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Market Mood
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Market Mood

  #11 (permalink)
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By volatile I mean the market is moving quickly and explosively. Like it's jumping around. I want it to be trending but what I consider a trend many others would consider range or chop since I trade 3 range.

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  #12 (permalink)
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Here are some of the things that are impacted by market mood:

1. How far an intraday trend, once established, can be expected to continue before reversing.

2. How deep a pullback can be expected without invalidating the current trend.

3. Whether breakouts beyond a prior S/R level will tend to continue in the direction of the breakout or reverse.

4. Whether there will be an overall directional bias; i.e., more / larger trends in one direction than the other.

5. How many trends can be expected in a given day (or other span of time).

6. When there is no established trend, how wide or narrow the range of "chop" will be.

I'm sure there are others I'm missing...

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  #13 (permalink)
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First, thanks to Worldwary for starting this thread. I'm glad to see this question posted as its own topic, because it's something that I've noticed in my own trading, and I'm curious if others take this into consideration.

True story... Several months ago I made an observation about how price tends to react to swing highs and swing lows. I made a hypothesis that it would be possible to profit by buying and shorting when the price touched a certain level. I am a programmer by trade, so I downloaded months of tick data from market replay. Then I wrote an indicator to write all the signals and raw data into Excel. Then I wrote a VBA macro to sim trade various combinations of stops and targets. My macro graphed expectancy and charted win-loss for hundreds of combinations.

What I found was that it was indeed profitable to trade as I'd noted. I had an 80% win-loss ratio using a certain target/stop combination and a healthy expectancy.

I don't trade live very often. I do papertrade quite a bit. I view this as sort of a hobby, but I'm far too nervous to trade live on a daily basis. However, since I had all this research to back me up, I decided to live trade using a small account.

I started on a Monday morning, which just so happens to be a day when the system did horribly. In fact, the system did far worse than it had on any day I'd backtested. The next day was no better. Neither was the third day. Eventually I pulled the plug on my system.

This "market mood" continued for several weeks, and eventually my system came back to profitability. But by then I had given up on it. Scores of hours of work put on the trash heap. The problem (as worldwary has noted) is that when market mood shifts, the exact opposite trade becomes profitable than was previously profitable using the same chart, the same indicators, etc.

This is just my personal experience, of course. I'm not a professional trader. As I see it, it would be one thing if a system stopped working for periods of time. But when the inverse of your system becomes profitable, that's like a punch in the gut. It means that you hit maximum stop every time. Not sure I've had a worse feeling while trading than seeing this happen to my real money.

Anyway, I'm curious how others deal with this. Do you simply trade day in and day out, so that a small drawdown is expected once in a while but do you continue to trade profitably overall? Do you sit on the sidelines during the times when it seems like your setups aren't working? Or do you indeed bet the opposite?

Love to hear some of your personal experiences as they relate to this topic.

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  #14 (permalink)
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Curbfeeler View Post
First, thanks to Worldwary for starting this thread. I'm glad to see this question posted as its own topic, because it's something that I've noticed in my own trading, and I'm curious if others take this into consideration.

True story... Several months ago I made an observation about how price tends to react to swing highs and swing lows. I made a hypothesis that it would be possible to profit by buying and shorting when the price touched a certain level. I am a programmer by trade, so I downloaded months of tick data from market replay. Then I wrote an indicator to write all the signals and raw data into Excel. Then I wrote a VBA macro to sim trade various combinations of stops and targets. My macro graphed expectancy and charted win-loss for hundreds of combinations.

What I found was that it was indeed profitable to trade as I'd noted. I had an 80% win-loss ratio using a certain target/stop combination and a healthy expectancy.

I don't trade live very often. I do papertrade quite a bit. I view this as sort of a hobby, but I'm far too nervous to trade live on a daily basis. However, since I had all this research to back me up, I decided to live trade using a small account.

I started on a Monday morning, which just so happens to be a day when the system did horribly. In fact, the system did far worse than it had on any day I'd backtested. The next day was no better. Neither was the third day. Eventually I pulled the plug on my system.

This "market mood" continued for several weeks, and eventually my system came back to profitability. But by then I had given up on it. Scores of hours of work put on the trash heap. The problem (as worldwary has noted) is that when market mood shifts, the exact opposite trade becomes profitable than was previously profitable using the same chart, the same indicators, etc.

