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Summary of All Types of Day Trading/Scalping Systems/Methods?


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Summary of All Types of Day Trading/Scalping Systems/Methods?

  #1 (permalink)
 smtlaissezfaire 
Oakland, CA
 
Experience: Intermediate
Platform: Phone
Trading: US Treasuries Futures
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I'm looking for a summary / intro list to all styles/systems of trading, specifically short term trading (day trading / scalping).

I'm still in the exploratory phase of "what's out there" and am trying to settle on a style that suits me for shorter term trading (I already have a style for longer term / option plays).

Here are some of the topics I've come across:

Pure DOM scalping (John Grady/jigsaw, etc)
Tape Reading / Order Flow
Market Profile
Volume Profile
Basic Technical Patterns - Trend lines / S+R / Channels
Pure Price Action (ala PATs / Al Brooks)
Japanese Candlestick patterns (doji's, haramis etc.)
MA's
Other Indicators (RSI, MACD, BB's etc.)
Pivot Points
Market Delta
Correlations (Correlation Trades)
Spread trades (ZB vs ZN etc)
Arbitrage Algos
Other Algo types...?

One book that I bought a while back covered a lot of longer term technical methods (mostly all technical swing strategies such as Gann, indicators, patterns, MA's, Elliot wave, etc etc. - https://www.amazon.com/gp/product/1118043561 - "Trading Systems and Methods"). It's basically a big reference book that has a few pages on each style and some programming code to show technically how it's traded.

The problem with that book is that it doesn't cover shorter term things. Like what systems were floor traders using back in the day? Was it all "intuitive" / "you know it when you see it" / "zen"? What are other short term systems that people are employing now?

So I guess I'm looking for a recommendation on a book / website that would go through all of these types (more of a reference). I'm sort of trying to know what the "space" of short term trading is like.

Thanks for your help!

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  #3 (permalink)
 iantg 
charlotte nc
 
Experience: Advanced
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Hi smtlaissezfaire,

I think you will get a lot of interesting answers on this topic. I'll throw my two cents out for starters...

Regarding short term types of trading strategies there are a few major classifications, and then of course within each classifications there are practitioners and guru's pushing one method - technique or another within that class. The way I break it down is based on what type of bet are you making? Is this a directional bet, an arbitrage bet, or a bet that works regardless of direction. But here is how I look at it myself.

1. TA: Past predicts future. Here users rely on technical analysis of a variety of things to predict the direction of price. This is the most common major class and within this there are tons of methods, techniques and you have covered quite a few of them in your list:

2. TA with Level 2 data: Past, in connection with speculation on visible DOM data can predict the direction of price. Similar to pure TA but with the added benefit of using resting volume on the DOM to speculate on future price movement.

3. Spread Trading - Arbitrage: This type of trading pits two instruments that are highly correlated against each other. Most bets are made when the instruments deviate outside of the normal range. HF systems can rake in quite a bit of fairly risk free money by doing this technique at high speeds.

4. Market Making - Algo trading: There are a number of classes within this category that do different things but generally speaking the aim is to make the spread and have a higher win rate vs. loss rate. Additional edges can be acquired by scratching losers at a commissions only break even, canceling trades and working to optimize queue position. This type of bet typically is directionless because the market maker is on both the bid and ask at the same time. So having skin in the game both ways makes the bet more of a classification based strategy. This is another major space the HF systems play.

5. Directionless Trading / Betting on the Risk - Reward: This is an emerging technique that is less known that bets based on the size of the risk relative to the reward being correct based on the volatility level. The direction of the trade is not as important as knowing to use a 1x1, 2x1, or 1x2 risk / reward setting.

I think within these major classes there are lots of trading styles, techniques, etc. Some you can pull off as a chart trader and some you obviously can't. 3 and 4 are by far the most profitable and are employees by the large players. There are barriers to entry here though, so these spaces are not for most retail players.

Obviously there are lots of snake oil salesmen out there that advocate a trading system or technique so before you put all your eggs in one basket make sure that you understand the bet, understand the edges, and have a basic understanding of the probability of the bet panning out for you. If the rules of a given system are vague, hard to follow or can not be quantified easily then this is can be a red flag. Try to research what edge a given system supposedly has, and work to quantify a way to scrutinize and test this edge to ensure that it actually works.

The biggest failure I have seen from trading systems is not having a binary set of rules such as this:
1. When A occurs do B:
2. When B occurs and when C occurs too, then do D, but if B occurs and C does not, then do E
etc.

If you follow each of the rules of the system does it have a positive expectancy? If you can't even quantify what the expectancy is suppose to be, or the system does not have rules, then stay away... run for the hills.... There are plenty gurus out there peddling complete nonsense.

