StockTickr Blog

Is Your Trading Streaky? You Might Be Able To Profit From It

Dave — Thu, 12 Mar 2009 19:27:31 +0000

I’d bet that if you asked every trader if their trading was “streaky” – the vast majority would say yes. Every trader goes through dry spells and periods of nice profits. But if your trading is TRULY streaky you would be able to improve your system by modifying it slightly to skip trades or at least modify your commitment to certain trades (reduce position size).

Let’s say you have profitable and losing trades that tend to occur in streaks. If you could determine that the streakiness was statistically significant, then during a string of losing trades you could back off your position size or pass on trades until you see one that would have been profitable. Once you encounter a profitable skipped trade you could start trading again.

If the trades in your system are negatively correlated (that is, losing trades tend to be followed by winning trades and vice versa) you could potentially set up a rule to do the opposite.

I’ve recently added a streakiness report in StockTickr that will calculate this correlation statistic for you based on anything you choose to filter on (tag, date range, dozens of other filters).

It turns out that there are fewer systems that are streaky enough to profit from than you might imagine. At least in my experience, there were only a couple out of the dozen or so systems that I’ve traded that showed any promise at all for this streakiness.

I’d be interested to hear if anyone out there has implemented a rule such as this to try to improve their trading system. How did it turn out?

Interview with TraderAM

Dave — Mon, 02 Feb 2009 14:20:23 +0000

For the next interview in the StockTickr Interview Series (RSS feed), I spoke with TraderAM. TraderAM is an independant day trader who has an interesting style of trading and posts all his trades on his blog. Feel free to ask him questions in the comments section below.

Read on for a great interview and learn more about how Amarjit trades, the types of setups he’s looking for, and how he got started trading.

StockTickr: Tell us a little about yourself, TraderAM.

TraderAM: Born in the UK and have lived most of my life here apart from a 3 year stint in Canada. On the education front, I did a University degree in Biochemistry, I didn’t follow that thru as a career and went into the IT and Computer Industry instead. Pretty much most of my working life has been in IT Software development which I still do currently as full time employment. Enjoy golf, science fiction, marine aquarium hobby and family life.

StockTickr: How did you get started trading stocks?

TraderAM: I became interested in the stock market while at University when I went on some general information seminars. But it was only later (1999-2000) when I had an opportunity to actually think about trading for real. As you know this was the time of the tech boom and IMO it was also the start of online trading coming to the fore. These two factors combined to produce the incredible market conditions we experienced. Looking back, I was not really “trading”. I didn’t look at charts or consider stops and losses, I was just jumping on the momentum bandwagon like everyone else and making lots of money which all seemed so easy..lol.. The buzz of trading during this time and the desire to learn more about how the markets work, got me hooked.

StockTickr: Most traders have a horror story about losing their shirt when they first started trading. What’s yours?

TraderAM: By nature, I’m not an aggressive trader, so I haven’t really blown a big account as such. In fact I probably missed out on the biggest gains in the tech boom as they occurred after I had moved most of my money out of the trading account for mortgage and car etc. The remaining 15% or so, I naively believed that I could build up again quite easily. Then came the tech crash and so I suppose you could say I “lost my shirt” as that disappeared quite rapidly.

StockTickr: Do you trade for a living now?

TraderAM: No. I still have my full time job. But being around computers all day, the flexibility of working hours and also the fact that the US market is open 2:30pm to 9:00pm UK time means that I can normally trade on most days.

StockTickr: What single lesson did you learn along the way that has helped you the most in your trading?

TraderAM: You have to find both a strategy plus a timeframe which makes you comfortable and you have to stick with it to allow it a chance to work.

StockTickr: Do you keep a journal and do you consider good record keeping essential to your success?

TraderAM: Yes and Yes. It is only by doing this that you can judge your performance, see if the strategy is underperforming and see if you are deviating from your trading plan.

StockTickr: Describe your style of trading. How long do you typically hold stocks?

TraderAM: I trade off the 15min chart, using primarily candlestick price action setups on stocks which have gapped. I am looking for setups such as range breakouts, price action at s/r levels and pullbacks in trends alongside staying on right side of the general market. I am always aiming to hold part of my position until end of the day as that way I can catch the most of a move if a stock starts to trend.