This is just my personal experience, of course. I'm not a professional trader. As I see it, it would be one thing if a system stopped working for periods of time. But when the inverse of your system becomes profitable, that's like a punch in the gut. It means that you hit maximum stop every time. Not sure I've had a worse feeling while trading than seeing this happen to my real money.

Anyway, I'm curious how others deal with this. Do you simply trade day in and day out, so that a small drawdown is expected once in a while but do you continue to trade profitably overall? Do you sit on the sidelines during the times when it seems like your setups aren't working? Or do you indeed bet the opposite?

Love to hear some of your personal experiences as they relate to this topic.

Hi,

Thx for your sharing, did you trash your system or are you still trying to figure out why it failed, I would focus on the market shift, I mean once you know when it happens or identify the key factors you could adapt your system or just stop it until the market shifts again in the right direction. Assuming that your backtesting and/or replay/paper trading data were correct I would not abbandon a system with 80% assumed profitability. With regards to your question about others trading my answer is in post #4.

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  #15 (permalink)
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Curbfeeler View Post
First, thanks to Worldwary for starting this thread. I'm glad to see this question posted as its own topic, because it's something that I've noticed in my own trading, and I'm curious if others take this into consideration.

True story... Several months ago I made an observation about how price tends to react to swing highs and swing lows. I made a hypothesis that it would be possible to profit by buying and shorting when the price touched a certain level. I am a programmer by trade, so I downloaded months of tick data from market replay. Then I wrote an indicator to write all the signals and raw data into Excel. Then I wrote a VBA macro to sim trade various combinations of stops and targets. My macro graphed expectancy and charted win-loss for hundreds of combinations.

What I found was that it was indeed profitable to trade as I'd noted. I had an 80% win-loss ratio using a certain target/stop combination and a healthy expectancy.

I don't trade live very often. I do papertrade quite a bit. I view this as sort of a hobby, but I'm far too nervous to trade live on a daily basis. However, since I had all this research to back me up, I decided to live trade using a small account.

I started on a Monday morning, which just so happens to be a day when the system did horribly. In fact, the system did far worse than it had on any day I'd backtested. The next day was no better. Neither was the third day. Eventually I pulled the plug on my system.

This "market mood" continued for several weeks, and eventually my system came back to profitability. But by then I had given up on it. Scores of hours of work put on the trash heap. The problem (as worldwary has noted) is that when market mood shifts, the exact opposite trade becomes profitable than was previously profitable using the same chart, the same indicators, etc.

This is just my personal experience, of course. I'm not a professional trader. As I see it, it would be one thing if a system stopped working for periods of time. But when the inverse of your system becomes profitable, that's like a punch in the gut. It means that you hit maximum stop every time. Not sure I've had a worse feeling while trading than seeing this happen to my real money.

Anyway, I'm curious how others deal with this. Do you simply trade day in and day out, so that a small drawdown is expected once in a while but do you continue to trade profitably overall? Do you sit on the sidelines during the times when it seems like your setups aren't working? Or do you indeed bet the opposite?

Love to hear some of your personal experiences as they relate to this topic.

I don't know what tool you used to backtest, I think you said excel, and I don't know the details of your system, But, there are various issues with backtesting that you have to take into account. Even professional trading programs like NinjaTrader and TradeStation have serious backetsting issues which makes their results unreliable. If you know Ninjatrader well enough, there are known ways to work around some of these issues.

Some also have the opinion that backtesting is not as useful as is perceived by conventional wisdom. Walk-Forward testing is a better gauge, but ultimately live trading is the ultimate test of any strategy.

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  #16 (permalink)
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redratsal View Post
I would focus on the market shift, I mean once you know when it happens or identify the key factors you could adapt your system or just stop it until the market shifts again in the right direction.

This is a good point and is my ultimate goal: to be able to gauge the shifts in mood well enough that you know what kind of system to use on a given day in order to maximize your potential. This is easier said than done of course but hopefully we can explore some ways to do this here in this thread.

Two things I watch in order to try to gauge market mood:

1. Daily chart of the S&P 500 and other major indices. A significant shift in the state of the broader market can be expected to have an impact on the intraday mood. For instance, if the broader market has been in an uptrend but then breaks a trendline or falls below a key swing low, you can expect a change in intraday conditions that might mess with the success of whatever system you were trading during the uptrend.

