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Outside the Box and then some....
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Outside the Box and then some....

  #1 (permalink)
Trading for Fun
charlotte nc
 
Futures Experience: Master
Platform: ninjatrader
Broker/Data: NinjaTrader
Favorite Futures: Emini (ES, YM, NQ, ect.)
 
Posts: 77 since Jan 2015
Thanks: 5 given, 153 received

Outside the Box and then some....

First let me say that I am not a day trader, I am a programmer, statistician and mathematician by trade. I started analyzing the futures markets about 10 years ago as more of a hobby / gag just to bust on a friend that though he could predict the market with some charting tools. He would always tell me he knew exactly the direction the market would move just because he could look at old charts with lots of sloppy looking overlapped objects and such.....

So fast forward a few years later and I started programming some basic entry / exit logic in excel and I thought I had something pretty neat. I was just following simple moving average lines, but I thought it was neat that I stumbled onto without having any prior knowledge of trading. Like most things I tried early on it failed miserably in the long run.

About 3 or 4 years ago I got board over a long weekend so I wrote a program that would extract price data from yahoo finance and put it into a SQL Server I had. From there I build a linear regression based system to enter and exit based on a few things. It was an interesting project and I actually got the system to break even, but once you factored in commissions and all...... But keep in mind I had never actually seen a real trading platform, I was just making stuff up for fun.

About 2 years ago a friend of mind told me about ninja trader and asked me if I would take a look at it and program hist trading system for him. So I downloaded it and started playing around with it. It was very easy to use, C# is one of my more commonly used languages, so I figured I would have a go at it. Like a lot of people his system was not programmable because it relied on a lot of discretionary rules of thumb but no real binary parameters, so I never built him that system but I did however learn how to program in ninjatrader.

So for a little over 2 years now I have been hacking around in ninja trader and I have had a ton of experiences that think would be very interesting to share. As I have sim traded somewhere north of 1,000,000 trades and written over 1,000 different strategies all with varying degrees of success.

More recently I have developed several strategies that are highly profitable via Sim trading so I will likely roll the dice with a live account in the coming months.

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  #2 (permalink)
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  #3 (permalink)
Trading for Fun
charlotte nc
 
Futures Experience: Master
Platform: ninjatrader
Broker/Data: NinjaTrader
Favorite Futures: Emini (ES, YM, NQ, ect.)
 
Posts: 77 since Jan 2015
Thanks: 5 given, 153 received

Where to Start?


Observation 1: AKA my golden rule.

Let me start my blog by saying after years of backtesting my most conclusive finding that may be helpful to other traders is this: Everything will work some of the time but nothing will work all the time.

This applies to any type of entry or exit system via technical analysis, indicator, etc. The concrete proof of this is evident by the very nature of trading in markets with more than 100 participants. Think about it this way... if you put 100 people in the room and tried to get them to agree on trading philosophy odds are they would not. They would be divided between various trading styles, and for even those that agree they may trade different time frames, use different target sizes, etc. So the outcome would be that these 100 people in a controlled simulation would move prices randomly by employing various strategies that cancel each out. Compound this by a factor of 1 million and you have a real market. For this reason I stand by the claim that no entry or exit system will ever consistently pick winners. The market moves randomly in the long run and there is no way that any crystal ball can predict this.


Last edited by iantg; February 21st, 2016 at 02:00 AM.
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  #4 (permalink)
Trading for Fun
charlotte nc
 
Futures Experience: Master
Platform: ninjatrader
Broker/Data: NinjaTrader
Favorite Futures: Emini (ES, YM, NQ, ect.)
 
Posts: 77 since Jan 2015
Thanks: 5 given, 153 received

My first taste of success that turned out to be a dud.

Back when I started out, the first system that I thought I found success with was based on using Line Breaks. In the end I realized that I just found a way to trick the ninjatrader simulator and that the system produced a false positive. For a while though it seemed rather clever and some of the concepts I came up with at the time weren't that far off base, but I abandoned the system long ago and moved on, so I will share my system and the ninjatrader glitch that I was able to produce a false positive with.

Using a line break system I put together a pretty decent system for entries:

Entries: for 3 line break settings: After a single bar color change use a stop order to enter in the direction of the new trend.
Exit: I built a programmed trailing stop exit using a profit ladder that would access the current profit position and moving the stop loss up by a tick or two at each level. For example if profit = 4 move stop loss to 3, then when profit hits 5 move the stop loss to 4, etc. I ran this about 5 to 10 levels, I forget exactly what the recipe was. If anyone is interested I may just dig out the old code and post it. But the effect that it would have would be to protect your profits.