I owe some thanks to TraderX as my strategy is based on his with some of my own modifications added to it.

StockTickr: What’s your exit strategy for winning and losing trades?

TraderAM: Whenever I enter a trade based on a candle setup, my initial stop is usually at the opposite end of that candle. I move my stop to breakeven once I am up 1R. In terms of exits, it varies depending on market conditions, but generally I take partial profits at Fib Ext levels, 1R, 2R , $1 gain (whichever one seems more appropriate) and the rest I exit at the end of the day if it is still open.

StockTickr: What 3 books do you recommend traders read?

TraderAM:

StockTickr: Other than your own, what are your 3 favorite blogs?

TraderAM: The blogs I read (see my blog for links) are all very good and I try to visit them most days if I have time. But if pushed to name 3, these would be (no particular order):

StockTickr: Do you think one day computers will make better traders than humans and has that day come already?

TraderAM: A quick answer might be yes as they would be better than humans at performing mechanical tasks since no emotions are involved (e.g. obey stop losses, let profits run etc). However I would say no. Any computer system will have been designed by a human initially and as such has some human ‘influence’ already built in. The market is driven by greed and fear and as long as humans are involved it will always be so, any computer system will have an impossible task of trying to find order in this mass. I hope that is the case anyway, as computers are pretty boring beasts.

StockTickr: What technical indicators could you not live without?

TraderAM: I trade more off price action rather than indicators per se. However the ones I do use are: ema, CCI, volume,atr. More as supporting factors rather than decision makers.

StockTickr: How do you think the market has changed over the last several years? How have you adapted?

TraderAM: Hard to say over that timeframe as I have only followed the markets day in day out for last couple of years when I started trading “properly” with a definite trading plan. At a basic level they are still driven by the same forces (supply and demand) so from that point of view they haven’t changed. In terms of character: the market for most of 2007 and 2008 was not moving as much as say in Tech Boom days, so that is one aspect. All that changed in last quarter of last year when volatility came back big time. In terms of adapting during this time, I have forced myself to trade less, be more critical of my chart patterns and try to only take the very best looking setups.

StockTickr: Do you backtest and if not, how do you instill belief in your system?

TraderAM: Yes, Backtested then paper traded before going ‘live’. I also continue this going forward and backtest any modifications to my strategies and any new setups that I build.

StockTickr: What advice can you offer traders who are just starting out?

TraderAM: Learn about Money Management so you don’t lose your shirt. Learn discipline so that you can stick to your trading plan to give it a chance to work. Keep in mind that you only need to be successful 50-60% of the time to make decent profits. Don’t take a strategy from any blog/forum and expect it to work. You have to work at it yourself and better still try to take the best bits of it and add things which you have found in your own study of the markets. It is inherently human that when you have built something yourself, you will have more confidence in it and will be more likely to stick with it.

Unfortunately, trading is going to be painful, there will be days when the market kicks you and then kicks you some more when you are down. If you know that from the outset then you can steel yourself to it. The key is to just take it but stay in the game over the long term (hence money management) until you become more successful. Remember, it is a marathon not a sprint.

StockTickr: What do you like best about trading?

TraderAM: The buzz and satisfaction you get from good trades which you have executed to plan and kept your discipline. Also freedom that it gives you to enjoy other things in life, when you can do it fulltime successfully (which I hope to do at some point in future).

StockTickr: When did you start your blog and what prompted you to do so?

TraderAM: I started my blog at start of 2008. A lot of my trading ideas and best info has come from free blogs and forums despite the many books and courses I have been on. So in a similar fashion, I wanted to pass this on to any new traders who happen to want to read my rantings. Another reason was the hope that more experienced traders would read it and pass on their valuable insights which would help and improve my own trading. I like to think I have achieved both of those objectives.

StockTickr: Thanks for your time, TraderAM.

TraderAM: Thanks, Dave.

There is now a risk free trial for StockTickr Pro – hone your trading edge and become consistently profitable with StockTickr.

Stay tuned – there are several interviews on the way. You can subscribe to these interviews via RSS feed.

Previous interviews in the StockTickr Interview Series (RSS feed)

Do you have suggestions for other traders you’d like to see an interview with? Let us know!

