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When NOT to trade


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When NOT to trade

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  #1 (permalink)
Dallas
 
 
Posts: 23 since Jun 2009
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My personal trading intention: Create a reasonably simple, robust strategy to scalp the market.
Of course, every word or concept has to be defined to understand what I mean, i.e. what does "resonably simple" mean? But that is not the point of this thread.

The reason I state my intention is because my understanding is many, or the majority, of traders who post here are pursuing a similar short-term intraday trading strategy, so we should have several who are like-minded in this effort.

What I would appreciate sharing ideas about, is an aspect of trading that is at least as critical as when to enter the market. In fact, if capital preservation and risk management are a priority in your trading, it may likely be more critical than entry:

When NOT to trade.
(yea, the title kinda kills the impact of the moment...)

So to start off this thread, I will suggest the following trader perspective from which to evaluate the concepts discussed below:
As a trader, assume that price action will continue as it has in the recent past several bars, and if it has not been price action that is useful for you to enter and profit from, then wait for the personality of price action to change before considering an entry.

I will suggest 3 concepts that may be useful to help identify price action to avoid:

1) Relatively low volume market conditions. I need to know what 'normal' volume is for my market that provides sufficient opportunity for useful price action to profit from. If volume is low relative to the same time on other days (perhaps due to pre/post-holiday lack of participation), or if volume is low because it is the typical time of day for it to be low (lunch lull), consider avoiding entries until acceptable volume resumes.

2) Narrow range consolidation. Perhaps one's strategy can participate in wider consolidation swings and profit in the middle, but at some point, the current trading range may be too small to expect to get the price action required to identify/confirm an entry plus achieve the number of ticks necessary to profit from based on your trade management. Narrow range consolidation is revealed by the obvious horizontal support and resistance channel it is in. Also, the price bar formations tend to be more overlapping (no strong moves that directioanlly progress from close to open) and alternating (up bar/down bar), not exhibiting any conviction of an ongoing directional commitment from the market participants.

3) The grinding directional move. The market is showing a directional bias, say making higher lows and higher highs with moving averages and other favorite indicators pointing up, but...price extensions are minimal, before stalling and retracing, then resuming the initial direction again. This one gives the hope of an entry, but price action that chews up tighter initial/trailing stops. It is really a subset of 2) narrow range consolidation, in that there is an upward (as opposed to a horizontal) channel of support and resistance, but minimal price extensions, which represent as the overlapping and alternating bars.

These are just a few ideas which require some analysis of relative volume and price action. Again, it seems to me that I can only expect the market to continue to do what it is currently doing now, and if I expect it to explode in my favor after it has been listless, just because my indicator or entry rule says it should, I may be placing my capital and psyche in harms way unnecessarily.

I welcome your critique and ideas.

Did today's ZN price action have any bearing on this post...?

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  #2 (permalink)
Seattle
 
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Haha, Neal. I thought the body of your post was simply going to be "Today."

Great post!

Blz

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  #3 (permalink)
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Excellent post, Neal. Too many traders focus on when to trade or when to enter and not nearly enough on when NOT to trade, as you've pointed out.

Today for instance, I was concerned that as soon as I stopped trading (after being in chop all morning) that there would be a big break out move and I'd miss out on making my daily goal on the ZN. But, I also recognized, from past experience, that it was likely to just chop around again over and over.

So what is the safer course of action? The one with higher probability for not losing money? Simply not to trade when things don't go right. There are plenty of times when they do go right... so why force it.

Thanks again.

Mike

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  #4 (permalink)
Calcutta, India
 
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true, its very imp to know when to gets in, but its even more imp to know when to gets out, but the most imp of all is to know when to do nothing

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  #5 (permalink)
Florida
 
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Neal, thanks for an insightful thread.

I intend to start a journal on futures.io (formerly BMT) soon to show my setups and timeframes.

I've been excluding Monday mornings, FOMC afternoons (and being aware when it's too choppy on FOMC mornings), and Fridays.

I saw that I was giving alot of profits back on Fridays, so why not go play golf or fish.

I don't trade before 8:40 EST on ZN or 9:40 EST on TF.

Good success.
Kirk

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  #6 (permalink)
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The rules vary depending on the instrument you are trading and whether or not you are trying to automate the process or not.

Here is a brief overview of my automated system which you may find interesting. It has 3 different state classifications: trending, ranging, consolidating

It uses multiple timeframes to determine the current state of the system. Ie if signal to noise ratio is above a threshold in higher timeframe then market is trending. If it is below threshold on the higher timeframe but above threshold on a lower timeframe then it is either ranging or consolidating. To differentiate between those two I check the slope and width of a channel.

In this way I am able to trade with different parameters on a lower timeframe even if the market is not trending. Basically it is three totally different strategies depending on which state the market is in.

check out the image I posted here

which has a screenshot of what i use for the highest timeframe, when the SNR indicator line with cyan and magenta dots is underneath the threshold then it is classified as nontrending and the system then checks against two lower timeframes to see if it can trade on either of them. Any signals generated when the SNR is under the threshold are considered void (unless it is seen as valid on a lower timeframe).

The SNR indicator is actually based on the channel in the top pane, it essentially calculates the variance about the median of the channel. The channel itself is somewhat complex, based on a nonparametric kernel density estimation but a similar system could be devised based on keltner bands with pretty good results.

