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Kevin's TST Combine Journal


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Kevin's TST Combine Journal

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  #91 (permalink)
Legendary Market Wizard
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No trades today, so I'll talk about the strategies I am using...


A few posts ago ( ) I talked about the need to develop a system (strategy) that meets the rules of the Combine. Certain rules you have control over (daily loss limit, being out by 4:10 ET everyday), and certain rules you leave to your strategy (profit, drawdown).

Once I had spent some time examining the rules, I was ready to develop a strategy.

Since I am doing the $30K, 20 day combine, I felt the most constraining rule was the $500 daily loss limit. Exceed that, and the Combine game is over.

To account for slippage and commissions, I lowered this level to $425 maximum daily loss.

Based on my previous trading experience, I felt (and still feel) that this is a very low daily loss, even for one contract. If you try to trade Crude Oil, for example, a slightly misplaced entry, along with a strong market movement, could hit that daily loss pretty quick. Maybe my thinking is because most of my trading is swing trading (days to weeks), not intraday. $425 swings happen all the time.

So, I decided try the Euro for this Combine, and trade only 1 contract at a time. My stop loss would always be $425 (34 ticks) from entry, or less.

The Euro has been kind of crazy lately, and I felt that profit and loss goals, based on 1 contract, were not unreasonable.

With this rule established, now I just needed to find a strategy that could meet the $2,000 profit goal, and the $1,500 max drawdown goal.

But before I started development, I had to take care of something else. Another constraint. Because I am using the T4 platform to manually enter trades, I have to be around the computer to place orders. Not too much of a problem for me, since I trade full time. More of a nuisance, really.

Because of the manual entry requirement, I decided to trade only between 7 AM and 3 PM ET, and to use 60 minute bars. So, every hour, I'll get notified if I have to place or change an order. And I decided to use limit orders to enter, so typically if I am a few minutes late on an order, I'll have some leeway. I typically eschew limit orders, since backtest platforms can easily be tricked or manipulated with these kinds of orders. But in this case I felt it was necessary (and I know the backtest tricks with limit orders).

Hopefully, you understand my thinking up to this point: develop a trading strategy that meets the end requirements, but also meets my thoughts and desires. I'm sure I spent more time thinking about all this than I did actually developing the strategy itself!


Next non-trading day I'll develop the strategy. There is an interesting monkey wrench that gets thrown into the process...

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  #92 (permalink)
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kevinkdog View Post
Once again, a small overnight win, and no other trades.

At this point, I can't say I am happy with the system's performance, but I can't say I'm surprised either. The current results are easily in the distribution of possible outcomes for the system. (if anyone is interested in seeing this, just reply and I'll do the analysis. Otherwise, I won't)

Hi Kevin - thanks for all the info in the thread. I'm interested in seeing the analysis of how the current results are easily in the distribution of the possible outcomes for the system, if you feeling like sharing. thanks.

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  #93 (permalink)
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chambemk View Post
Hi Kevin - thanks for all the info in the thread. I'm interested in seeing the analysis of how the current results are easily in the distribution of the possible outcomes for the system, if you feeling like sharing. thanks.


I will try to do this over the weekend.

It is an interesting analysis, because it shows that even winning (positive expectancy) systems can start out in the red (losing) for a while, and it does NOT mean the system is broken.

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  #94 (permalink)
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No trades again today (Thursday), so I'll continue with discussing how I developed my primary strategy...

part 1 is located here:

part 2 is located here:


At this point, I knew the instrument (Euro), the time session (7AM - 3PM ET), number of contracts (1), entry type (limit orders), stop level (34 ticks, $425), and bar size (60 minute bars).

The biggest questions at this point were:

1) how much data to use in the backtest
2) what is the entry rule(s)
3) what is the profit target
4) any other rules (breakeven stops, trailing stop, etc)
5) the overall strategy development process


1) how much data to use in the backtest
Normally, I like to use as much data as possible. For the Euro, this would take me back to 2001, when the Euro started trading (really sophisticated users would create their own pseudo Euro datastream before 2001, use the mark, franc, lira, etc, weighted to create a synthetic Euro).

But, since this is an intraday strategy, and in my view electronic trading has really altered the intraday landscape, I decided to start my data Jan. 1, 2009. I purposely started after the financial crisis. I have mixed feelings about using only 4 years of data, but I thought I'd try it.

2) what is the entry rule(s)
After trying a few simple ideas, I decided to look for the highest high of the last X bars, and then sell short (vice versa for long trades). One last condition is that for a short signal the longer term trend is short, so in effect this strategy expects the long term trend to prevail, and for the price to change short term direction.

3) what is the profit target
After some preliminary tests, I found it was best (profit wise) to go for unlimited profit (no target). So, hop on a trend, and ride it. As you can imagine, though, this doesn't happen a lot, so the trick is to stay in the game until it does happen.

4) any other rules (breakeven stops, trailing stop, etc)
None. I decided to keep it simple.

5) the overall strategy development process
I used the strategy process that I describe in the 2 webinars I did for futures.io (formerly BMT). These are in the archives, for Elite Members. I also describe the process in the TST webinar I did. Kevin Davey presents, "Developing a Trading Plan to Pass the Combine and Stay Funded" - YouTube


After all this development, I had what I thought was a pretty good strategy. But here is the monkey wrench - the strategy is good, but not good enough to pass the Combine (not enough profit[although close], too few trading days in 2 month period, less than 50% wins). Finding this out, this is how I felt:


Since after developing the primary strategy, I only had about 1.5 weeks before the Combine start, I wondered what was best: 1) abandon this strategy, and start over from scratch, or 2) try to develop complementary strategies to trade with this strategy, to get the combined package of strategies to pass the combine.

