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Started:November 23rd, 2014 (09:08 PM) by Tap In Views / Replies:34,270 / 839
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Old September 18th, 2016, 05:46 PM   #811 (permalink)
Market Wizard
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grausch View Post
Completed testing now and I am ashamed to admit that my initial profit calculations had an incorrect formula that overstated the results. @Tap In - you were right to be skeptical of the results, they were significantly overstated.

In any case, I have redone the spreadsheets using adding in an easy way to test whether adding on retracements could work. Entries were determined by straddling price at 2am. I have not retested every single system I tried, since it takes quite a while and most of the results were not really that exciting. Trades were held until stops or targets were hit or until 16h00.

This time, the win% is more in line with what I would expect it to be. The best performing systems tend to be those that hold for 6R or more even if the win % was lower.

Since this evolved out of a discussion on pyramiding or averaging down vs a single contract, I will give a summary of the results of using a 20 tick stop and adding once the position has gone 10 ticks against it vs just trading a fixed number of contracts. Results are for the period 1 June 2016 to 31 August 2016 using the CL contract in Ninjatrader (thus I am not sure of how the contract is put together and whether or not it is a continuous contract). Spreadsheet is attached for those who are interested in reviewing the detail. Testing was done manually so there could be some errors, but if there are errors, the impact should be immaterial.

Results with averaging down at the following profit targets as follows:
40 tick target = -$7,715
80 tick target = -$10,655
120 tick target = -$6,915
16h00 exit = -$5,120

Results using just one contract with the following profit targets:
40 tick target = -$5,015
80 tick target = -$6,475
120 tick target = -$1,760
16h00 exit = -$2,250

All of the profit targets still yielded negative results, but averaging down yielded significantly worse results - taking stops on higher risk, when profits were not always realised on the bigger position just hurt returns significantly. At the same time, with the initial batch of "faulty" testing, pyramding as a trade works suffered from the same problem.

In view of these results, I think that trading multiple contracts is not as essential to trading success as I previously thought. Trading a fixed number of contracts could potentially lead to better results than adding to a position. Scaling out could smooth the equity curve, but the dip in profitability in 80 tick targets makes me unsure of how I would actually scale out.

@Tap In - Apologies if I side-tracked your journal a bit, but based on the previous discussions, I thought you would appreciate seeing these results.

Hey, no problem. I enjoy these types of discussions. Thanks for doing all that work. I am sure it will help you in the long run.

The more I go along in this endeavor the more I am convinced that money management is secondary to whether or not one is picking quality trades. Money management will either maximize or minimize the potential in one's trading, so it is important, but without good potential in the trades no amount of money management, scaling in, scaling out or anything else will make money.

There has been much discussion about the benefits of scaling in to reduce basis. I can see these benefits, but it still does not relieve the trader from the responsibility of picking quality trades. If the trader cannot pick more trades that go in his favor than go against him, all he will do with scaling is lose more money. Some have even said that it changed their trading. Did it really? Or did they just become more experience and better at picking quality trades?

What is a quality trade? Simply put, it is a trade that moves in your favor enough to take adequate profits before moving against you forcing you out at a loss. Whether a trader enters on one contract, or scales in with multiple contracts, he will have a "basis" on his entries. Whether a trader is all out on his exits, or scales out his exits, he will have a "basis" on his exits. Over a sampling of trades, how the basis of entries compares to the basis of exits in relation to the original puke point, will determine long term success. If the trader is being forced out, either with a mental or hard stops, 50% of the time or more he will have a very difficult time making consistent money.

The best way that I have come up with to measure the quality of my trading is to track how often price gets to 1R before it reaches -1R. I know I sound like a broken record with this but I believe it to be true. Keep in mind this is just a measuring tool. It does not mean I take profits at 1R. It does not mean I manage my trades based on 1R or any other multiple of R. It's just a measuring devise. It does not have anything to do with how I actually managed a trade. It is simply an objective tool that answers the question, "am I picking trades that move in my favor more often than they move against me?"

Over a large sample, a coin flip would yield 50%. I do not believe one can scale in or out in such a way as to make money on coin flips. I believe you have to be much better than a coin flip at picking trades to make money in trading. I am open to being wrong on this but I have yet to see proof.

This past week I attempted to hold trades for higher multiples of R. I was about 50% to 1R, so my win/loss was no better than it has been, and no better than a coin flip. Instead of taking profit at 1R, I held for more. The result is that I lost a lot more money than I would have if I had taken all profits at 1R. Why? Because I let some trades that were in the money come back for losses, and I never caught a big move.

