Trend Filter - Building Blocks of a Trading System

Any trader who does not only follow his guts, should have a set of rules that she or he follows. This set of rules is a trading system. Just saying this to make clear that I am not talking about automated strategies. The set of rules typically include


Entry rules

- condition(s) for setup
- filter rules (trend filter, volatility filter, time filter, intramarket filter)
- trigger condition

Exit rules

- stop loss and stop loss adjustment
- targets
- time based exit

Money management rules

- how many contracts to trade
- max. drawdown allowed per day and week
- drawdown that invalidates the setup

Quite often only one entry rule is discussed and called a setup and treated like a trading strategy. In my opinion this is not enough. Money management rules are most important, exits come second and entries third. Money management rules prevent the trader from blowing her or his account. Exit rules can be tested independently from entry rules. Entry rules should at least (!) have three components: a setup bar, filters to increase the probability of an edge and a trigger bar.

High Frequency Trading

The markets change. Edges in markets disappear. Trends change. The participants change. The levels of volatility and risk change. As traders we have to adapt to stay in the game. One thing thats affecting the markets right now is HFT algos. Average daily volume has skyrocketed 164 percent since 2005, according to NYSE data. Up to 73 percent of this volume is handled by algorithmic trading programs. These algos might not change the destination but they do change the path.

Think about it. We track volume to see the footprints of larger traders. But with the new algos these guys are executing in fractions and they aren´t just sitting in the orderbook waiting to get hit. Then we have the pure HFT systems that are trading on their own, messing up the volme readings. We might se big volume coming in on a breakout and think we got confirmation when it´s just algos playing for ticks.

So when up to half of all stock market volume consists of these algorithmic trades, I make it my business trying to learn as much as I can on how they operate. I recently read an very interesting article on HFT by the propfirm SMB and yesterday they had a clip on StockTwitsTV talking about it.

SMB University Live with SMB Capital (01/10/10) StockTwits TV

Is Dollar Stability a Necessity

In spring 2008, financial markets witnessed the early makings of what may emerge as globally coordinated support for stabilizing the U.S. dollar. The first signs occurred at the April G8 meeting in Washington, D.C., where finance ministers and central bankers of the world’s leading economies expressed concern about the economic repercussions of persistent damage in the U.S. currency. Not only had a rapidly falling dollar further deepened the emerging economic slowdown in places such as Europe, Japan, and Canada by excessively lifting their currencies and hampering their exports, but it also signaled the acceleration in the dollar price of key commodities, such as oil and food, which boosted the cost of these imports and lifted inflation at home. Never since the 1980s has the United States and its trading partners experienced such a deep and protracted loss in the value of the dollar, and not since the Louvre Accord of 1987 have the world’s leading economies expressed such broad concern with the falling U.S. currency.

The U.S. Dollar Index lost 40 percent of its value between January 2002 and April 2008, averaging a decline of 8 percent per year. On June 3, 2008, Fed Chairman Ben Bernanke shook the currency market by taking the unusual step of talking up the dollar in a speech at the International Monetary Conference in Barcelona, Spain. The topic of the dollar had long been the purview of the U.S. Treasury since the 1990s, when then Treasury secretary Robert Rubin shaped the so-called “strong dollar policy.” But as the currency slipped into a multiyear decline between 2002 and 2007, the strong dollar policy was limited to mere rhetoric and no action.

In fact, the real currency policy of the United States had grown to be that of benign neglect as Treasury officials tacitly encouraged a depreciating dollar so as to favor U.S. exporters. Meanwhile, the Federal Reserve’s actions were everything but dollar positive when policy makers engaged in aggressive easing of monetary policy by sharply slashing interest rates in two different easing cycles within less than five years. In the aforementioned speech, Bernanke said, “We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion of longer-term inflation expectations.” The speech was largely perceived as a potential sea change in the U.S. economic priorities vis- ` a-vis the value of the dollar.

Review: Reading Price Charts Bar by Bar

Reading Price Charts Bar by Bar
This book is extremely hard to read, and some of his ideas seem "wishy-washy" (technical term) to me, so I struggled with believing them. His webinars make much more sense, I encourage you to find them in the Brooks thread and watch them.

Trading without indicators is the right step, in my opinion. But by itself it won't make you profitable. Only a sound money management plan will do that, along with the wisdom to follow it.

There are many ways to continue your pursuit of growth of knowledge and understanding, which will ultimately lead to success. Some ideas:

- Trade ES only
- Trade during cash session only
- Use a 5 minute chart and EMA 20 only, maybe my new Envelope bands
- Trade only with trend, only take longs when price is above EMA 20, shorts below
- Limit yourself to 5 trades a day. I don't care if you are on-fire or have lost every one, stop at trade #5. This will force you to space them out and look for only the best setups.
- Create a journal here. Take a screen shot every time you enter a trade, and make a note as to why you entered the trade. Then record the result. You MUST be honest with yourself.

Why Quantitative Easing Is Bad For The U.S. Economy

Buckle up and hold on -- a new round of quantitative easing is here and things could start getting very ugly in the financial world over the coming months.
The truth is that many economists fear that an out of control Federal Reserve is "crossing the Rubicon" by announcing another wave of quantitative easing.  Have we now reached a point where the Federal Reserve is simply going to fire up the printing presses and shower massive wads of cash into the financial system whenever the U.S. economy is not growing fast enough?

If so, what does the mean for inflation, the stability of the world financial system and the future of the U.S. dollar?  The Fed says that the plan is to purchase $600 billion of U.S. Treasury securities by the middle of 2011.  In addition, the Federal Reserve has announced that it will be "reinvesting" an additional $250 billion to $300 billion from the proceeds of its mortgage portfolio in U.S. Treasury securities over the same time period.  So that is a total injection of about $900 billion.  Perhaps the Fed thought that number would sound a little less ominous than $1 trillion.  In any event, the Federal Reserve seems convinced that quantitative easing is going to work this time.  So should we believe the Federal Reserve?

The truth is that the Federal Reserve has tried this before.  In November 2008, the Federal Reserve announced a $600 billion quantitative easing program.  Four months later the Fed felt that even more cash was necessary, so they upped the total to $1.8 trillion.

So did quantitative easing work then?

No, not really.  It may have helped stabilize the economy in the short-term, but unemployment is still staggeringly high.  Monthly U.S. home sales continue to come in at close to record low levels.  Businesses are borrowing less money.  Individuals are borrowing less money.  Stores are closing left and right.

The Fed is desperate to crank the debt spiral that our economic system is now based upon back up again.  The Fed thinks that somehow if it can just pump enough nearly free liquidity into the banking system, the banks will turn around and lend it out at a markup and that this will get the debt spiral cranking again.

The sad truth is that the Federal Reserve is not trying to build an economic recovery on solid financial principles.  Rather, what the Federal Reserve envisions is an "economic recovery" based on new debt creation.

So will $900 billion be enough to get the debt spiral cranked up again?

No.

If 1.8 trillion dollars didn't work before, why does the Federal Reserve think that 900 billion dollars is going to work now?  This new round of quantitative easing will create more inflation and will cause speculative asset bubbles, but it is not going to fix what is wrong with the economy.  The damage is just too vast as Charles Hugh Smith recently explained....

Anyone who believes a meager one or two trillion dollars in pump-priming can overcome $15-$20 trillion in overpriced assets and $10 trillion in uncollectible debt may well be disappointed.

In fact, economists over at Goldman Sachs estimate that it would take a staggering $4 trillion in quantitative easing to get the economy rolling again.

Of course that may eventually be what happens.  The Fed may be starting at $900 billion just to get the door open.  With these kinds of bureaucrats, once you give them an inch they usually end up taking a mile.

So why should we be concerned about quantitative easing?  The following are 9 reasons why quantitative easing is bad for the U.S. economy....

