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What Is the Source of Your Edge??


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What Is the Source of Your Edge??

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  #21 (permalink)
SpeculatorSeth
Salt Lake City, Utah
 
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WoodyFox View Post
Most all indicators are worthless and are nothing more than lagging history. You are more than likely curve fitting your data by not looking at enough historical history. This is why your edges only last for short periods of time and then you find yourself looking for another edge elsewhere. There are edges using stock/public available indicators if you use a large enough amount of historical data. The downfall is...Your equity curve draw downs will be ugly. You can somewhat combat this with diversifying instruments, but for me its still not worth the effort. The best edges take work and are not going to be obvious. Try finding an edge using just price or Volume (without lagging it by an indicator). If and once you do, combine them. Also,Try using implied volatility to gauge price moves. Many edges there.

Most of what I have done in the automated space has been almost completely with order flow analysis. Which is a real pain because you have to tick replay everything to determine buys and sells which takes forever backtesting. I also have some work on level2 signals, but I haven't gone too far into that since those are best tested with live data. That might be a Christmas break project.

The ones that have shown some degree of success probably did have some edge in that market. I was testing them because of theories based on fundamentals. The problem is just they don't work in other markets, and there's no way to know based on technicals if we're in that kind of market or not. A problem I'm sure more than a few of you will relate to. You think they have something, and then you get the switches.

Realize that all data you get from the exchange is past data. Even with leading things like level 2, as soon as that order hits your screen it is now in the past. To get beyond that you have to incorporate information that isn't reflected on the exchange yet.

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  #22 (permalink)
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TWDsje View Post
Even with leading things like level 2, as soon as that order hits your screen it is now in the past. To get beyond that you have to incorporate information that isn't reflected on the exchange yet.

This is exactly why I use Implied Volatility to gauge/predict price moves.

Here is a brief list of stock indicators I will consider using when building strategies...For me the rest are junk. I also use some private indicators that are not public/stock.

ATR
Corelation
Donchian Channel
Max Min
Range
RIND
SMA
Std Dev.
Std Error
Sum
Volume Delta

Chances are you won't live on one edge. You really should build edges with several markets to diversify and grow capital with a smoother equity curve.

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  #23 (permalink)
Oslo+Oslo
 
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lightsun47 View Post
Extreme hard work and insurmountable patience.

Only those two helped me find my true edge.

I agree with your points too, but they can only be found after these two. Otherwise, forget about it. You're battling against robots everyday which are designed to take your money instead of giving it to you. So have patience and work hard.

BATMAN: There is always a way - you just have to find it.

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No bot is designed to take away money from you. I`d reconsider what they actually are doing in the market. Personally I don`t offer it a single thought because there is very little I can do about it if it was true.

Trade-management is not really mentioned yet here, but I believe it is a huge part of a profitable traders edge. Mike Katz has a very good video about it HERE.

His management edge looks like this:

a) Normal days are a grind around the regular R-distribution (at worst offsetting his losing days, at best slightly profitable)
b) Very few outlier losing days (=>Daily max loss limit)
c) Your true edge is capturing the profitable outlier days. (Adding to winners, and risking parts of profits for a bigger reward, now these guys trade around a core and they have insane skills)

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  #24 (permalink)
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Dingo666 View Post
No bot is designed to take away money from you. I`d reconsider what they actually are doing in the market. Personally I don`t offer it a single thought because there is very little I can do about it if it was true.

Trade-management is not really mentioned yet here, but I believe it is a huge part of a profitable traders edge. Mike Katz has a very good video about it HERE.

His management edge looks like this:

a) Normal days are a grind around the regular R-distribution (at worst offsetting his losing days, at best slightly profitable)
b) Very few outlier losing days (=>Daily max loss limit)
c) Your true edge is capturing the profitable outlier days. (Adding to winners, and risking parts of profits for a bigger reward, now these guys trade around a core and they have insane skills)

Not sure why you quoted me for no bot is designed to take money. I didn't say that - I actually replied to some other peoples' views from other threads.

Yes, money management is important too, but your psychology comes first then managing your money. Basic skills such as being patient and hard work comes before everything else.

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  #25 (permalink)
SpeculatorSeth
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WoodyFox View Post
This is exactly why I use Implied Volatility to gauge/predict price moves.

Here is a brief list of stock indicators I will consider using when building strategies...For me the rest are junk. I also use some private indicators that are not public/stock.

ATR
Corelation
Donchian Channel
Max Min
Range
RIND
SMA
Std Dev.
Std Error
Sum
Volume Delta

Chances are you won't live on one edge. You really should build edges with several markets to diversify and grow capital with a smoother equity curve.

Well if you can provide some stats I'm always open to looking at it. I was actually backtesting channel indicators today but I found that Donchian channels did not perform as well as the alternatives. The numbers I got out suggest that Bollinger Bands work best simply because they are the most popular.

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  #26 (permalink)
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TWDsje View Post
Well if you can provide some stats I'm always open to looking at it. I was actually backtesting channel indicators today but I found that Donchian channels did not perform as well as the alternatives. The numbers I got out suggest that Bollinger Bands work best simply because they are the most popular.