Here is an exercise for anyone who is interested, especially those who are struggling: For the next week, month or number of trades, track your trades the way I do. Note your basis upon entry (whether all in or scale in), note the distance of your entry to your stop (whether mental or hard stop). This is your R. Now follow price until it either hits your stop or hits +1R. Do this irrespective of whether or not you stayed in the trade. Record the results. At the end of the period calculate what percentage of trades reached +1R before -1R.

Was it more than 50% yet you are still not profitable? Perhaps you are holding trades too long. Maybe you should consider taking all profits at 1R until your percentage is higher.

Is it 50% or less, yet you still think your problems are in your money management or psychology? Perhaps you are focusing on the wrong thing, and you need more work picking better trades.

Are you a profitable trader and it is less than 50%? I want to talk to you!

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Old September 18th, 2016, 05:53 PM   #812 (permalink)
Market Wizard
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ratfink View Post
Enough smart traders make it work to decide for themselves, but the rest of us still don't know if that's because scaling-in is inherently a good idea or because they just have good theses, although we do have our suspicions...

Cheers

Well said. Obviously I am in the camp that the thesis reigns supreme, which is why trading is hard. It would be a much easier endeavor if something as simple as scaling were the answer.

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Old September 18th, 2016, 06:48 PM   #813 (permalink)
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grausch View Post
Well, the idea was to identify a breakout with the hope that it would lead to a larger trend. I had used Donchian channels in some tests, VWAP straddles once price was within a reasonable range, VWAP crossovers and price straddles at specific times. These lead to easier back testing than trend lines and support and resistance lines, which is why I chose them.

As stated before, I did not test any counter-trend strategies as I found all of the indicators very unreliable in the past. Perhaps counter-trend strategies would benefit more from averaging down. I do not know - I merely investigated one aspect. I do think that the result should at the very least should raise the question of whether scaling in is that much more superior to trading a fixed number of contracts.


ratfink View Post
I would certainly expect those sort of standard indicators to perform as you found. I am also a scaling-in sceptic, but I have to be an agnostic until we can test it against a daily thesis, rather than arbitrary levels. And nope, as you said, that's not easy. Enough smart traders make it work to decide for themselves, but the rest of us still don't know if that's because scaling-in is inherently a good idea or because they just have good theses, although we do have our suspicions...

Cheers

Well, I agree with everything said so far.

I do have a real level of doubt about using a backtesting type method to address the question. Basically, you need to start out with some strategy that you hope will apply, but you will also have to simplify things down so you will know when it tells you to do something.... I do not think that people who do scale in, such as @Inletcap, do it that way.

In effect, the backtesting is an attempt to approximate what a skilled discretionary trader would do, sizing up all the things (whatever they are) that he would size up to make the decision. I do think the backtesting idea is a good one to try, and maybe the results will tell us something, but I am pretty sure that it doesn't capture what these guys actually are doing.

So that limits what it is able to give us.

Just my cent and a half on this one. It is very interesting, but I really have no idea what is the best approach when it comes either to scaling or to testing a scaling hypothesis.

Bob.

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Old September 19th, 2016, 12:00 AM   #814 (permalink)
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@grausch I really appreciate your work on this- thank you!

Now, if someone could just share a mechanical system that "works", we could really dig in and do some back testing

I say this not being rude to @grausch, that's why I gave a sicere thanks first but we are all aware that back testing has it limits as one simply cannot input all the variables ( contextual clues) that a discretionary trader takes into account before executing and I've yet to be shown a mechanical system that works in the real world ( yes, I too have 100's that work on SIM- I'm talking the real real world with realistic drawdowns and consistent results). Without a truly dynamic entry, target and exit system, it is just too difficult to gauge the validity.

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Old September 19th, 2016, 05:04 AM   #815 (permalink)
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Inletcap View Post
@grausch I really appreciate your work on this- thank you!

Now, if someone could just share a mechanical system that "works", we could really dig in and do some back testing

I say this not being rude to @grausch, that's why I gave a sicere thanks first but we are all aware that back testing has it limits as one simply cannot input all the variables ( contextual clues) that a discretionary trader takes into account before executing and I've yet to be shown a mechanical system that works in the real world ( yes, I too have 100's that work on SIM- I'm talking the real real world with realistic drawdowns and consistent results). Without a truly dynamic entry, target and exit system, it is just too difficult to gauge the validity.

@Inletcap - No problem. Several of us posted in this journal that trading multiple contracts was essential to success. I also posted that I found @Tap In's number of trades reaching 1R, 2R, etc. too low and that it should be possible to do much better. This is merely my attempt at putting my money where my mouth is.

Just to clarify - My goal was not to find systems that don't work... Once I corrected the profit formula and manually entered the number of profitable trades per day (was automatic previously based on the incorrect profit formula) none of the aforementioned systems registered a profit. The VWAP crossover / straddle was one of my favourites, but it ended up being the worst performer after correcting these items.

