ES and the Great POMO Rally

August 14th, 2011, 10:13 PM

tigertrader

Would your maximum daily ruin remain the same, or would you raise that number proportionally?

That's an excellent question actually. For myself, my daily stop loss (maximum daily ruin) exists because some days I am just not reading the market as well as others, or I'm overly reactive to losses or wins, or the market is behaving in such a way as to not reward my method of trading. All these (with the possible exception of the third) lie outside the statistical reasoning I used in my post. In instances like the markets we've had the last two weeks, I would plan to be very conscious of why I am losing as I approached my daily stop loss and adjust that daily stop loss upward if I could be confident that my losses were not due to any of these factors. This is a slippery slope though and touches on why discretionary trading will always have an element of "art" to it.

August 16th, 2011, 08:34 AM

Bulls should still be in charge - would look for support 1171.00-1173.00, with an upside target of 1232.00 (50% retracement). Nevertheless, we should not ignore the fact the market pulled back to exactly the 38.20% retracement level and failed. My feeling is that this is still a dead cat bounce, but markets often under-shoot or over-shoot their objectives, so a failure from any level is possible.

August 16th, 2011, 09:08 AM

Good article on adapting to an HFT environment!

August 16th, 2011, 04:08 PM

What turned out to be a relatively ugly range day saw the ES test the 1202.00 level and fail for the second day in a row As I mentioned earlier this level represents a 38.20% retracement of the July/August down move and is quickly becoming a line drawn in the sand. Liquidity appears to have returned back to normal (except when it was pulled during the Merkel/Sarkozy meeting) and volatility has subsided for now. With options expiration upon us, ant it�s attendant seasonality for reversing short term trends, we must be cognizant of the 2bar double top at 1202.00 and the possibility the market could sell off from this level.

August 16th, 2011, 08:14 PM

tigertrader

What turned out to be a relatively ugly range day saw the ES test the 1202.00 level and fail for the second day in a row As I mentioned earlier this level represents a 38.20% retracement of the July/August down move and is quickly becoming a line drawn in the sand. Liquidity appears to have returned back to normal (except when it was pulled during the Merkel/Sarkozy meeting) and volatility has subsided for now. With options expiration upon us, ant it�s attendant seasonality for reversing short term trends, we must be cognizant of the 2bar double top at 1202.00 and the possibility the market could sell off from this level.

I agree. There definitely seems to be some resistance that match many trading approaches criteria for a potential reversal such as fib levels and double tops, etc. Hopefully tomorrow will be a bit more exciting even though the volatility did pick up a bit today.

August 16th, 2011, 09:38 PM

Short ES @average of 1187.50 with a price target of 1166.00.

Euro needs to stay under 1.4370, however.

August 16th, 2011, 10:25 PM

Im still considering to go short on a higher bounce, but 2 things i don't like. capitulary volume and very bearish setiment. Will wait and see how this turns out. Might go long if im wrong, but so far, short bias. No positions yet.

August 17th, 2011, 07:13 AM

Surly

OK, I want to challenge some of your statements a bit but definitely in the context of myself being the student and you being the teacher.

Your first two statements above seem to agree with my "reason #2" which was that the increased volatility (low liquidity) does make it easier to trade - in other words, the increased volatility makes one's tradeable patterns more consistent ("higher degree of fidelity" and "highly correlated to one's opportunity to make money").

If this is the case, then it follows that one should be trading with increased risk because expectancy is higher. In drawing this conclusion I am making the assumption that risk:reward is a constant and that the different market conditions simply increase %win. An increase in %win, when coupled with a constant risk:reward, means that your system is just working better and this, to me, means you should be willing to increase your risk per trade because over a series of trades (given a higher %win) your TOTAL RISK will be lower.

To illustrate what I mean, if you normally risk $500 per trade and win 50% of trades then over 20 trades you will lose (statistically speaking) $5000. If your % win goes to 75% then if you want to risk $5000 over 20 trades you can increase your risk per trade to $1000. Thus, if your stops have to grow by 3x (in ticks) your position size does not need to decrease by a factor of 3 but only by a factor of 1.5 to keep the same risk over a group of 20 trades.

I do realize that it is more comfortable to keep the absolute size of your stops (in dollar terms) constant by deceasing position size in direct proportion to the increase in absolute stop size in ticks, but trading rarely rewards the comfortable path.

The hard thing is to quantify your % win and also whether or not the favorable conditions will continue. Miscalculations will lead to a greatly increased "risk of ruin". But position sizing definitively has a place in trading...

I recommend reading the work of Edward Thorp and Dr. William Ziemba, a lot of the gambling theories translates well to trading.

In fact, they just published a compilation of the research papers regarding the Kelly Criterion:
Amazon.com: The Kelly Capital Growth Investment Criterion: Theory and Practice (World Scientific Handbook in Financial Economic Series) (9789814293495): Leonard C. MacLean, Edward O. Thorp, William T. Ziemba: Books

August 17th, 2011, 07:20 AM

Michael.H

They're norwegian.... They work for a investing firm. We still keep in touch, its amazing how tight the regulations are over there. He wanted to send me some ideas for stocks, and later found out that i can't if i have us citizenship.... Very interesting. Guess thats why your economy has been so stable for so long, and we go through shit like this every 8 years.

Ok, interesting. The finance business is such a small "community" in this country, so you made me quite curious about where they work. I know a few traders, but I'm always interested in expanding my network...

Regulations are quite tight, yes. We did have our own bank crisis in the early 90s, and that tightened up regulations even more..

August 17th, 2011, 08:30 AM

Michael.H

Im still considering to go short on a higher bounce, but 2 things i don't like. capitulary volume and very bearish setiment. Will wait and see how this turns out. Might go long if im wrong, but so far, short bias. No positions yet.

Yes, there was capitulation selling, it was a swing bottom. However, sentiment is actually slightly bullish - ISE Sentiment Index was at 103 yesterday and is trending bullish longer term although "dumb money" does appear to be VERY short. If the ES does take out 1202.00, it will probably trade up to 1232.00/50% level, and who knows maybe they will even run it up and take out the July or even the May highs -anything is possible. But for now, the bears aren't allowing the market to get back over the 1202.00/38.20% level.

ES and the Great POMO Rally

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ES and the Great POMO Rally