June 17 2022 Prep

No clear edge in stats.

However, option Expiry is bearish. Hence leaning towards shorts today.

Traveling currently and hence likely 1/4 size so that I forget about it.

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July 17 2022 Review

No clear edge but leaned on shorts due to option expiry bias. 1/4 size.

Very random moves, range bound and would have quite difficult to scale in/out.

Break even trade.

Since, more than 60% of the days tend to be range bound, whiplash & somewhat boring like this, it's important for me to recognize this as early as possible and adopt a different strategy + mindset.

Lack of clear edge or statistical advantage for long/short may be the 1st clue. How to use this info? Instead of initiating my position @ RTH open, I could fade the extremes (by relying on $tick for exhaustion and oscillators). Perhaps, I am also allowed to switch directions, intraday, only in this situation. Will look deeper into this later.

Big picture - Performance review

Slightly negative / Breakevenish week.

Bullish equity curve with a shallow pullback @ momentum slowing. Will the trend continue?

Review of my 'edge'

First of all, What is my edge?

THE question I dodged for 5 years but I had to face it last year once I decided to take my trading game seriously.

I have 4 edges.

1. The ability to check the price data of the last 20 years with the advantage of adjusting variable inputs (aka current market condition) to check the 'higher probability' outcome of the trade (Entry RTH Open and exit EOD). Since I have a probabilistic mindset now, I no longer argue with stats.

2. The discipline to execute this without exception. More importantly, I have the flexibility to change my execution by prior planning to evaluate the effectiveness of modifications.

3. (Debatable) skill of reading current trend & momentum using EMA cross over methodology to decide on entry and exit points for scale-in/out (This hasn't been forward tested but will be my next project).

4. My professional background is in health and psychology but personal interest is in technology and I like stats & math. Finally, Crowd behaviour fascinates me.

I am currently reviewing my individual trades from May 17 to June 17. In total, 23 days of trading of Forward testing to assess the usefulness of stats (One of my edges).

Since, I added a variable of discretionary scaling in/out, the analysis will be a bit more complicated. However it also adds some richness to the otherwise bland data. I'm going to analyze 3 scenarios.

1. All in at RTH open & All out at close
2. 50% in @ RTH open & 50 % scale in once. All out close
3. EOD close vs New HOD/LOD after EU close. (Reason is on the assumption that reversal day is likely and hence risk reward ratio is not favorable)

Will post the results before Monday AM.

I am also contemplating the rules for my trend & momentum based entries/exits. This is the most subjective part of my discretionary trading. Hence its the most vulnerable and the weakest link of my 'edges'.

Review of my edge in statistics

Halfway through my analysis.

Not easy because of the cognitive and emotional loading but extremely useful.
6 data points considered.

1. Supposed entries/exits according to my stats signal.
2. Actual entries/exits (Tradervue chart is very helpful)
3. Hypothetical points of entries/exits for scaling.

The 1st point must be well defined and there should NOT be any ambiguity in how I classify the signal strength. Because, this defines the position sizing.

2nd point is not that relevant as my discipline is pretty good now. I don't argue with stats.

Final point is the most challenging exercise and heavily influenced by hindsight bias. Obviously your mind makes you believe that you would have entered and exited at optimal locations. Making this LESS discretionary is one of my goals.

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Now to the brief summary of results.

1. Do I have an edge? Absolutely Yes. Though the sample size is less, it's clear that when it's right, profit is BIGGER than when it's wrong. I want to emphasize that the win/loss percentage is close to 50%. This may be frustrating to a novice trader, (it was to me in the past but I understand now that most of my profits comes from a handful of big winners).

2. Is it better to scale in/out rather than ALL in/out? - Possibly. My P&L did improve with hypothetical entry/exit points for scaling but it's lot less than I expected and hoped. I'm also mindful that my criterion is ill defined and the hindsight bias will further affect the results adversely.

3. Do I have to worry about EOD exit without a stop? Not Really. Since my position size is less than 0.5 of my account size, this is not an issue for me now. Hypothetical stop @ Post EU close HOD/LOD adversely affected the results. The only sensible stop level is >1.5 daily ATR which I will consider once position size goes up.