Introducing Automation into your Manual Trading System

Dave — Fri, 30 Jan 2009 13:22:08 +0000

When a lot of traders think of automated trading, they envision going from completely manual trading to completely automated trading. They mistakenly view this as a loss of control – they are used to being in complete control of their trading making every decision. It’s unsettling for a lot of people to lose this control and offload more work to their computer.

What most don’t realize is that automated trading IS complete control. The factors and inputs are completely designed and controlled by the trader and the computer doesn’t stray from the strategy it’s been assigned. This is just the opposite of lack of control.

A good way to think about switching to automated trading is to introduce automation into your manual trading system. Think of it as a continuum like in the image above. It’s not all or nothing – you can slowly integrate automation into your manual trading system so that over time you’ll do less trading grunt work and become more and more comfortable with automated trading as you move to the right on the continuum.

Here are some ways to start offloading manual work from your trading system:

Use a product like Trade-Ideas to systematically gather stocks that fit your trading system.
Explore using multiple monitors to save you time and effort and miss fewer trades.
Use tools to automatically calculate your position size, saving time and preventing mistakes.
Streamline your trading routine to cut the fat and become a more efficient trader.
Use the StockTickr Trading Bot to get you into trades and then you can manually manage all aspects of the exit.
Use the StockTickr Trading Bot to get you into trades with a time stop and then optionally manage an exit before the time stop expires.

There are lots of ways to become familiar with automation without going all in. Are there other ways you can think of to move towards automation on the continuum?

Should You Trade with Multiple Monitors? Here’s How To Tell

Dave — Tue, 06 Jan 2009 13:15:48 +0000

OK, I don’t think anyone on the planet needs a 24 monitor setup like the one above, but it makes a lot of sense to trade with more than one monitor. I trade with the 4 monitor setup pictured below and I would never go back. It’s not cheap, but it was a simple decision to me once I thought about it. (See the end of the post for links to the specific components I bought).

First off, there are a lot of benefits to having multiple monitors. Some are pretty obvious but others I didn’t realize until I used my setup for a while.

1. Much more viewable area to have more windows open

Flipping through open windows is extremely time consuming and inefficient. You don’t realize just how much time you spend flipping through windows until you don’t have to. Let’s say you look at charts in multiple timeframes – the daily, hourly, and 5 minute charts. If there’s not room on your screen to have all three visible at the same time you’re going to spend a lot of time and energy changing between windows to take in the information on each chart. Since the data is changing constantly, you’ll be doing this routine several times just in the course of a few minutes. If you have enough desktop space to have all the charts visible on your screen at once you’ll be at a huge advantage.

2. You’ll miss fewer trades

If you’re not spending time flipping windows, you’ll have more time and more desktop area to find more setups, so you’ll miss fewer trades. Of course, if you have a tendency to over trade you’ll need to be very careful and keep that in check.

3. You’ll be far more productive doing your non-trading tasks

I really underestimated the affect multiple monitors would have on my non-trading tasks. It’s huge! Imagine doing some programming or intense writing and then having to refer to some documentation in a browser window. With one monitor, there’s really just not enough room to position both windows quickly and efficiently on one screen. With multiple monitors there’s plenty of room to place the windows side by side so they’re both visible. I can’t emphasize enough how much more efficient this is.

Making a “Business Case” to Your Wallet (or Spouse!)

Multiple monitors are not cheap. A reliable, supported video card that supports 4 monitors is at least $500, plus at least $180 or so per monitor and you’re closing in on $1400-$1500, which is more than even the computer itself in many cases. Plus you’ll need a mounting setup.

Does it make sense for you to spend that much for a multi-monitor setup for trading? It depends on your trading and how well you know your trading system and daily routine.

The questions I asked myself were:

Do I believe that I’d be able to find enough additional trades using the new monitors to recoup the cost?
Do you find yourself missing out on setups that have made your watchlist but you miss them because they’re hidden behind another window or minimized?
How regularly do you miss trades like this?
How many of these trades would it take to recover the cost of the monitors?

As you can see, the answers to some of these questions depend a lot on the frequency that you’re trading, the level of profit you make from your trades, how much size you use on your trades, and the nature of your trading system.

For me, it was a pretty easy decision. I knew my system well enough to realize that I was missing trades on a somewhat regular basis and it would just take a couple of good winning trades to cover the cost. Looking back on my results I figured the investment would easily pay for itself within a month. While at first the upgrade seemed a little decadent considering my normally cheap, bare-bones personality, when I thought about it in these terms I realized that there was really no argument at all and I pulled the trigger.