2. The VIX. This is a volatile measure but the level of the index as you start the trading day can give you a rough guide of how much volatility to expect on an intraday basis. As a general guide, I think of anything below 18 as low volatility; between 18- low 20s is mild volatility; mid-20s or higher is high volatility. But I also think these gradations change over time.

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  #17 (permalink)
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worldwary View Post
This is a good point and is my ultimate goal: to be able to gauge the shifts in mood well enough that you know what kind of system to use on a given day in order to maximize your potential. This is easier said than done of course but hopefully we can explore some ways to do this here in this thread.

Two things I watch in order to try to gauge market mood:

1. Daily chart of the S&P 500 and other major indices. A significant shift in the state of the broader market can be expected to have an impact on the intraday mood. For instance, if the broader market has been in an uptrend but then breaks a trendline or falls below a key swing low, you can expect a change in intraday conditions that might mess with the success of whatever system you were trading during the uptrend.

2. The VIX. This is a volatile measure but the level of the index as you start the trading day can give you a rough guide of how much volatility to expect on an intraday basis. As a general guide, I think of anything below 18 as low volatility; between 18- low 20s is mild volatility; mid-20s or higher is high volatility. But I also think these gradations change over time.

Assuming your backtest data are correct, you could also monitor your drawdown and mae, if a new high is showing up something might have changed with the market. IMO people are dropping their system too fast, I would work harder on optimization; expectation simulated vs live with backtest results are often too high (the higher profitability the better) but you should be less optimistic on live trading. From a psychological point of view it is killing to be deceived by false expectancy.

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  #18 (permalink)
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monpere View Post
Some also have the opinion that backtesting is not as useful as is perceived by conventional wisdom. Walk-Forward testing is a better gauge, but ultimately live trading is the ultimate test of any strategy.

I agree that the emphasis needs to be on live trading. I personally have issues not only with backtesting but also with walk-forward testing, for many of the reasons mentioned in this thread.

I'm not saying you shouldn't test before diving in; obviously you have to start somewhere. I guess my issue is more with the tendency of testing to create a false sense of security. What walk-forward trading tells you is whether the system is well suited to the mood the market's in at the time you're running the test. It shouldn't give much confidence about how the system will perform when the mood shifts.

I generally think you should "stike while the iron is hot" and take live trades rather than paper trades as soon you've found an approach that you're reasonably confident is working "right now." The edge might not last long so might as well be earning real profits rather than paper profits.

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  #19 (permalink)
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Yesterday I was planning to post something about my perception of the current market mood.

What a difference a day makes. What I would have written about yesterday may have been rendered obsolete by the time the market opened this morning. It's still too early to tell what the lasting effects will be, but the S&P ratings outlook issue could be the kind of external shock that slaps the market into a new (bad) mood overnight.

VIX is up pretty sharply today, but only to as high as 19. Intraday price action has generally confirmed that we're dealing with elevated volatility, with more reversals and false breakouts than we've experienced the past couple of weeks.

I don't know what to expect going forward as this will be determined by the market's reaction. If we continue to sell off, then volatility should remain elevated. If you have a downward directional bias then the way to play this might be to take with-trend trades to the downside (understanding that relatively deep bounces can be expected) and fade breakouts to the upside. That's what I've been doing today but again I don't know yet that this selloff will continue tomorrow. That's one thing about these sudden mood changes caused by extraneous events: sometimes the market shrugs them off, sometimes it doesn't.

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  #20 (permalink)
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Volatility has dropped sharply and it's starting to look like the market has shrugged off the S&P downgrade news. My assumption until proven otherwise is that the mood that had dominated prior to yesterday's selloff is still in play.

That mood is characterized by long, slow-moving trends with very shallow pullbacks. It reminds me of a market on ice skates: get it started in one direction and momentum will carry it in the same direction until it hits a wall (i.e., a S/R level), then it will tend to reverse into an equally slow trend in the opposite direction.

It has not been a market for pullback trading. By the time you get a noticeable pullback, the trend is probably over. You pretty much have to hold your nose and enter at an earlier breakout, when it seems like the move is already overextended.

The real key I think is predicting where the "walls" are that are likely to trigger a reversal. I watch a longer term chart marked with horizontal lines at past reversal points and these have generally served as good profit targets. Since volatility is low there isn't much chance that you'll get shaken out of a move early due to random noise or "stop hunting." Overall a pretty favorable market for longer trades and larger profit targets.

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