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Seeking advice and general counsel here. I'm a programmer by education and by trade and have worked in the financial industry for the past 4 years. I've dabbled in futures before, blowing out an account or two. However, I'm much more aware of futures trading as a science now and that it requires hard study as well as a strong mind/spirit. (i've been reading and agree with a lot of what has been said in the Psych forums here). It was gambling the way I was trading - simply slinging lots in and hoping to go green. No wonder I blew the accounts. The leverage was so attractive!!
I personally am an extremely laid back person, which I expect to be tested while trading. Reading all these threads is great, but I need to actually put the theory (the psych and money mgmt) into practice. I'm trying to go through this forum to look for any and all advice for newbies. I've read through the recommended book list and plan to go through many of them on my ebook reader.
The way I see it there are three aspects to trading that my experience has shown me and that this forum as illuminated:
1. Psychology is key
2. Rules following (Money Management - SL/PT) is critical
3. Figuring out where/when to enter is essential (using backtesting and analysis)
All three parts are needed to be successful. There is plenty of documentation (on this forum and elsewhere) regarding points 1 and 2. I plan on spending a good amount of time learning and training myself to be 'zen' about this business venture. That being said, I NEVER researched (#3) entries/exits or markets generally (like I said, I would simply place and pray). I now realize that this is a science in itself and requires hard work and diligence to understand(which I am willing and thankfully able to put in). However I find myself at a complete and utter loss on where to start and more specifically HOW to start reading markets and identifying good potential entries. I'm trying to get as much information sunk into my skull before even attempting SIM. I want to do it right this time. So….keeping all that in mind, is there something specific I should read/do, specifically for item #3 above? Maybe one or two of the books should be bumped up higher in the priority queue? Or blogs/threads I should read?
I'm very comfortable using Ninja and have used it at work as well as developing indicators/strategies for traders. However getting the trading 'ideas' is my weakness (well, weakness because I'm completely ignorant). I'm so happy that I've found a group that is NT-friendly and is very open to helping and assisting others less knowledgeable. I also am excited to help traders with their programming needs and learn in the process. I see that as my contribution to the site at the minimum.
Essentially I'm looking for guidance when it comes to studying the markets (say the ES for example). I plan on trading the ES because of its liquidity and from what I've read it being quite friendly to beginner-traders.
My humble 2 cents... from a guy who is not getting his primary income from trading... yet.
Yes Pyschology, Risk/Money Management, and an "edge" or trade idea with positive expectancy are said to be three pillars of trading. If I remember Elder calls it Mind, Money, Method or something like that.
I've been tackeling those issues as follows:
Mind: Automate. I try my best to no longer have an opinion about the market or the economy. I need to have entry and exit rules that have a postive expectancy, or no trade. I'm tempted to get one of those signs for my desk that says "Please check your Macro opinion in at the door."
Money: Make sure you have enough . Elder puts it at $25K minimum, I put it at 3 times the overnight margin plus 20% per futures contract. I'm conservative, and I've never blown up. Personally the old paradigm of having 3-6 months of expenses in cash for emergencies is now a 1-3 years of expenses in cash for emergencies, but that really depends on one's specific situation.
I'd also put risk in here. What happens if your internet goes down when you have open positions? Are you reallyflat when you think you are flat? What are the signs that my trade idea is not working as expected, etc etc.
Method: This is really your question, isn't it? Where to get Alpha ideas... personally I've only got one that works, and its low frequency. I've had intraday methods work for a while and then crash and burn. My approach is read, read, and read. Books, academic papers, forums such as this, etc. Also attend any workshops your exchange puts on, or your local university.
Then code your idea in NT and backtest it to death. I was shocked how few of the accepted trade ideas have a positive expectancy in backtesting.
Personally I focus on three kinds of trades: Momentum (directional, trend following, etc), Relative Value (pairs trading, spread trading, stat arb, etc), and Market Microstructure (scalping, liquidity provision, market making, etc).
I then break it down into types of instruments in each catagory, and try to build a strategy from there. Backtest, foreward test, and last, probationary trade it. I'm of the view that the process (Mind, Money/Risk, and Strategy Development process) is 80% of the work and takes about 80% of my time.
In the Elite section there is an Elite Group Trading Methods subsection where people post strategies and let others try to improve the code. There are high and low frequency momentum strategies in there, and two attempts at using Ninja for pairs/spread trades. It can be a source of ideas.
Lastly, personally I think that daytrading the ES using a momentum strategy is hard work... if you expect to make money in the long run. If you are a momentum guy you might want to look at CME currency futures (6E, 6A, etc).
So no real Alpha ideas for you in my words, but I hope they help you find one.
Many thanks for your thoughts and sharing your experiences. I really like the analogy of Mind/Money/Method. That is essentially it put in a succinct and easy to remember way - The 3 Ms. I don't plan on getting my primary income from trading either for quite some time. Thankfully I'm still employed in a industry that requires my skills. I'm very fortunate and I know it.