I bought these several months ago, but here are some equivalent components that I would get if I was making the purchase today – note that, of course, by the time you’re reading this these prices have probably changed:

4 X BenQ FP202W V3 20-inch Widescreen LCD Monitor (Black)
@ $173.50
Matrox M9140 – Graphics adapter – M9140 – PCI Express x16 low profile – 512 MB DDR2 – DVI
@ $511.99
DS100 Quad-monitor Desk Stand
@ $291.93

Any suggestions on the setup? Would you make any changes?

Trading Goal Setting for 2009 – Here’s My Advice

Dave — Wed, 31 Dec 2008 13:55:08 +0000

Well, it’s that time of year. Everyone is reflecting back on 2008 and making trading plans for 2009. This trading goal post from Jack from rmultiples got me thinking again about some good advice on goal setting I heard from my track coach in college.

Instead of coming up with a single, succeed-or-fail goal it’s usually much better to come up with a range of goals. I come up with a conservative, reasonable, and radical number for whatever goals I’m setting.

This accomplishes a couple things – it gets you away from a feeling of failure if you fall short of your goal – it gives you some wiggle room. Also, say you reach your goal earlier in the year – if you have a single goal then you may feel subconsciously like your job is done. If you’ve got a range of goals then you can continue to take your goal seriously.

The more subtle thing this technique does is forces you to think more deeply about what your trying to accomplish and what is reasonable to expect from yourself and your situation. Everybody likes to shoot for the stars and come up with a lofty goal, but it actually takes a lot more thought and self-examination to come up with a conservative goal – something closer to the failure mark and a moderate goal – a number that’s acceptable.

Are there any suggestions you have for trading goal setting as we turn our calendars?

Crazy Trade in GW Yesterday

Dave — Tue, 23 Dec 2008 12:23:23 +0000

I took one manual trade in GW yesterday. It was gapping down and printed a nice inverted hammer on the 2nd 10 minute bar. It looked like it was on its way until 10:28AM or so. Luckily I was stopped out before trading was halted for over two hours. Apparently someone found out some news that initially the company had no idea about. They initially put out a release that said they had no idea why the stock price dropped. A little later they fessed up.

This is only the second stock I’ve been in where trading has been halted in over 2.5 years of trading this particular style. The previous one turned out really well. Here’s the chart:

5 More Reasons to Consider Automated Trading

Dave — Mon, 22 Dec 2008 13:21:16 +0000

This post was contributed by Kelly Kilpatrick, who writes on the subject of currency trading. She invites your feedback at kellykilpatrick24 at gmail dot com.

Each day, more and more traders are leaning toward automated trading. Far more precise and less prone to human error, automated trading truly does seem to be the way of the future. Browse through the following list and see some more reasons why you may want to consider automating your trading and free yourself up for something new.

You Set the Parameters

You may be hesitant about leaving your financial future in the hands of a computer, and that is completely understandable. However, you are the one that ultimately sets the parameters for just how far you are willing to go on any given day. Of course, the term automated trading sounds like you won’t have to do anything, but this is far from true – you ultimately set yourself up for success or failure with automated trading, just like manual trading.

Attend to Learning and Research New Investments

Once you establish your parameters for your automated trading, you are free now to pursue more investment options and continue learning about new strategies and possibilities. This is valuable, indeed, and helps lay the foundation for more earning potential in the future as you continue to develop your skills while the program does the dirty work.

Snap Analysis

Automated trading programs are able to analyze copious amounts of data in a very brief amount of time. This being said, the program can make the best analysis far faster than you can and will make a decision based on the guidelines you have put in place. This can be very beneficial in crunch time and could ultimately save you valuable time and money in the process.

Emotional Detachment

The program itself will not be emotionally attached to the investments or the data. This can be a great thing when you are having a tough time making a rational decision. The fact that the program can crunch more data and use said data to make an informed decision will only serve to help you and your needs down the road.

Results Speak for Themselves

If you look through some of the previous posts on this blog, you will begin to see that this kind of trading has been very good to us indeed. Manual trading can be tough; sometimes we zig when we should have zagged, but automated trading seems to take this phenomenon down to a minor point.