Now for the NT bug: In the strategy analyzer the simulator does not have access to every tick within line break bar types so it can only see a nice string of green bars followed by a nice string of red bars, etc. So the effect will always be with decent entries followed by at least one or two bars in your favor you will essentially never lose. I think the system was like 75% winners. I tested it over a few months and it never lost a single day, so I figured it was too good to be true, and it was. When I finally tested it with market replay... BOOM! All the ticks that were previously invisible came in and kicked my ass. So instead of getting a run of 5 to 10 bars before my exit got triggered with a heavy profit, I would get a 20 point swing against me inside of a bar that was still going my direction and get knocked out before the line break streak continued. I think line breaks are neat and likely the best visual way to trade a trending system, but you have to have some serious room to play.

I think in retrospect I didn't have enough appetite for a large enough stop loss. I think a stop loss of about 2 to 3 times the size of your profit target would be needed to keep you in the game. Alternatively you could just stay in until the line break bar switches colors I think I tested this some in market replay with decent results but I remember like every other trend following system I crushed it on days where there were trends but on sideways days it got killed.

This was my last attempt at traditional trading. On to the next story and lesson.


Last edited by iantg; February 21st, 2016 at 02:02 AM.
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  #5 (permalink)
Trading for Fun
charlotte nc
 
Futures Experience: Master
Platform: ninjatrader
Broker/Data: NinjaTrader
Favorite Futures: Emini (ES, YM, NQ, ect.)
 
Posts: 77 since Jan 2015
Thanks: 5 given, 153 received

The Martingale

After trying every possible type of entry / exit based system using past to try to predict future I got board one day and programmed the martingale into ninja trader just to see what would happen with an unlimited bank role and just how much skin you would need to have in the game to win so to speak. For those unfamiliar with this it is a negative progression betting system that was used with varying degrees of success to gamble with in casinos. In recent years casinos have raised the table minimums and lowered the table maximums to combat this system. Without this dirty trick Bill Gates could walk into any casino and bankrupt them in one night.

So just for fun, I built it to run via ninjatrader and I saw some pretty neat stuff. With the default margin account of 100K you will typically get up around 30K to 50K inside of the first month, but usually within 3 months you will hit the big loosing progression that produces the dreaded "You don't have enough buying power in your margin account to complete the trade" or something to that effect. This means game over you lose. Your upside down more than 100K and to dig out of the hole you just fell in you would need another 200k. Just for fun I played with a few different starting margin account sizes to see what it would take to "beat the game". I only tested a year, and I would highly discourage anyone from ever doing this but starting out with a margin account of 10,000,000, I was able to beat it and make it through without a margin call. If anyone wants that code I would be glad to share. But use it or reverse engineer it at your own risk / demise.

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  #6 (permalink)
Trading for Fun
charlotte nc
 
Futures Experience: Master
Platform: ninjatrader
Broker/Data: NinjaTrader
Favorite Futures: Emini (ES, YM, NQ, ect.)
 
Posts: 77 since Jan 2015
Thanks: 5 given, 153 received

The House Edge

What I will share of my current strategy is that it is all based on statistics. Anyone looking to trade seriously needs to understand the concept of "the house edge". If you play games in Vegas you have at best around 49% chance of winning in the long-run in any game. The first thing I did was deconstruct what the house edge is in trading. This may be helpful to those starting out, for more advanced traders this is nothing new.

1. Commissions: This makes any system with 50% wining trades or less a loosing system right off the bat. Depending on which market and how close your profit target is to your commission line this will cut your expectancy down significantly.

2. Market Orders: If you are entering a trade, you lose a tick or 2 right off the bat, so if your PT and SL are = your chances of losing are higher than your chances of winning.

3. Slippage: This is a wild card and it may be positive or negative or non existent but this can be a potential negative for you so I will add it to the house edge.

So all in: Using market orders and betting with an even stop loss relative to your profit target you are pretty screwed. In the long run the house edge will be close to 60% to 65%. I have tested every possible flavor of this on 5 different futures market and get the same results.

Some times the dice will roll in your favor and you may seem to beat these odds, but before you bet with real money you need to test your system with at least 1 years worth of back-testing to see if your system can beat the built in "house edge"


Last edited by iantg; February 21st, 2016 at 02:06 AM.
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  #7 (permalink)
Trading for Fun
charlotte nc
 
Futures Experience: Master
Platform: ninjatrader
Broker/Data: NinjaTrader
Favorite Futures: Emini (ES, YM, NQ, ect.)
 
Posts: 77 since Jan 2015
Thanks: 5 given, 153 received

Statistical Anomaly / Holly Grail?

After data mining and testing for a year or so I thought I finally cracked it. I started producing quarterly backrest results like the following:


Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).

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  #8 (permalink)
Trading for Fun
charlotte nc
 
Futures Experience: Master
Platform: ninjatrader
Broker/Data: NinjaTrader
Favorite Futures: Emini (ES, YM, NQ, ect.)
 
Posts: 77 since Jan 2015
Thanks: 5 given, 153 received

How to Take Away the House Edge!

