Monday, July 23, 2012

Crawling before walking again

As the family schedule stabilizes somewhat until it gets disrupted even more later this month, I'm reflecting back on my limited time for trading and realized that I've had some interesting progress.  I last wrote about taking a new direction to evaluate and create various trading strategies using TradeStation, and the ability to get nearly instant feedback via backtesting has been very enlightening.

Here are a few areas I've researched in the past few weeks:
  • Probability of breaking overnight levels - FT71 has frequently stated that either the overnight/Globex high or low levels in the ES will be broken over 90% of the time.  Although I've heard the 96% figure, I wrote a test that indicated the probability to be around 92%, based on 6 months of tick data.  Close enough to give me confidence that this particular event of touching one or the other overnight level is nearly a sure thing.
  • Electronic Local's trading methodology - I've attempted to recreate some of his trading systems he discusses on his blog, and along the way, my work took me on a tangent that resulted in some automated systems with good potential with both the ES as well as the AUDUSD and EURUSD forex pairs.  Another setup he discusses is very similar to a Diamond Setup pattern I really like, as well as how to trade the gap open fill.
  • Gap opens - In addition to EL's blog, