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(CarneyRules is a reference to the former head of the Bank of Canada, who adopted monetary policies which were in my opinion really great in keeping Canada out of the US crash in 2007)
Hey all, before getting into specifics about my current research ideas, I wanted to share some background on how I've evolved as a trader.
I started out doing swing trading and options trading in small cap biotech. I was fortunate to meet a bunch of people who knew a lot about biotech. At one point, I made $100K in one month trading biotech derivatives and small cap biotechs. I learned a lot about fundamental analysis, etc.
I tried to day trade after that. I ran into a bunch of trading ‘educators’ who wanted $2k to $3K to teach me how to day trade. Here is my progression.
Short Term Tech Analysis (6 months)
The first iteration was straight up technical analysis, gap up momentum strategies. Doing scans, research every day and trying to trade. I lost my shirt doing this. It turns out a curling exponential moving average does not a trade make. I kept looking for ‘setups’ or predefined situations. This period really sucked, as I kept ‘working at it’, spending hours and hours on it but never getting to a place where I made money.
Frankly, the people who were making money trading in this space had a fundamental analysis edge. They were extremely well prepared before the start of the day. They also worked together in teams to split up the research. Sure—the ‘pattern’ might present itself—but I learned that there had to be a fundamental reason something was happening in tandem with the structure of the float, short shares, etc.
Technical analysis has appeal imho because it captures some of the demand asymmetries that exist in the market. Like a broken clock, it is right twice a day but people mistake the correlation of those patterns to some sort of causation. Just because a flag is forming, doesn’t mean there is really excess demand. The problem is—and I think this especially applies to futures traders—people often think because price forms a pattern that there is a certain market structure or demand/supply asymmetry present.
That thinking, combined with NYSE order book not being transparent and a failure to do research before the trading day (particularly about prior levels, disposition of float, historic volatility, and the story of the earnings and company)—was why most of the day traders I knew trading stocks failed. A lot of them wanted to get into 'chat rooms' and have some guru or other person tell them when to trade (for those people who wanted something for nothing, I have little sympathy). The sad part was the trading educators selling this dream to those who worked quite hard at an exclusively technical analysis based approach that would guarantee failure.
I saw so many traders fail--good people with hopes and dreams handing over their hard earned money to these 'gurus.' I tried to help some of them, but of course, it was like the blind leading the blind.
Indicators and market structure (9 months)
The second iteration was realizing that I liked trading one market and seeking the mentorship of a ‘professional’ es trader. Paid him thousands of dollars to learn ‘market structure.’ I had heard about him from one of the successful stock day traders I knew. He had developed a type of overbought or oversold stochastic which required a custom feed to power his software.
He broke his analysis down into the following:
1) Size of the bids/offers, frequency of the bids/offers
2) Whether the market was oversold or overbought overall
3) Strength of the trend (he had created a modified NYSE Tick measurement)
He claimed to have an 80% win rate…the problem was his oversold and overbought ‘indicator.’ You know the old saying that the market can stay overbought or oversold longer than you can stay solvent. He started building increasingly long narratives explaining why his oversold or overbought indicator wasn’t working….you get the picture. Most of this students left him.
His best trades were high range days with liquidity vacuums. The rest of the time, his models really struggled. He was great at taking $0.50 out of SPY when the market was juicy enough in range to give it to him.
I learned from this the limitation of building statistical models that do not incorporate context. I always was afraid of context as this non quantitative voodoo bug, but in all honesty--I think the best traders are people who connect the context to what the data is showing them. The best ES traders I've met (some of whom were making a couple of thousand a day and had learned from him but grown out of it), used the data as a framework to understand the general contours of the situation but combined the fact that they were experienced in the ES at a deep level to 'intuit' and think through player positioning in the context of the data analytics they developed.
To perhaps short circuit the background and cut to the strategies I'm currently considering..here they are:
1) Liquidity vacuum in ES. Trading strong moves in the ES where there are liquidity vacuums. I think this is attainable and measurable. Issues I see:
Highly irregular when they happen. Could wait a week or two without a setup
Not sure alone this could support my goal of getting to 2 ES points(equivalent) a week
2) Pair Trading indices. I've noticed a lot of the time, YM relative to ES takes off or under performs. One approach would be to short and long this pair.
Happens everyday..but seems like membership fees eat away a lot of these trades. You have to trade a lot of contracts
Don't really have the tooling. I use Jigsaw but can't automatically close a position on both legs at once, have to manually leg in...with corresponding execution risk
It's difficult to know when you're wrong. For example, if a spread goes against you, how do you know to add to it or that it is going to break out? It's true that for a lot of the indices they are co-integrated and mean reverting but that doesn't make it any easier to come up with risks.