Automated Trading Success: Downtowntrader Doing It The Right Way

Dave — Fri, 19 Dec 2008 14:12:32 +0000

Here’s another great post by Joey, the Downtowntrader. Joey was one of the earliest users of the trading robot. He’s trading the right way – he’s tested for several weeks in demo mode and then graduated to live trading, then trading with size.

He talks about his journey and goes into detail describing what I believe is a recipe for long term trading success. Here are some of the questions he answers:

Are the results real?
Does it ever blow up and have a really bad day?
Is your automated system profitable too?
How long did it take to develop your system?
Could you just use trade-ideas and trade the alerts manually?
Do you intervene with your system?
Can you use the canned alerts that come with Trade-Ideas?

Different Automated Trading Systems – Which One Is Right For You?

Dave — Thu, 18 Dec 2008 12:23:32 +0000

For new automated traders, it’s always interesting to hear what their mindset is. Specifically, it is interesting to know the type of system they plan on trading – not the specific details of their strategy, but from a very high level.

If you follow this blog you probably already realize that there are at least hundreds if not thousands of profitable systems out there. But how do you find one that YOU can use to make money. If you’ve taken the step into automated trading, you have lots of options.

Here’s one way I like to separate systems into categories for the purposes of automated trading – I think this provides a nice blueprint for how to start thinking about automated trading.

1. Automate a Manual System You Already Trade

The most logical step for a lot of traders is to automate a manual system that they’re already trading. I think this is a great place for most new automated traders to start. It allows you to take small steps into automated trading in an environment that they’re already familiar with – their manual trading system.

By doing the prep work to automate their manual system, the trader has an excellent frame of reference to compare their automated results to since they already have extensive experience manually trading the system. Once they’ve converted this system over to full automation, it provides a good foundation to start delving into other strategies.

The other advantage to this approach is that when you start modeling your strategy and backtesting it, you’ll likely learn a lot more about your manual trading by doing so and your results will be more consistent.

2. Trade a Strategy That Looks For Infrequent Setups

There are a lot of profitable manual systems out there that trade really infrequently. While it’s possible for you to stare at your computer screen all day waiting for the setups to materialize, it’s much more efficient for you to automate this type of system. So while it’s not impossible to manually trade these types of systems, automated trading can give you a clear edge since your automated trading software doesn’t need to take a rest or eat lunch.

I’ve traded systems like this before and inevitably a very frustrating thing happens – you wait for hours looking for the setup and then you get distracted for just a brief period and (of course) that’s the exact time that the signal occurs and you miss it and you torture yourself with the decision to chase it or not.

Automating this type of trading system is usually a big time saver and saves you a lot of wasted effort.

3. Trade a Strategy That’s Impossible to Manually Trade

This class of strategies is probably the biggest reason to start automated trading. There’s a whole universe of strategies out there that are simply impossible to trade manually, but that you can unlock by using automated trading software. For example, let’s say you want to enter 50 orders in the first minute of the trading day all with specific entry and exit criteria. You don’t need me to explain why this is impossible for a human to trade. With software, trading this type of strategy is now possible.

Another reason to trade this type of strategy is that there are probably a much larger pool of traders trading the first two types of strategies. However, because this type of trading can’t be done manually, you’ve excluded the vast majority of traders from your “pool of trading competition”. That is, you’ll essentially be competing against fewer traders.

Google Tech Talk on History of Automated Trading

Dave — Wed, 17 Dec 2008 13:04:05 +0000

Max Dama alerted me to a very good talk by David Leinweber who has been involved with automated trading and the markets for a long time. It’s about an hour long and the first 40 minutes or so are excellent.

In one of his slides he shows this image which I believe sums up the evolution of the trading industry as much as anything.

What I didn’t like about the talk was towards the end of his presentation. David culminates his talk with a discussion of an obviously well chosen example of how you could scour news stories to piece together a case for buying a stock before the market realized the implications of the news and therefore you’d be ahead of a huge surge in the stock.

I think most folks (especially analytical people) would be better off trading technicals than trying to guess how the market will react to a news story. That said, it’s well worth an hour of your time to watch his presentation.

David blogs about his new book, Nerds on Wall Street: Math, Machines and Wired Markets.