As I mentioned the market has a built in house edge of about 60% to 65% if you are doing the following:

1. Even odds (Same value) with PT / SL
2. You are using market orders


While I won't give up the secret sauce that I use to get my edge, I will share with you a few generic ideas that you could use to deconstruct and find your own edge.

1. Each instrument has a built in bias for a normal range that it will move in. Some move up and down in 10,20,50 point or tick increments, others more and others less. Understand this and exploit this. Going 50% / 50% with your PT / SL will almost always produce loosers, but if you go 2 to 1, 1 to 2, 2 to 3, 3 to 2, etc with the right settings you can exploit the fact that market you are trading has a build in bias to stay inside or outside your favorable range. For example if a market only moves up or down 10 ticks normally and on rare occasions it will move up or down 15 to 20 ticks, using a PL of 10 ticks vs a SL of 20 ticks would beat the statistical bet. You are beting 2 to 1 which moves your natural odds of winning from 50% to 75%, but all things even if you hit the 25% loosers with 2X the SL value you are just as screwed as if you had gone 50% / 50%. However, and this is the key if you can exploit a market with a built in bias to favor one range over another you may get > 75% winners using 2 to 1 odds for example.

Find this and you will find a winning system!

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  #9 (permalink)
Trading for Fun
charlotte nc
 
Futures Experience: Master
Platform: ninjatrader
Broker/Data: NinjaTrader
Favorite Futures: Emini (ES, YM, NQ, ect.)
 
Posts: 77 since Jan 2015
Thanks: 5 given, 153 received

Do you have a system or not?

I have seen a lot of discretionary traders lose big by moving from monopoly money to real money far too fast. As someone who has backtested and built countless systems here is my advise.

Before you put down one dollar of your own money ask your self this seriously: Do you have a system or not?

if your "System" involves the following rules: When X occurs go long, when Y occurs go short, when Z target is reached get out. Then ask your self this important question: in real time trading if you try this "System" and hit a loser or a series of losers how likely will you diverge from your own "system" and do something completely different? If you are 0% likely to change your rules, then you have something tangible, you pass the test and you should be ready to trade with real money. But if on the other hand you will likely diverge from your rules the first time you hit a few losers than you should not be trading.

I have seen way too many idiots in trading chat rooms with no real hard rules, but 100's of rules of thumb that are vague and loosely defined. And as soon as they hit a loser or two they abandon their rules and start making up new things and just clicking randomly trying to get in and out of trades as if they were children.

The first thing you have to accept is that trading is gambling and you can not win every time. Every system at best can only be slightly better than 50% / 50% when normalized for the spread between your betting parameters. If you have a PT of 5 and an SL of 10 you will likely hit 60% + winners easily, but when you normalize this you will still be somewhere around 50% / 50% if you are lucky and good. This is okay though. As long as you believe that your system will perform well over time and you will not abandon it at after the first bad trade you will hit your statistics in the long run.

I advise everyone to stick with their rules every time for every trade or else you don't have a "real system" and shouldn't' be trading.

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  #10 (permalink)
Trading for Fun
charlotte nc
 
Futures Experience: Master
Platform: ninjatrader
Broker/Data: NinjaTrader
Favorite Futures: Emini (ES, YM, NQ, ect.)
 
Posts: 77 since Jan 2015
Thanks: 5 given, 153 received

The great debate over timeframes


I have always been amazed by the various nuances of the time frames available to traders and the fractal nature of it all. Everyone has their own reasons for using their own preferential time frames. For manual traders 5 minute, 10 minute and longer time frames are nice for point and click control, but for automated traders tick level data provides more volume and earlier signals.

I don't use technical indicators or charts for my trading system but I do use limit orders. After lots of trials and errors I realized that limit orders can help give you a nice edge or they can screw you depending on where you are in the queue. If you get in line too late you will never catch any of the good moves, where price temporarily swings down to the trigger and then quickly moves up to your profit target. This action is only available to traders that were in the front of the queue, so unless you are using a longer resting limit you will never see these Instead the limit orders that will always get filled will be the ones that break through your trigger and hit you 1 to 2 ticks at least against you. These will be losers about 60% to 70% of the time.

How do you combat this? You have to have a resting limit order far enough in advance to get to the front of the queue. Here is where the great debate over time frames circles back to this topic. If you have a resting limit up on a 600 tick chart that resets every 10 bars, this will likely not be as effective as a resting limit in a 100 chart with a 30 bar reset. Depending on the volatility, the range, the volume and your limit target ( 1 tick, 5 ticks, etc.) you can find that you can catch the good limit orders better or worse using various settings.

I found a very nice recipe that works for me by oscillating between .5 to 3.5 ticks above or below the current price and resting between 10 to 50 bars all depending on the volume, the range, and a few other market dynamics.

The difference between using a successfully placed resting limit compared to (GetCurrentBid, or GetCurrentAsk) is stunning.

Cheers.

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