But you'll figure it out.

Best of Luck!

Ian

In the analytical world there is no such thing as art, there is only the science you know and the science you don't know. Characterizing the science you don't know as "art" is a fools game.
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  #4 (permalink)
 smtlaissezfaire 
Oakland, CA
 
Experience: Intermediate
Platform: Phone
Trading: US Treasuries Futures
Posts: 83 since Jun 2018
Thanks Given: 95
Thanks Received: 120

So regarding #5: Can you point me to some resources? Are you talking about volatility plays (buying VIX, selling credit in high IV markets, etc)?

Also - Re: #3/#4 - what I hear in the media is that it's all about having colocated space. Is that the main barrier to entry, or could one, as an algorithmic trader (but without the huge resources of a big firm) write an algorithm that could effectively scalp and/or arbitrage on the liquid futures markets?

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  #5 (permalink)
 smtlaissezfaire 
Oakland, CA
 
Experience: Intermediate
Platform: Phone
Trading: US Treasuries Futures
Posts: 83 since Jun 2018
Thanks Given: 95
Thanks Received: 120


iantg View Post
Obviously there are lots of snake oil salesmen out there that advocate a trading system or technique so before you put all your eggs in one basket make sure that you understand the bet, understand the edges, and have a basic understanding of the probability of the bet panning out for you. If the rules of a given system are vague, hard to follow or can not be quantified easily then this is can be a red flag. Try to research what edge a given system supposedly has, and work to quantify a way to scrutinize and test this edge to ensure that it actually works.

The biggest failure I have seen from trading systems is not having a binary set of rules such as this:
1. When A occurs do B:
2. When B occurs and when C occurs too, then do D, but if B occurs and C does not, then do E
etc.

If you follow each of the rules of the system does it have a positive expectancy? If you can't even quantify what the expectancy is suppose to be, or the system does not have rules, then stay away... run for the hills.... There are plenty gurus out there peddling complete nonsense.
Ian

Right. So two people in the charting world that seem to be well regarded are PATs + Al Brooks - both which don't have "concrete" rules but do have some rules. (For instance, high probability, profitable setups are buying pullbacks from the trend). But I imagine a lot of this has to do with how specifically you implement these rules (what setups you take and which ones you avoid).

This isn't a vendor review - BUT - I think both of them are probably profitable + honest people. With that said, it doesn't mean that it's necessarily my style of trading or something that resonates with me. Nor that there are formulaic rules (at least that they provide) which I could stuff into a computer. And honestly, I'm hard pressed to find anyone that provides such data in the futures world (although there are plenty in the options world since it's more of an obvious "probability game" vs. a discretionary game).

Another person I'm following is John Grady - also seems to be well respected. He gives setups but doesn't necessarily give a "formula" per se. To his credit, though, he says as much and that you just need to spend 6mo+ staring at the market.

Also - thanks @iantg for your responses. Looking forward to what others have to say as well.

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  #6 (permalink)
 iantg 
charlotte nc
 
Experience: Advanced
Platform: My Own System
Broker: Optimus
Trading: Emini (ES, YM, NQ, ect.)
Posts: 408 since Jan 2015
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Thanks Received: 1,147

Hi smtlaissezfaire,

For point 5 there is no literature or research that I know of.... outside of the research that I have done myself. I have a few friends that are hip to this and have taken this approach further than I have after showing them. I am not claiming that I invented anything, it's just more or less quantifying why things work in a different way. Most traders have extreme hubris and that's okay. You need that to get out there and take risks. So more times than not if someone has any positive results of any kind they chalk it up to their ability to predict the direction of the market. If something goes wrong, it was just HF spoofing, or algos stop hunting or some other way to pass the buck... I did quite a bit of research trying to uncover what edges I actually had. No ego, just looking at the data, and I found out that my only edge on a particular class of strategy was that I was managing risk in such a way that allowed me to profit from the volatility level. The first wining system I built was nothing more than just a profit target of 10 ticks, vs a stop loss of 20 ticks and random entries. The edge was nothing more than the fact that the market moved in a 5 to 15 point range and rarely hit 20 ticks in any direction. So I figured out how to adapt this based on volatility levels. In higher volatility levels use a larger profit target and smaller stop loss. The reasoning is because the market will have close to an equal chance of making either a medium move or a big move. Once the volatility levels dry up you flip the bet. You use a larger stop loss (outside the range the market is moving) and a smaller profit target (inside the range the market is moving). If you go with something simple like a 2x1 risk / reward ratio, you will hit 4 to 6 winners for every 1 loser and beat the expectancy easily. The reason I like this method better than trading direction is that direction changes all the time, and for every indicator that tells you to go long there are 3 more that tell you to go short. Volatility cycles tend to last longer. Often times for days or weeks, but most will last a few hours. It's just a cleaner bet IMO.

