants.

This, to me, reminds me of the importance of testing and quantifying my performance. Hope does not have a place in my trading plan, neither does luck. I am always glad of a little extra luck, but never make luck the basis of any part of my trading plan.

Back to more active trading today, in the Euro. The Euro had come down hard against the dollar last week, so I was watching to see if the downdraft would continue today. There was one more blip down as I was getting up - I wasn't at my screens at the time. Price then rallied back to "value" at the EMAs. "They" then had a few attempts to sell it but I didn't expect it to work as my Order Flow filter was green and the Pressure Change Alert was signalling too. I sold the 99EMA twice, with a some joy the first time and only a little the second time.

I decided that as the market couldn't go down, it "had" to go up and waited for the trend to change - bigCCI > 0. I bought the first pullback, scaled and loaded as the market moved my way. I called it a good morning as we hit my fav fib.

Transition to Live

2011-09-09T11:21:00.000+01:00

Becoming CP has a last step: the transition from SIM to real money trading. This is not always an easy transition. It's not a trading issue but purely a psychological issue.

People who have more capital seem to cope with it more easily. The fear of loss is greater if your trading account is smaller and you trade a larger contract. If you read this blog from it's earliest days, you will see a number of posts talking about this problem.

Transitioning from SIM to live should be done trading the smallest size and with the most modest expectations.

Trading SIM allows you to perfect your trading skills without risking any money. It develops that muscle memory. When you add all the backtesting that I have suggested, it makes you a believer in your methodology. It makes you believe in your skills when you see your weekly stats as a consistent and satisfactory set of numbers.

Transition to live should just be the addition of one variable: changing the account number of your execution app from your SIM account to your live account. Everything else should be the same. By the time you are ready to take that last step, you should be able to carry out the two steps of instant trade recognition and instant trade execution, in your sleep, without any real thought as your muscle memory should be taking over.

Until you reach that level, CP in SIM and instant trade recognition and execution, you are not ready for live trading.

This was our last day in Hungary. We were at Lake Balaton today, the Gold Coast for the Hungarians. Summer is over now and things had wound down. Back to France tomorrow for Mrs EL and me and back to London for the rest of the clan.

I'm looking forward to going back to work on Sunday.

Backtesting and Walking Forward

2011-09-08T14:45:00.000+01:00

The process I use for backtesting is different depending upon whether I want to use the algo for fully automated trading or for Hybrid Trading, where I will manage the exits.

I do this because I am looking for different things in the backtesting.

Before I start looking at each type of optimisation, I run a full optimisation testing all the main inputs in order to validate the model.

For a fully automated strategy, I want to see the most money made, but I need to qualify this with a number of prerequisites, including in no particular order:

Average Trade Size big enough

Maximum Drawdown small enough

Win Rate high enough

Outliers should have minimal or no impact on results

Walk forward analysis pass

Walk forward analysis is important in order to have the best possible robustness of the algo.

For a Hybrid Trading backtest they include:

Win Rate (most important)

Stop Loss levels

My main required metric is a high win rate, as the true profitability in using the algo will depend upon how well I manage the trades.

The process of building the algo and testing it is quite a complex one. As I have said before, I first was involved in the process in the mid 1980's and learned how to create algos successfully by trial and error. There was a lot of error. I discarded auto trading a number of times over the years as the technology just wasn't there to do it successfully. Teaching Kiki to trade was responsible for me getting back into auto trading once again in 2009.

The way that the data is used in the process and the way that an algo is created based upon sound trading principles not math and squiggly lines has proven to be the key to successful algo building. There are numerous biases that need to be taken into account, not the least of which is that position bias that has resulted from the way that the data trends. Building the algo requires the elimination or the accommodation of the type of market activity that is revealed in the historical data.

It is because of this complexity and because of the difficulties that I have seen very smart traders have had with the process that I decided to do the workshop in November.

The technology available to us, retail traders, has reached the level required for doing this successfully. We can't easily, if at all, trade many times a minute but that is NOT my aim. The aim and the arbiter of success is profits in my trading accounts. No number of successful computer runs mean anything. It's the making of real money in real time that counts. Of course I test in a SIM account because I know that if I'm not profitable in SIM then I can't be profitable with real money.

The November Workshop will break down my principal trading pictures into their components so everyone has a full understanding of how and why they work so well. We will then put the components together into trading logic for a computer.