Personally, I do not like the Bollinger Bands...they incorporate unneeded complexity. Start with the basic Donchian Channels and mix it with a little price action. By price action I mean...ATR, Range, things like that.

Below is a swing strategy. (I do not use this strategy). Its very basic and it evaluates price action with simple math. Looking at only Long swings and taking on average 14 trades a year (using one contract), while also including commissions and a little slippage (in real time its very minimal). Now this strategy only profits well in a bull market, but it also does not trigger unless its a bull market. You can see its doing well in 2020 despite the large drops during covid. I will not give the inputs because I work very hard on these edges, but I wanted to show its really not all that hard to find them. They are in every market. I think peeps just try and make it to complicated.


Strat


A couple other bits I think people should also be aware of. The quality of your back test is very important. Make sure of your merge policies and incorporate them in...if your not careful, the will give you bad results. Remember you can't carry a trade through rollover. I also would primarily use time based bars for back testing because using exotic, volume, range can often times give you bad results. Also use higher granularity down to one minute when using higher time frames. Most of all, do not over optimize. Although, One good way of optimizing and is often overlooked is looking at different trading windows. Opens can be huge in some markets. Always forward test.

OK, sorry, done ranting

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  #27 (permalink)
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Thought I would give one I do use. This is basically the same kind of strategy, but takes shorts too and is a more aggressive swing with shorter hold times. Its really simple mathematically and uses no indicators, just high low price action.

Its works only on 6E.

This if for the current 09-20 contract

6E Strat

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  #28 (permalink)
SpeculatorSeth
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WoodyFox View Post
Now this strategy only profits well in a bull market, but it also does not trigger unless its a bull market.

This is where simply having a backtest that shows a profit is not sufficient to prove "edge". Any strategy that is going long over the past 10 years is probably going to have positive results. Plus your strategies are swing trading. Holding overnight provides some edge. So to prove that your technical edges are real, we need to look at risk adjusted measures. For instance, the Sharpe Ratio which in your case is .5.

We can also compare the backtest to similar variations. For instance, trading the opposite of the individual signal components, or replacing any use of a Donchian Channel with a Bollinger Band. And that's where I'm saying that in all of the research I have done, the Bollinger Band consistently outperforms other channel indicators. Then we can say (at least in that particular setup) that one indicator provides an edge over the other.

I have found it is extremely common for traders that have some positive results to not understand where their numbers are actually coming from. Many are just deriving edge from taking on excessive risk for instance. So if we're going to take these results as evidence of a technical edge, more work would be required.

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  #29 (permalink)
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TWDsje View Post
This is where simply having a backtest that shows a profit is not sufficient to prove "edge". Any strategy that is going long over the past 10 years is probably going to have positive results. Plus your strategies are swing trading. Holding overnight provides some edge. So to prove that your technical edges are real, we need to look at risk adjusted measures. For instance, the Sharpe Ratio which in your case is .5.

We can also compare the backtest to similar variations. For instance, trading the opposite of the individual signal components, or replacing any use of a Donchian Channel with a Bollinger Band. And that's where I'm saying that in all of the research I have done, the Bollinger Band consistently outperforms other channel indicators. Then we can say (at least in that particular setup) that one indicator provides an edge over the other.

I have found it is extremely common for traders that have some positive results to not understand where their numbers are actually coming from. Many are just deriving edge from taking on excessive risk for instance. So if we're going to take these results as evidence of a technical edge, more work would be required.

Its best to look at volatility when comparing the ratios's. Either way, don't take these Ratio's so seriously...they are just a tool to help guide you.

The 6E strategy is a short and long strategy? Its not a directional bias strat. The NQ strategy was bias long, but I do not use it. Just showing how edges do exist.
and they are not really all that hard to find.

I went ahead and added shorts to the NQ strategy. Just for example. Notice how the trade count almost doubles, but the profit did not fall all that much. Also notice the improvement at 2017 and 2020 (It includes the most resent major sell off). So now its not bias directional and still performs well. Contract for Contract, I make more in NQ than any other market. Tech is were the volatility is.
NQ Strategy with Shorts included



Yes the 6E strategy is a backtest, but it has been forward tested. You should always forward test any strategy before throwing capital at it. (I have increased my capital with this strategy.)

The 6E strategy in nothing more than a high low price action strategy very similar to the Donchian channel. I would like to see you produce those numbers using the Bollinger Bands. Not saying you can't, but certainly would be impressed because I'm pretty confident.

That all being said...I have been humbled before. But i'm getting dam good at this stuff.

I would forget about them. JMHO

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  #30 (permalink)
SpeculatorSeth
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WoodyFox View Post
I would like to see you produce those numbers using the Bollinger Bands. Not saying you can't, but certainly would be impressed because I'm pretty confident.

Don't be silly. It should be easy for you to just create a version of the strategy using the Bollinger Bands and post the results. Show the full stats too because just seeing the cumulative net profit is not very interesting or useful.

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