Source: http://www.businessinsider.com/why-quantitative-easing-is-bad-for-the-economy-2010-11

The Dollar Bear Awakens

The 2002–2007 period was a major turning point in global currency markets, which triggered the start of a new bear market in the U.S. currency and the  eemergence of a broad strengthening in the euro. The falling value of the dollar brought about a super rally in commodity prices, culminating in new record  highs in precious metals, energy fuels, and agricultural products. This chapter tackles the annual performance of the world’s eight major currencies (U.S. dollar, euro, yen, British pound, Swiss franc, Canadian dollar, Australian dollar, and New Zealand dollar) between 2002 and 2007. As in Chapter 3, the annual performance of each currency is measured by aggregating a currency’s percentage changes against each of the other seven currencies.

The year 2002 marked the end of the U.S. dollar’s seven-year cyclical appreciation from 1995 to 2001 and ushered in the beginning of a bear cycle, entering its seventh year as of this writing in 2008. U.S. manufacturers stepped up their complaints about an overvalued U.S. dollar eroding their competitiveness, demanding that President Bush impose tariffs on U.S. trading partners and declaring that the currency needed to depreciate by about 40 percent.

The president heeded those complaints, and U.S. Treasury officials began adopting a policy of benign neglect, whereby they implicitly wanted the dollar to depreciate, despite mechanically reiterating declarations that a strong dollar is in the interests of the United States, a mantra widely adopted—and fully intended—under the second Clinton administration.

The dollar ceiling was firmly reached in spring 2002 when President Bush launched a trade war, slapping foreign steel producers with tariffs in order to secure the Republican Party victory in key steel and manufacturing states ahead of the Congressional elections later that year. Trade actions, such as tariffs, always beget currency depreciations as countries aim at increasing the competitiveness of their products in the global marketplace.

Trend Capture System

I've seen this guy on youtube...apparently a seasoned floor trader?

Anyway he is hosting a live chatroom, actually a screen room during Euro Session to trade the 6e...but I really can't be up at that time!

Here is a link to his latest video...he is posting daily results: YouTube - Trend Capture Daytrading System

the system looks easy enough...perhaps one can see what it is about with indicators.

looks like trade management is key since there is no way of getting out at the maximum.

The Dexter Automated Method

Dexter is an automated strategy that puts all the attention on the exits and on always being right (ie: high win rate).

Dexter (from the Showtime TV series with the same name) places a lot of attention on always being right before he kills. (he kills for justice). You might think "the kill", in trading, is about the entry -- but in fact, it is really about the exit. The exit is what controls your PnL, not your entry. Sure, entries can help position yourself, but the exit is really all that matters.

Why did I choose the name Dexter? Because I am a fan, and because it's fun. Nothing more than that.

I haven't written Dexter yet. But I am about to. So even I don't know how he will perform. But since I really like him, I'm going to try hard to make him a winning strategy.

Quick Summary is created and edited by users like you... Add FAQ's, Links and other Relevant Information by clicking the edit button in the lower right hand corner of this message.

Dexter's basics:
- 3 targets
- Market orders
- No traditional indicator usage, only Daily ATR, and open/high/low/close
- Each target has controllable lot size
- Dynamic targets based on support/resistance areas like CMA, Open, prior day high/low
- Dynamic stops based on swing high/low and on Daily ATR movement
- Ability to add to winners (up to 3 times per entry), with multiple conditions

To-do:
- Make Dexter pivot-aware so it can make smarter decisions for entries and targets based on nearby pivots

VWAP

I've been considering taking off the only moving average on my charts -- an ema 20 -- and replacing it with a VWAP. Over the past couple months, I have outgrown one of my last "hard-fast" rules in trading, which is to only trade on one side of the EMA 20. I don't really use this rule any longer, as I felt it was holding me back more than it was helping me. Sure, there are many times it makes sense, but many times it does not.

VWAP, on the other hand, seems to fit my current trading style better. Which is a bigger picture of support and resistance, or an area which price tends to gravitate towards. I know that many institutions use VWAP as a measurement to determine efficiency for that days buying, how close was the traders average price for the day in comparison with VWAP, etc.

Index Futures Comparison

I am trading ES, YM, TF and sometimes FDAX. Often I question myself, which of these is the appropriate instrument to trade. Each of them has a different character. In my opinion FDAX is very volatile, a bit like crude oil, maybe due to lower liquidity. TF is trending nicely and I am gradually developping more confidence. as it does not trap me as often as ES. The character of YM seems to be somewhere between TF, ES and FDAX. NQ has never attracted my attention. And FESX is a failure, as the commissions do not buy me enough volatiliy.

This introduction was a bit subjective, and I do not want to stay there, but do my first analysis. I want to compare transaction cost and slippage for the index futures. So this is my question:

How much volatility can I buy with the commission for 1 roundturn and 1 tick slippage (representing the bid/ask)?

To do this, I measured the average range of the 15 min bars over the last two weeks. I excluded the night session, as volatility is too low for trading. And I chose the average range and not the average true range on purpose, because I did not want to include the opening gap, which I cannot trade, as I do not hold overnight positions.

For the US Index Futures the RTH session lenght is 6h45, which is 27 15 min bars. I coded an average range indicator and used a period of 270, which represents the last 2 weeks. For the EUREX traded index futures the session length is 8:30, which would be 34 15 min bars, so I used a period of 340 for my range indicator to establish the average range of a 15 min chart over the last 2 weeks.

Results (15 min range, point value / slippage / commission)

ES range 3.22 points * $ 50,- = $ 161.00 / slippage $ 12.50 / commission $ 4.00
TF range 2.75 points * $ 100,- = $ 275.00 / slippage $ 10.00 / commission $ 3.60
NQ range 6.19 points * $ 20,- = $ 123.80 / slippage $ 5.00 / commission $ 4.00
YM range 26.34 points * $ 5,- = $ 131.70 / slippage $ 5.00 / commission $ 4.00
FESX range 8.68 points * € 10,- = € 86,80 / slippage € 10.00 / commission € 4.00
FDAX range 15.64 points * € 25,- = € 391,- / slippage € 12.50 / commission € 4.00

I now calculate the trading cost as a percentage of the average range result for an average 15 min and an average 5 min trade. For the five minute trade I assume that I obtain the approriate volatility measure by dividing the range through sqrt(3).

Results 15 min trade / 5 min trade

ES 10.25 % / 17.75 %
TF 4.95 % / 8.57 %
NQ 7.27 % / 12.6 %
YM 6.83 % / 11.84 %
FESX 16.13% / 27.94 %
FDAX 4.22 % / 7.31%

This looks quite interesting. The precentage shows, which fraction of a profitable or non-profitable trade that lasts 5 or 15 minute is eaten away by the broker and the bid/ask. Quite a lot. You should not trade FESX or ES on a short term time frame.

To evaluate the impact of this result, let us apply it to a simple strategy with an assumed

- percent profitable 60%
- win-to-loss ratio 1:1

What is the expectancy in terms of the money value of the 15 min range?

ES 0.6 * 89.75 - 0.4 * 110.25 % = 9.75%
TF 0.6* 95.05 - 0.4 * 104.95 % = 15.05%
NQ 0.6* 92.73 - 0.4 * 107.27 % = 12.73%
YM 0.6 * 93.17 - 0.4 * 106.83 % = 13.17%
FESX 0.6 * 83.87 - 0.4 * 116.13% = 3.87%
FDAX 0.6 * 95.78 - 0.4 * 104.22 % = 15.78%

Interesting result, is n't it? For the same strategy FDAX or TF produce an expectancy about 4 times higher than for FESX, and over 50% higher than for ES. As a retail trader, who suffers from the assumed transaction costs and does not need the liquidity of ES for trading size, will you ever touch FESX or ES again?