Both options have merit, but eventually I decided on Option 2.

Next time, I'll talk about strategies #1 and #3, the strategies I added to this first strategy I developed.

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  #95 (permalink)
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Almost a big day... almost. But still a pretty good day. I did make one mistake - one extra trade - but it went breakeven.

After 10 days of the Combine, I am close to breakeven overall. About $800 below where I expected to be at this point.

Let's hope the next 10-14 days I trade are much better than the first 10!


I think the most interesting thing is that I have 70% winning days, yet am still underwater...


Over the weekend, I'll update the probability table (spoiler: I have even less chance of passing Combine now), and also show how I determine if a strategy is on track or not.





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  #96 (permalink)
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First, here are the updated probabilities for me passing the Combine, at the 10 day mark.

Note that my chances of meeting the profit goal are much less now, which makes complete sense (I am still losing money in this Combine). So, now I have roughly a 1 in 4 chance of passing the Combine. On the good side, my chances of a "blow out" (exceeding the max drawdown) have gone down, too.

I think the benefit of doing this analysis is that it keeps my realistic and grounded about my chances. I am optimistic by nature, but I am also a realist. If I had the attitude "I'll still pass this Combine, no problem! I've got 10 days left." I would be ignoring the situation at hand. As a trader, ignoring reality (of price bars, of account equity, of margin calls, etc.) will eventually prove fatal.




As far as my performance versus "perfect" performance (as determined by my Tradestation strategies), I am now pretty close to that ideal performance. I'm pretty satisfied with that.


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  #97 (permalink)
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Kevin, appreciat your journal and research. However I think your formula does not account for the fact you can trade actually 40 days not 20? 20 is the minimmum required. Or have you decided to end it on day 20 no matter what?
Thanks.

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  #98 (permalink)
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xelaar View Post
Kevin, appreciat your journal and research. However I think your formula does not account for the fact you can trade actually 40 days not 20? 20 is the minimmum required. Or have you decided to end it on day 20 no matter what?
Thanks.

Hi @xelaar -

In post #36, Kevin explained that he expects the system to trade about 70% of the available days:


kevinkdog View Post
No trades for the Combine on Thursday 3/28. Over the long run, there should be trades on about 70% of days, or around 28 days for a 2 month Combine (40 possible trading days).


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  #99 (permalink)
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omni72 View Post
Hi @xelaar -

In post #36, Kevin explained that he expects the system to trade about 70% of the available days:


Yes, my latest calculations assume that I'll be trading in the Combine for about 14 more days, give or take. I don't think it will hit 70% of days (28 trading days total).

Of course, if I pass at any time over 20 days, I'll just stop there.


Thanks for the comments!

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  #100 (permalink)
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As you know, the strategies I am using for the Combine are brand new - created just for the Combine.

It is always a tough thing to bring a new strategy into your trading - those first few trades are really important to your mental state, and can reaffirm, or kill, the confidence you have in the strategy.

What if the first couple of trades are losers? Does that mean the strategy should be abandoned?

Or, better yet, what if the first few trades are home runs? Will that performance continue?

In my experience talking to other traders, it seems like a lot of people need a new strategy to be profitable after a very short time (maybe 2 weeks to 1 month), or a short number of trades (5-10 trades). If the strategy is not profitable by then, they alter the strategy, or dump it.

I have found there is a strong correlation between trader experience and this "demand" for quick profitability. Experienced traders have more patience, and know that even good strategies can start off as losers. So, they trade it until either the long term expectancy (profit) begins to show itself, or the strategy proves itself as bad.

Both inexperienced mechancial and discretionary traders have this quick trigger mentality. Mechanical traders, after 3 or 4 initial losses, will add a rule, or a filter to eliminate those early losers (after the fact). Discretionary traders will tweak their approach, with the same goal in mind.

The problem is that once they do that, all their historical testing is now worthless. They are, historically speaking, flying blind.


OK, all that might be well and true, but where am I going with this? In the next few posts, I am going to walk you through a method of monitoring your new strategy, to see if it is performing per its historical expectations.

I'll use my Combine strategy as an example. Please see the chart at the bottom for a sneak peek.


If you want to do this analysis with your own strategy, you'll need:

1. Historical results for your system, preferably walkforward or real time results. The more the results the better.

2. A Monte Carlo simulator. The Monte Carlo simulation spreadsheet found earlier in this thread will do the trick.

3. Ability to write macros in Excel (to automate some calculations). You can also do it by hand, but it will take a while. I've created an automated version for my own use, but it is so cobbled together that I cannot share it - it would cause others more problems.


If numbers scare or intimidate you, don't worry just yet about performing the analysis with your own strategy. Instead, just read along and try to understand the concepts. Afterwards, you'll hopefully have a good understanding of the process, even if it is just in general terms.


There will be 3 parts to this subject, over the next few days:
1. Part 1 - What you are reading now
2. Part 2 - A simple method to track performance
3. Part 3 - More complicated method, shown in chart below




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