It would be great if someone could share a profitable system that we could perform the analysis on. FWIW, while I was performing this testing, I ran a pen and paper test alongside it using 8R - 12R targets, holding trades until Friday's close and only doing one trade a week. That was actually quite profitable, but the sample was too small for this to be conclusive, and this is @Tap In's journal and he is aiming to get funded by TST which prohibits holding overnight. Therefore I would propose to keep the discussion within that context.

I agree that a skilled trader could of course use pyramiding or averaging down to his advantage. Plenty of evidence of that in some of the journals here. I still think being able to vary size based on my assessment of the market is a definite asset, but after this testing, I won't go so far as to say that it is absolutely critical to success. In my own trading I am experiencing a higher percentage of stop-outs by pyramiding and moving stops up to keep the risk constant. That erodes a lot of the profit potential from landing some nice $4k days and it made this type of testing very interesting for me as well.

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Old September 19th, 2016, 09:58 AM   #816 (permalink)
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9/19/16 blueprint

After a good sized up move in Globex, price has consolidated between layers of support and resistance. We may bounce around off these areas today unless OTF players get involved.

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Old September 19th, 2016, 10:39 AM   #817 (permalink)
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ratfink View Post
I would certainly expect those sort of standard indicators to perform as you found. I am also a scaling-in sceptic, but I have to be an agnostic until we can test it against a daily thesis, rather than arbitrary levels. And nope, as you said, that's not easy. Enough smart traders make it work to decide for themselves, but the rest of us still don't know if that's because scaling-in is inherently a good idea or because they just have good theses, although we do have our suspicions...

Cheers


Tap In View Post
Well said. Obviously I am in the camp that the thesis reigns supreme, which is why trading is hard. It would be a much easier endeavor if something as simple as scaling were the answer.

@ratfink

I think a lot of people feel that scaling in "arbitrary levels" based on a thesis subjects one to massive drawdowns and big upswings and requires balls of steele but I promise you that one can find a "consistent approach" to all the madness. "...because scaling-in is inherently a good idea or because they just have good theses" || "It would be a much easier endeavor if something as simple as scaling were the answer" - I've said a bunch of times- you don't have to be right, but you have to trade your thesis- scaling in and out of your thesis eliminates the pressure of getting it right and provides the opportunity to let it run when you are. Consistency and asymmetric returns can be achieved... Here is some proof that it can "work" from the very recent past- no cherry picking conditions or curve fitting these numbers on a backtest

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Old September 19th, 2016, 12:06 PM   #818 (permalink)
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Inletcap View Post
I've said a bunch of times- you don't have to be right, but you have to trade your thesis- scaling in and out of your thesis eliminates the pressure of getting it right and provides the opportunity to let it run when you are. Consistency and asymmetric returns can be achieved... Here is some proof that it can "work" from the very recent past- no cherry picking conditions or curve fitting these numbers on a backtest

The consistency of both your returns and your fantastic input to FIO tells us all we need to know as to whether the combination works - greatly appreciated from all of us that's for sure. Our doubting Thomas questions relate to which is more important, the quality of the thesis, the quality of the entries or the use of scaling-in as a methodology.

That said, I think what you've just clarified for me, that I have not seen well enough before, is the potential for pressure/stress reduction that it can offer, and that just might be more important than any relative weighting between the three.

[Except that you need good entries else you're going to get a lot of stop-outs, and you still need a good thesis else you're not going to get the asymmetric returns. After that scaling-in might help too. ]

I will investigate this more for my own benefit over the next year.

Cheers

Travel Well
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Old September 19th, 2016, 12:10 PM   #819 (permalink)
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ratfink View Post
The consistency of both your returns and your fantastic input to FIO tells us all we need to know as to whether the combination works - greatly appreciated from all of us that's for sure. Our doubting Thomas questions relate to which is more important, the quality of the thesis, the quality of the entries or the use of scaling-in as a methodology.

That said, I think what you've just clarified for me, that I have not seen well enough before, is the potential for pressure/stress reduction that it can offer, and that just might be more important than any relative weighting between the three.

[Except that you need good entries else you're going to get a lot of stop-outs, and you still need a good thesis else you're not going to get the asymmetric returns. After that scaling-in might help too. ]

I will investigate this more for my own benefit over the next year.

Cheers

Excellent- you got from my posting that exactly what I wanted to convey! Was a little afraid of how my message would be perceived - sometimes seeing is believing

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Old September 20th, 2016, 10:01 AM   #820 (permalink)
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9/20/16 blueprint


The trend overnight is down but price sits right at Friday' 's low. It could go either way from here. A push through to look for shorts and a bounce for longs. The longs may not have far to go since there are a couple of immediate areas of resistance to work through, but if they get through these it could get back to 45.00.

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