My present for all scalpers

ES 0.6 * 82.25 - 0.4 * 117.75 % = 2.25%
TF 0.6* 91.43 - 0.4 * 108.57 % = 11.43%
NQ 0.6* 87.40 - 0.4 * 112.60 % = 7.40%
YM 0.6 * 88.16 - 0.4 * 111.84 % = 8.16%
FESX 0.6 * 72.06 - 0.4 * 127.94% = -7.94 %
FDAX 0.6 * 92.69 - 0.4 * 107.31 % = 12.69%

Haha, good news for ES scalpers. The expectancy is still positive, as opposed for FESX. But how positive? Let us look at a small example.

I will take the example of ES. The assumed range for a 5 min bar was 3.22 points divided by sqrt(3), which is 1.86 points or approximately 7 ticks. So now you trade your strategy, which has a profit target of seven ticks and a stop loss of 7 ticks with a win/loss ratio of 60%. The value of the 7 ticks would be $ 87.50, the expected profit will be 2.25% of that value or $ 1.97 per trade.

Who is getting rich here, the trader or the broker?

Conclusions

(1) Results are unfavourably affected by transaction costs.
(2) Never trade FESX.
(3) Don't trade ES, except if you have institutional level commissions and you trade volume.
(4) Scalping is a loser's game with a retail account.
(5) If you plan to hold your position about 5 minutes, trade TF or FDAX.
(6) For trades longer than 15 minutes YM and NQ are also be a also reasonable alternative.

I have made these calculations the first time and rapidly, directly here within the dialogue box, so it is well possible that there are some systematic errors or miscalculations. Also it is late in the evening.

Jurik Moving Average on Renko Chart

I have liked the JMA for quite a while but haven't come to terms with how to use it in my active trading plan. So, I just put some on a chart using my favorite periods of 20, 52, and 78. The picture shows what I got. See the arrows where I marked my entries.

I like the Jurik because it follows price pretty closely and adjusts to changes in direction very quickly. What I noticed right away is the compression areas. They are identified pretty easily and entries are the bar that clears that compression area. Notice I'm using a modified Renko brick that has wicks and sticks. You can use Wicked Renko, Better Renko, or whatever else fits your style.

Notice the bottom panel...you see 3 lines there as well that are the slope of the JMAs in the top panel. The slope they are showing really isn't the exact slope. They show when the corresponding JMA in the top panel is greater than 30 degrees over the last 6 bars.

The first red arrow really isn't valid imo because it isn't in a compression area.

I just started looking at this set up so it's an open book. But, I found it interesting and thought I'd share it here. Maybe you all will see something of value or maybe not. I'm going to play with it for a while to see how it develops. I documented it here so maybe I'll stay on task.

When a winning strategy stops working

Here's an example of an equity curve of a strategy that has worked well from 1998 - Sep 2008, but more recently has performed miserably. The actual strategy is explained here, but I thought it an interesting example of a strategy that performs nicely for so long that suddenly falls off a cliff and doesn't work anymore.

Never get too comfortable with a winning strategy! Always prepare to adapt!

Why Foreign Exchange Rates Move

Determining why foreign exchange rates move the way they do may seem a far too ambitious and challenging task, as it requires making sense of an unlimited array of factors ranging from fundamentals (macroeconomic changes, central bank actions, capital markets changes, corporate/dealer transactions, political and geopolitical factors, and news reports) to technicals (price charts, momentum, oscillators, moving averages) to pure flow-driven developments. Other books tackle the theories of international economics and finance that explain the principle drivers of foreign exchange rates. Since this book aims at focusing on the real-world developments impacting currencies, textbook theories take a secondary role in shedding light on the major developments in currencies. These theories are only briefly mentioned. Chapter 3 and 4 tackle the trends in major foreign exchange rates between 1999 and 2007, identifying the highest- and lowest-performing currencies, and citing the fundamental reasons for these developments.

This analysis calculates the annual changes in the values of currencies against one another to determine a ranking of currency returns. Performances are examined against a host of fundamental variables such as national GDP growth, world and regional GDP growth, interest rates and central bank action, capital flows, current account balances, and export dynamics such as commodities markets. The real-world developments that dictate the major trends in global currencies demonstrate the theories and paradigms that worked, and the reasons for their prevalence during those years.