Books for the INTERMEDIATE level traders

After 5 years of amateur approach to trading and reading all the popular books, the real positive change in my equity curve and mindset happened after I developed a probabilistic mindset last year. Since then my goal has been to embrace 'uncertainty' and was looking for some books in this field.

I was hoping that 'Noise' by the famous Daniel Kahneman would help but many reviewers felt that it's underwhelming. Very disappointing compared to his useful 'Thinking fast and slow'.

So I gave a shot at 'SuperForecasting'. Cheesy title but surprisingly useful with lots of insights about uncertainty and ways to improve the odds of success.

Currently reading 'Thinking in Bets' by a poker champion but very relevant for trading. Highly recommmeded.

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This modified my approach & quantification of 'the edge'. Will explain this in my next post.

How to improve forecasting?

Let's start with a small fun exercise from that book.

The Renzettis live in a small house at 84 Chestnut Avenue. Frank Renzetti is 44
and works as a bookkeeper for a moving company. Mary Renzetti is 35 and works
part-time at a day care. They have one child, Tommy, who is 5. Frank’s widowed
mother, Camila, also lives with the family.

How likely is it that the Renzettis have a pet?

Like most of the study participants, I started with the details of the family. Italian family, most likely. Their occupation and it's implication for income and free time to manage pets. Famlly size, which is small, compared to the usually big Italian structure, age of the child, size of their house etc. This is called 'Inside view'.

The best way to start is to consider 'Outside view' first. For instance, '62% of American households own pets'. Then you assess the impact of the individual familly factors in increasing/decreasing that odds.

May be a trivia or obvious to others but an eye-opener to me.

How did I translate this to trading. An example will help here.

Last Friday was options expiration day (bearish bias). Though it's important, it's an 'inside view'. I paid too much emphasis on this and went short @ open. I should have started with 'outside view' factors first. That includes 1. price closing lower the day before, gap down open, bull vs bear market condition, volatility etc. They had a bullish bias.

Why is this important? Anchoring bias. Initial anchor should be based on outside view first and then see whether specific inside view factors align with it or not. In this case, I have to assess whether 'the outside' Options bearish strength is strong enough to change the 'inside' bullish bias. In this case it was probably just enough to make it neutral. In my experience, it's often not enough to move the outside bias significantly.

I would like to think 'outside view' as Macro Bias and 'inside view' as micro bias.

Hope this makes sense

Are markets truly random?

My edge is based on the premise that market is NOT random, atleast in certain circumstances. I want to find out what those periods are and take advantage of that. Let's look at an example.

One of the inputs in assessing my edge is gap opening.

Do you know that when UP gaps are filled intra-day, it's bullish for the following day. This strength persists regardless of the closing price (up or down). The profit factor of 1.25 is pretty significant, especially when you consider the fact that these days account for almost 1/3 of the last 20 years i.e 1600 days.

Obviously, this doesn't mean we should all buy after those days but gives a good 'outside view' or macro bias. I also consider few other macros and then move to inside or micro features like day of the weak, month end, FOMC, Options expiry, NFP, etc.

Who said trading was easy?

June 21 2022 Tuesday Prep

Stats are bullish.

Though the signal is pretty strong, long weekend and low trading volume on monday makes the data somewhat less valid.

Hence Long 1/2 size @ open and then will consider scaling in @ Friday Hi/close depending on PA.

If we drive up straight from RTH open, it will be hard for me to scale in above the price I paid. Unless we have a trend day structure i.e High RV, High tick & shallow PB, I will stick to my 1/2 size.

I'm wrong below Friday's low. I may start using hard stops though I like the EOD Market on Close MOC orders. One less decision on my part.

P.S. Normally I will be fading this move on my gut feeling (with the assumtion that it's a Bear market bounce and short lived). Though the premise may be correct, the momentum of the up-move is just beginning. I should either wait for it to slow down or sellers to pounce to new lows to have a bearish bias.