Regarding #3 and #4: You will never be able to arb the way HF algos do by co-locating and running FPGA's. This is the most profitable class of trading and mere mortals will never have the DMA, co-locations or equipment. But generally spread trading is possible as a class of strategy, but not arbing the way HF's do it. Market making is more promising though, there are quite a few different classes of this, and a small number of them that little players can pull off. if they co-locate and use the highest end retail tools. I am pursuing one of these at the moment.

I am sure others will have more information and feedback on these topics, but that's my two cents anyway.




smtlaissezfaire View Post
So regarding #5: Can you point me to some resources? Are you talking about volatility plays (buying VIX, selling credit in high IV markets, etc)?

Also - Re: #3/#4 - what I hear in the media is that it's all about having colocated space. Is that the main barrier to entry, or could one, as an algorithmic trader (but without the huge resources of a big firm) write an algorithm that could effectively scalp and/or arbitrage on the liquid futures markets?


In the analytical world there is no such thing as art, there is only the science you know and the science you don't know. Characterizing the science you don't know as "art" is a fools game.
Visit my NexusFi Trade Journal Reply With Quote
  #7 (permalink)
 smtlaissezfaire 
Oakland, CA
 
Experience: Intermediate
Platform: Phone
Trading: US Treasuries Futures
Posts: 83 since Jun 2018
Thanks Given: 95
Thanks Received: 120

Thanks @iantg! Lots of questions:

* How did you verify this edge? Was it through discretionary trading or through some program?

* How do people get historical tick data? I'd love to say, OK, I think when A happens then B will happen. For instance, today when watching a DOM replay, I said, "Oh, the price is pushing highs right now. If I waited for a 6 tick retrace from the high and then sold at 2 ticks above the high, that would be the optimal trade". I'd love to have an assumption like that and then verify it with historical data. How are people getting a hold of that data?

* I've noticed the same profit target thing on ES (I'm assuming you're talking about ES?). I noticed that when I (demo) traded without stops, I'd end up mostly even. On days in which I had stops, I'd be a consistent loser. Examining, my trade log, I found out why: on days without stops I'd have one or two blow out trades, but otherwise I was cutting my risk quickly - BUT - I would have gotten stopped out for more. So for risk at 4-8 ticks on ES I'd consistently lose, but when I'd cut trades quickly I'd lose less (price would go against me 4-5 ticks, then move in my direction so I'd be in a 2-3 tick loser).

* BTW - it sounds like you are really trading volatility, not direction (but because you're trading futures you aren't technically delta neutral). Are you trading this in ES or with options? Are you hedging your positions with options? Sounds like something you'd want to trade directionally with VIX (or VXX) options or just by buying straddles/strangles in low vol -> rising vol and doing the opposite in high vol -> low vol. This is what a lot of option traders do - sell delta neutral options at earnings / high iv rank for the "volatility crush". I did it the other day on USO as it was somewhere close to 90% IV rank - and vol. is mean reverting.

* What's DMA?

* Also - wanted to ask: what language are you writing in? C++?

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  #8 (permalink)
 smtlaissezfaire 
Oakland, CA
 
Experience: Intermediate
Platform: Phone
Trading: US Treasuries Futures
Posts: 83 since Jun 2018
Thanks Given: 95
Thanks Received: 120

Oh - it just occurred to me - are you trading calendar spreads on the futures?

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  #9 (permalink)
 iantg 
charlotte nc
 
Experience: Advanced
Platform: My Own System
Broker: Optimus
Trading: Emini (ES, YM, NQ, ect.)
Posts: 408 since Jan 2015
Thanks Given: 90
Thanks Received: 1,147

Hi smtlaissezfaire,

I'm glad to help field your questions.

1. I verified the edge with algorithmic trading and actually deconstructing the microstructure manually to verify the SIM engine. I tested this edge over 3 years from 2014 to 2016. I used to run 3 lap tops 24 hours a day just running different permutations of this type of strategy.... That was back in my NinjaTrader 7 days. The market replay system in 7 was very slow. Since 2017 I have been researching a different style of trading from this.

2. You can get historical data from a number of place. Here on FIO there is an elite section thread that has some. You can also build an extraction algorythm that can get the data out of your trading platform's replay data. I built a full microstructure analysis out of the market replay data from ninjatrader. I extract every single level one add, cancel, or transaction and I snapshot all the level 2 data and sequence it in a way that I use for my analysis. I have a nice microstructure analysis that scores every single price level and has a whole host of KPIs with it. Most people won't ever look at this level of detail, but in my opinion this level of detail is what matters the most for finding the better edges out there.