Charts are difficult to come by. For example, if you plot the ratio of the dollar value of ES and YM, it's difficult to find an accurate chart (just in my experience, maybe people have other ideas)
3) Going back to stocks. Although I like concentrating on one market, now that Bookmap has order flow data for nasdaq stocks, it opens up the possibility to combine the fundamental research I'm used to doing and incorporating the order flow I've learned from trading bonds and the ES. Advantages and disadvantages are:
Trade 1: 7:40AM
Iceberg hits at 156.15, hits at buy as well. This was the support area I was expecting. not that ZF and ZN are near the middle or top of their ranges (zf 118..182, ZN 126..275).
Front iceberg at 156 '15 in ZB, target at 156 17. But don't like the lack of buying and large sell iceberg in ZN at 7:44 without any buying pressure in the 10 year, so move target down a tick to scalp one tick. Stop at 156 '13.
Trade 2: 7:59 AM
Again, I see the ZB at the bottom of its range, the other products much higher. I know that '15 and '14 are support areas from the prior day. This is overtrading, as I don't see a surplus level amount of orders to justify. I just think if I were institutional I would step in here. Bad thinking. i enter at 156 '16.
A block order comes in at 8, after the I enter the trade. But where is the buying?
More block orders come in...man I should have waited to see if there was confirmation buying. Other products come down, and I am looking at 3 ticks in the red now. I did not set a stop before hand (also mistake).
To be clear, yesterday's trades were in the ZB. Because that is a thinner market, I have decided to only trade the ZN.
Day Prep:
Consumer confidence at 10:00AM
Overnight, the ZB broke out of the long term range of 157 '09., so if we do not see a pull back in the range, I would expect a march to new highs. The move in interest rates is most likely a result of the North Korea threat, as people run into bonds.
7:35: Took a trade that looked like a lure to me on the ZN. Entered at '125, looking for '135. Sat in it for almost 20 minutes, looked like it was going to break against me, then hit my price . Scratch trade. Pretty frustrated by that. Would have been 2 ticks.
NET: 0 ticks
8:09 Saw an iceberg building on '130, then most of the offer being taken out. Followed it, but crucially did not see the excess demand on the offer that I like to see when entering a trade.
NET: -1 tick
8:26 After open saw a strong parallel shift in interest rates, buyers completely in control. Entered at 8:24 at '150, for 2 ticks. Got out early., could have ridden it for 4 or 5 ticks.
NET: 1 tick
8:32, saw the buying stop, huge buy orders not moving the market up. Then get hit by a bunch of sell orders. Was late to join in, but did so at '165 for 2 ticks. Saw some backticking and exited--early could have written it for 2 more ticks.
NET 3 ticks
8:49 I am getting tired and also finding it hard to read the situation. We are stuck below the top of the range, with consumer confidence coming out at 10, I am concerned that nothing will happen.
8:59 I see a large sell order and crucially, no response on the buy side. 30 contracts trade on the offer. Then crucially, multiple icebergs hit on the ZB, all sell orders. No buyers in sight. I enter at '145, getting the edge and scalp 2 ticks. Part of this is a context read--if I were a buyer, would I want to buy new interest rate highs right before consumer confidence?
NET 5 ticks.
9:11 The return of the buyer. They push up at '140, but then crucially, stop. Nobody is buying. All that buying and it is going bid. Large sell orders are buying and I don't see any buyers in sight. I decide to risk a tick to take a tick.
NET 6 ticks
We seem stuck in range, from '155 to '140. Stock market is about to open, so I don't want to take any trades. ES looks heavy--lots of traders underwater from the overnight session. My guess is that bonds will break to new highs, but only mildly b/c of the news at 10.
I see the ES start to plung to new lows, take a shot at '155 for a break of new highs on bonds. BUT I was wrong, try to scratch, failed force a 1 tick loser.
NET 5 ticks
9:45 AM I try again because I see the ES failing somewhat and signs of a reversal in the 30 year. It was stupid, I wind up scratching.
9:49 The ES does fall back into its range. But I am spooked. The market has thinned out (presumably b/c of news) and I do not want to get caught in snap moves. I'm sitting on the side lines.
9:55 bunch of dumping b/f news
10:00 News. I honestly do not have the experience to trade these news events. I noticed it looked like it was selling off, then reversed. Very strange.
In the spirit of protecting my edge, I'm not going to post specific trades but a day analysis. For those interested in the trades, feel free to PM me.
7:50 AM We failed to break 156 '06. We either will have a retest of the highs OR a drop down into the range with 156 '24 at the bottom. We have unemployment at 8:30 AM, so I honestly don't expect much action until then. We have also moved to the December contract.
Key Levels:
156 '24 low of the range
157 '04 top of the range
News at 8:30 Unemployment (high impact)
Looks range bound, thin, rife for opportunity to be gamed by large players
Net: 1 tick
I'm closing up shop at 11 AM. My concentration is waning and there are a lot of snap moves. I've been underwater in some instances and lucky to scratch. This just isn't a low risk kind of day.
I also (in a separate account) tried trading the unemployment figures after their release. Didn't go well--I clearly have have work to do in learning more about trading events.
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