My system is still a work in progress but already it is profitable across most all market conditions (in live trading not sim). Getting to that point has been quite a journey and like most people involved blowing up a few accounts, around $35k in all (much of which was lost in stress-induced discretionary trading before I got my psychology and money management in check). Based on my what I have learned, knowing when not to trade is far more important than how you enter trades. I would say it is second only to good money management.

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  #7 (permalink)
Toronto, CA
 
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could you recommend good book (or web site) with the algorithm explanation for the nonparametric kernel density calculation?

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  #8 (permalink)
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record100 View Post
could you recommend good book (or web site) with the algorithm explanation for the nonparametric kernel density calculation?

These are the two books I have:
Amazon.com: Nonparametric and Semiparametric Models: Wolfgang Härdle, Marlene Müller, Stefan Sperlich, Axel Werwatz, Wolfgang HSrdle, Marlene Mnller: Books
Amazon.com: Markov Chain Monte Carlo in Practice: Interdisciplinary Statistics (Chapman & Hall/CRC Interdisciplinary Statistics Series): W.R. Gilks, S. Richardson, David Spiegelhalter: Books

Good Research papers:
https://www-stat.wharton.upenn.edu/%7Estroud/classics/PittShephard99.pdf
A smoothing filter for CONDENSATION
CONDENSATION -- conditional density propagation for visual tracking
The Condensation Algorithm Home Page
http://users.umiacs.umd.edu/~ramani/pubs/nips2004_similarity.pdf

Recursive Bayesian estimation - Wikipedia, the free encyclopedia

BTW.. these are the same type of ideas behind Mark Jurik's JMA also. You can get basically the same signals I have from his indicator (they both closely approach the bayesian optimal estimate after a given number of samples)

The signals are not the point though, you can get similar signals from any number of indicators. The power of this kind of nonparametric technique is that they are 'measure preserving' transforms, in other words they give you a smooth estimate of the signal without introducing any distortion in the smoothing process (like most indicators do).

The lack of distortion is very important because it allows you to accurately asses the extent of one movement compared to another. And with density estimation you also get a framework which you can use to assign concrete numbers (ie probabilities) to different events. From there you can record statistics and do all kinds of interesting things with the data, such as define with high accuracy when the market is trending and when it is not =)

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  #9 (permalink)
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here is an quick kalman implementation in java found by <google>

easy to make a conversion ... or better how to use the files Randall L. Eubank in recipes.pdf

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  #10 (permalink)
Austin, TX
 
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wh View Post
here is an quick kalman implementation in java found by <google>

easy to make a conversion ... or better how to use the files Randall L. Eubank in recipes.pdf

I haven't looked in great detail at the files there but in general the problem with Kalman filter is that they are usually based on the gaussian assumption and thus not as good at capturing nonlinearity and ergodic behavior.

However in that pdf it appears they are using nonparametric spline regression to make kalman filter adaptive. While I'm sure that is a powerful technique it appears to be much more complex to implement than the kalman smoother based on condensation algorithm I linked to above. Also by using spline (polynomial based) regression you lose the major benefit of the Monte Carlo based techniques which is the probability density approximation.

Here is an image which illustrates what I mentioned before about measure preserving transforms. You can see how the Woodies CCI shows nearly identical signals to the particle oscillator but it is far less smooth and it distorts the magnitude of movements.


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  #11 (permalink)
Toronto, CA
 
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so, my understanding that you are trying to build automated strategy? what is considered as long and medium time frame when system trying to determine the state?
very impressive work

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  #12 (permalink)
Austin, TX
 
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Yes this is part of an automated strategy, that is why I place so much importance on being able to statistically define things. I think understanding these concepts is very helpful in discretionary trading too though.

I have been running this system live for a few months now after forward testing for over a month with good results. When I first started out trying to develop an automated system I wasted alot of time trying to find the perfect trading signals, ie stop and reverse, always in the market type strategies like most new traders. I had some success with that but it was likely due to curve fitting, the strategies always eventually fell apart in forward testing. It wasn't until I started really focusing on when NOT to trade that I finally started developing some truly profitable strategies.

I currently use 4 range based timeframes, 34, 21, 13, 8 (on EURUSD)

Edit: Forgot that most of you guys trade ES rather than forex, I also trade ES/YM occasionally, on those I use a simpler strategy with only 2 timeframes, 8 and 3 range because there is much less noise and less movement compared with forex market

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  #13 (permalink)
Austin, TX
 
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Since several people have asked me about it, I created a simple SNR indicator based on keltner channel. It is posted in the downloads section.

Here is a screenshot comparing it with the my proprietary SNR indicator, you can see that they are very similar.

The blue line is a moving average of the white line, when blue line is sloping up that means the market is trending. When it is low or sloping down that means there is alot of noise or noise is increasing so it is probably not a good time to trade.


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  #14 (permalink)
NJ
 
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I am looking for the Keltner SNR indicator by sefstrat (mentioned above).
Anybody know where I can find it?

Thanks much!

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  #15 (permalink)
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Here you go, it's in the download section...

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  #16 (permalink)
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You may be interested in checking the new indicator I've just submitted in the download section. It is called Vertical Horizontal Filter:


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  #17 (permalink)
Florida
 
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I only trade morning session, 9:30 - 11:30am eastern. That's when I get the best movement for the trades I look for.

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