3. Right, so I have traded the ES, YM, NQ, and TF over the years with different algos and the concept is the same for any instrument. You are trading volaitlity not direction with this technique. Instead of betting if the market will move up or down, you are betting that the current volatility level will hold. I find this to be an easier bet. Volatility levels shift slowly, hold for longer periods and allow you to place better bets than picking direction.


I'll give you a couple quick examples of how the bet works. (This is a gross oversimplification of the idea, but you should at least understand from the examples how it works)

Go back to a high volatility period.... say February of this year. The market went nuts for 2 or 3 straight weeks. If you would have traded a profit target of 10 ticks vs. a stop loss of 8 or 9 ticks, you would have likely done well over this period. The market was moving up and down in wild blocks of 15 to 20 ticks. So hitting 10 ticks was just as easy as hitting 8 ticks. So you have roughly even odds. 50%/ 50% win loss ratio, but your win value is > than your loss value.

By contrast back in 2017 when the volatility dried up and went away, the bet would have been reversed. If you traded a profit target of 5 ticks vs. a stop loss of 10 ticks you would have done well. The market barely moved last year. You would have to analyze the market and know which day / week / month and what exact setting to use, but generally speaking taking 2x the risk would have paid off, because you would have won far more than 2x times because of how tight the range of movement was.


DMA = direct market access. This is where you plug up your server / algo into the machine engine of the exchange. It allows you process the feed faster, catch price level changes faster, get your orders to the front of the queue, etc. Without this, the HF world is a rough place. And I am working with NinjaTrader / C#, which is less than ideal for the type of work that I am doing... I may be moving to another platform soon.

Hope some of this can be helpful. But always remain skeptical of any advice anyone gives you including me. Get the raw data and look at it for yourself. This is the best place to figure out what kind of bets exist that you could actually make money on. Charts don't allow you to do any analysis, build statistics, sum, average, count, rank, etc. It is a very abstract world.... Anyone that succeed in that world is a complete rock stare because the skill set it takes to figure out the market from Charts completely eludes me. I had no idea how it worked until I could see it row by row in excel. (I mean the full level 1 data feed).

Best of luck!

Ian




smtlaissezfaire View Post
Thanks @iantg! Lots of questions:

* How did you verify this edge? Was it through discretionary trading or through some program?

* How do people get historical tick data? I'd love to say, OK, I think when A happens then B will happen. For instance, today when watching a DOM replay, I said, "Oh, the price is pushing highs right now. If I waited for a 6 tick retrace from the high and then sold at 2 ticks above the high, that would be the optimal trade". I'd love to have an assumption like that and then verify it with historical data. How are people getting a hold of that data?

* I've noticed the same profit target thing on ES (I'm assuming you're talking about ES?). I noticed that when I (demo) traded without stops, I'd end up mostly even. On days in which I had stops, I'd be a consistent loser. Examining, my trade log, I found out why: on days without stops I'd have one or two blow out trades, but otherwise I was cutting my risk quickly - BUT - I would have gotten stopped out for more. So for risk at 4-8 ticks on ES I'd consistently lose, but when I'd cut trades quickly I'd lose less (price would go against me 4-5 ticks, then move in my direction so I'd be in a 2-3 tick loser).

* BTW - it sounds like you are really trading volatility, not direction (but because you're trading futures you aren't technically delta neutral). Are you trading this in ES or with options? Are you hedging your positions with options? Sounds like something you'd want to trade directionally with VIX (or VXX) options or just by buying straddles/strangles in low vol -> rising vol and doing the opposite in high vol -> low vol. This is what a lot of option traders do - sell delta neutral options at earnings / high iv rank for the "volatility crush". I did it the other day on USO as it was somewhere close to 90% IV rank - and vol. is mean reverting.

* What's DMA?

* Also - wanted to ask: what language are you writing in? C++?


In the analytical world there is no such thing as art, there is only the science you know and the science you don't know. Characterizing the science you don't know as "art" is a fools game.
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  #10 (permalink)
 smtlaissezfaire 
Oakland, CA
 
Experience: Intermediate
Platform: Phone
Trading: US Treasuries Futures
Posts: 83 since Jun 2018
Thanks Given: 95
Thanks Received: 120


Thanks @iantg

Can you point me to that premium thread?

I think you are right, though - that getting access to data is a really important thing. How else are you supposed to verify edge? Otherwise it might take you months just to verify a possible set up.

Haven't heard anything back from others on this thread so I decided to create a mind map.

I know I don't have much filled on the fundamental side, but it's not really my interest

Do you think are vast swaths of ways people trade that aren't listed in this mind map?

Curious what you (and others) think.

Thanks!

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Last Updated on September 11, 2018


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