Also the reason I'm going down this route again, is because I am truly amazed by the futures markets and how they tick (pun intended). I'm so fascinated by how they move and what the price actually entails in the larger scope of our world. It's amazing that human civilization has come to create such an amazing mechanism for pricing of commodities and goods. Also I want to make money =). As far as your breakdown is concerned, I'm not sure I entirely agree with the Automation part. Perhaps its too early for me to think along those lines, I feel like I should understand how markets move and then think of automating a system IF its appropriate.
Mind: Automation I believe is good sometimes and bad sometimes and should be used carefully. It was somewhere on this forum where someone posted that they use computers to do what computers do better than humans (fast calculations, fast entries, etc). They left the rest to themselves (discretion, reading markets, etc). I agree with this. I've seen it at work (working in the financial industry) that having humans around are well worth their 150-200k salaries, simply to double check and ensure all's well. Bad prints do occur and computer programs might have bugs in them.
Money: I completely agree! I had absolutely (ABSOLUTELY) no sense of money or risk management the previous two times. I oftentimes 'doubled-down' when I had to...to see my account whither away. The few times it worked, just encouraged me to try it again and again until BUST. I need a lesson on risk/money management and I'm sure there's good literature out there for that as well. I'm looking forward to it.
Method: Agreed that this is the core of my question, however I'm not even looking for someone to share their 'edge'. I understand and appreciate this as personal information. What I'm looking for are the first steps, the exact 'hows' in learning about markets. For example, an exercise I'd like to start doing is looking at today's chart (in the evening) for the ES (as an example) and trying to understand it by throwing a bunch of indicators on it (maybe?). The idea is that by studying today's price action and trying to hear where the market wants to go if certain levels get hit (S/R, etc), instead of predicting one way or another. The problem is I have absolutely no idea where to start.
I fully plan on joining the Elite Section this week. I want to get a sense of the rest of the forum (non-Elite Section) and read through a lot of the threads. I imagine there's alot of material in the Elite section -- I don't want to get overwhelmed =).
Looking forward to the journey...just need some help with all the instructions
Attached an example of the kind of things I look at. It is an academic paper looking at the performance of a commodity index, and is full of things to try, including:
1. Trade idea for a single instrument
2. Quantitative portfolio management idea... a basket of 1. above
3. Lots of references to other academic literature you can find on the web
This is one of many papers available on momentum strategies. There is loads more on relative value, and to a lesser extent market microstructure.
FWIW both in my real library and my "virtual" PDF library I'll keep stuff that I don't necessarily understand today, but hope to down the road. Yesterday I pulled out a book I purchased two years ago that was out of my depth. It makes a lot more sense to me now than then (thankfully!).
MANY thanks. I'll go through this document and try to make the most of it. Hopefully it'll highlight the scientific method that trading-scientists use when deriving their systems. Just as programmers have their own scientific method (requirements, algo writing/pseudo code, development), I imagine traders share a generic process. I want to learn more about this process, this document looks like its these authors' attempt at it.
So for anyone out there in futures.io (formerly BMT)-land, I have a question...
From what I'm gathering about the actual process of developing a 'method' - one leg of the Elder's formula - the basic steps are as follows?:
1. Throw indicators on a chart that you would want to trade (1-5-15 minute charts, etc)
2. Use human logic or human eyes to make correlations between indicators and subsequent price action.
3. Develop a method that is based off of said logic and what was observed (with loss protection and potential targets)
4. Create strategy via code or wizards
5. Backtest strategy against historical data
6. Optimize/Tweak strategy to increase probable trades
7. Forward test (=>repeat steps 5+6)
8. When mind and wallet are ready, go live.
If so, this is somewhat akin to a scientist working in a laboratory. You are experimenting with various combinations of mathematical formulas on historical data to clue you into how the market reacted in the past.
Would anyone disagree with the above process or have insights in other ways of accomplishing this goal (method creating)? I apologize for making it so elementary, but it helps me keep focus. I imagine it's ALOT more difficult to actually find something than just going from step 2 to 3.
1. Do not throw too many indicators. Most indicators just display price in a different fashion and pollute your chart. Use volume or any other information not derived from price. Simple indicators won't easily make you money.
2. Correlations are permanently changing. There is positive feedback, negative feedback and no feedback (noise). Market psychology creates primary feedback, feedback is then reinforced by behaviour of nonlinear systems.
3. Method should include setup, trigger, stop-loss and targets. Try different filters to improve profitability.
4. I have found it extremely difficult to implement intraday strategies via wizard. One of the problems is the noon period or the time of the news announcements, when many strategies fail. Difficult to tell your code to read the economic news calendar and not to trade during news release. It is much easier to implement backtesting with daily data.
5. Yes
6. Optimizing is dangerous, as it often leads to curve-fitting. Positive returns in the past do not guarantee positive future returns, as markets and correlations are permanently changing.
7. During the forward test you should not optimize.
8. Avoid leverage in the first place. You could start with ETFs and later switch to futures, when you have shown consistent profitability.
. Elder puts it at $25K minimum, I put it at 3 times the 