Whether you want to use the algos for just signals and alerts, or hybrid trading where the algo takes care of the instant trade recognition and instant trade execution and you manage the trade, or you want to fully automate your trading, this workshop can provide you with the tools you need to be self sufficient.

One more day in Budapest and back to France on Saturday. It's been great here. Last night we went to the world premiere of a 3D production of the opera, Bluebeard, written by Bela Bartok. I really liked the opera and using 3D projection of the scenery was very novel.

Computer Glasses

2011-09-07T16:33:00.000+01:00

I've been wearing glasses since I was about 3 years old and have gone through a number of phases as a glasses wearer. My first phase started when I was 3 and I had one of my eyes covered with a patch.

The next phase was on the floor when I had difficulty seeing the big boards around the exchange and reading books. It turned out after having had three sets of glasses made, the time had come for reading glasses, so I chose varifocal lens. This was in about 1987 when they were new and not as good as they are now. I spent two days falling down steps, as I couldn't judge the distance with the varifocals.

For the last few months I've been struggling to see my screens, all 24 inches of them. My eyes got tired and things went fuzzy. My next phase had arrived. After some research, I worked out I needed computer glasses tuned to see just the distance to my screens. Luckily, both my French optometrist and my French speaking were good enough and I learned that they made a variation on the varifocals, just for computer use.

I'm wearing them now and my world has changed again for the better. Ain't technology wonderful.

Chinese Terracotta Army

2011-09-06T08:48:00.001+01:00

In London, it was impossible to get tickets to see the Terracotta Army. Here in Budapest I could reach out and touch them, if touching had been permitted. The photo below shows how close we were.

The first emperor of China was buried and he was buried with his terracota army. In fact, about 200 hundred of his real soldiers were killed and buried with him to help him on his way to the then Chinese equivalent of "heaven".

I can't help but see similarities between the discipline of the terracota soldiers and the discipline and regimentation needed to successfully day trade the markets. We need the same systematic routines repeated every day that the Chinese army of Qin Shi Huang, the first Chinese emperor, had in order to successfully conquer and unite all of China.

We had cakes at Gerbeaux, the famous Budapest "cukrazda". There are a few famous food palaces that I love in the world, including Demel in Vienna and Maxim's in Paris.

The stock markets are continuing their realignment, as I have discussed a number of times. This run to the end of the year continues to provide lots of opportunity but requires that stops and targets be adjusted in line with the volatility at the time of the trade.

Budapest and a Great Story

2011-09-05T09:11:00.000+01:00

I've brought the clan for a week's holiday in Budapest, Hungary. Last break before the run to the end of the year. Volatility should be awesome.

We arrived Saturday. The city is divided into two: Buda and Pest and there are many bridges that cross backwards and forwards joining the two sides. Lots to see, thermal baths built by the Romans and Turks in bygone days and the best food in Europe. I'm trading a couple/few hours a day while we are here so the posts will continue.

I have to share an email I received last week. I get similar ones every few weeks. My premise when I started this blog was that I could teach almost everyone to trade profitably. The constraints were that they did the required work in the way I prescribed and that their financial condition was such that they did not have an issue with risking their account money trading and could live off other income until they perfected their craft in SIM.

The guy whose email I am reproducing below supports that premise. I want to emphasise that he is the one who deserves all the kudos. It was he that did the work. No mentoring from me apart from 500+ posts on the blog. My reply at the end of his email says it all.

Dear Tom,

Thank you for your blog. I have been following your blogfor a good year now and I have put in the many hours to read and re- readeverything you have posted. I find the information you provide of great value.Allthough that many people may believe it is all about the indicators orcharts, I see the bigger picture what you are saying and I have adapted thesame vision. That was the final piece I needed in my search for over more then15 years to get to consistent profitability... Now I finally have reached thatpoint... I hope I can do the same for other people in the future but I wantedto thank you for sharing.

greetings,

(name and address supplied)

My reply:

Hi Xxxx

Thanks for the mail. I love getting these. It’s a bigkick for me even though it was you doing the work. I'm going to post it afterdeleting your name as an inspiration for other who are still on the road to CP.When people see others do it, it helps them get the motivation to do what needsto be done.

You have a great life ahead of you in the best businessin the world, but you know that.

Regards

Tom

LAST FRIDAY: I tweeted the bounce off the 26 August VAH @ 1179.75ish as it was happening in the ES. Glad to see that the crowd was watching (see the time stamps - London time):

verniman
$ES_F: Bearish. Res 1187. Breakout Sell Pattern below 1179.75 Targets 1175 (Gap Unfilled) 1169 (61.8 Confluence) http://stks.co/4V1
Sep. 2 at 1:58 PM
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desifinance
$ES_F good support at 1180 area, consider taking profit on some swing shorts at the open, bounce to 1201 not unlikely
Sep. 2 at 1:58 PM
fromTwitter
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verniman
$ES_F: Bearish. 1181.25 Target Hit. Expect a bounce to 1200 or a drop to 1175.25 (Gap Unfilled) 1170 (Fib 61.8 Retrace) http://stks.co/4V0
Sep. 2 at 1:58 PM
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ElectronicLocal
$ES_F We just bounced off VAH of 26 Aug. Watch out below if it breaks convincingly with order flow
Sep. 2 at 1:57 PM
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Information moves at the speed of thought. How I love this technology.

But it's the trade that counts, not the call. Instant trade recognition and Instant trade execution is what is required.

Waiting for Jobs - Not Steve

2011-09-02T16:09:00.000+01:00

London was quiet in the morning except for some nice Euro action. "They" were waiting for the Monthly Jobs report due at 8.30am NY time.

Today's morning trades went according to Flo. The Euro chart on MarketDelta show how well the even unfiltered Flo signals are working on the 5 tick range bar chart.

Using an algo, even just to identify the trades, is a great edge as it provides one half of what is required for CP: Instant Trade Recognition. Then, you need to act quickly on it to meet the second requirement: Instant Trade Execution. Using an algo to enter the trades ensures compliance with this aspect.

The most difficult part of a trade is the trade management, I think. This is true whether you are managing manually or whether you are programming the algo to manage it's entries. There are pros and cons for each method but the challenges of management are different for each of them.

For a manual management, you are reacting in real time to the context. For algo managed trades you are trying to look into the future and take into account different eventualities. You have the benefit of being able to backtest but the end product can be only an "average" management result. A good manual management should out perform the algo. However, the algo can manage 100 trades at the same time when I am struggling to manage 3, manually.

Euro FX and DAX

2011-09-01T16:53:00.000+01:00

This morning turned out to be a great morning in London time. It started off slowly and then the markets broke.

The charts below are unfiltered pullback signals in the Euro and the DAX markets. I didn't take the longs, as there was no real positive order flow, but then the Euro broke down.

I was too slow to catch the 1.5359 sell but it alerted me to what was to come: SOLD @ 1.4354. The better part was that it made me watch the DAX and 10 minutes later I was able to catch the sell @ 5762ish. My size on the Euro was smaller and I ran out of bullets on the way down, but I did catch the DAX @ 100% size as I had been alerted.

These are MarketDelta charts. The DAX's MarketProfile also gave good context to the trade. The Euro's MP always needs a lot of splitting and I had not done my homework on it when the market broke as I was doing a GoToMeeting. I paid the price for not being prepared - less profit.

Doubling Down

2011-08-31T16:27:00.001+01:00

My criteria for an outside in trade is the ability to double down. By doubling down, I mean that I add to a loser. I know that eventually the price will get back to my EMAs so this strategy works for me if my original trade was correct, albeit at not the best trade location.

I do have a drop dead stop as "the market can stay irrational longer than I can stay solvent". When I put the outside in position on, I have secondary and even tertiary areas where I will add to that loser. And, of course, where I yell "uncle" and cut my position.

But the doubling down increases my profitability quite a lot. Firstly, I'm not taking unnecessary losses and end up with a winner instead of a loser - a big difference to my bottom line.

And secondly, I put additional positions on without increasing my dollar risk by much, if at all. My position sizing is related to the risk of the trade so I may start with a 25% position and my stop on the entire position will be equal to or even less than a normal 100% position.

Its the math.. I would not recommend that anyone tries this without deep testing - as with everything - so that the math is understood and shown to work in the way that you implement it.

Below is an example from today. Not the cleverest trade I must say but it did make money and it could have been a loser. I was trying to manage an ES trade from the DAX Market Profile, probably a stupidity in itself and the original sale was misconceived but I was trying something out. That's my excuse anyway. But it is a good example of the technique. I covered just above the 33 EMA. I guess this is a reversion to mean technique. I will be teaching some of these techniques in the November Workshop. This trade can become an 80% plus winner if done correctly.

The rest of the day in the ES was great. We've got some nice MarketDelta signals developed so those of you who are coming to the November Workshop and use MD will have a good starting point to build on, perhaps adding some of the metrics unique to MarketDelta.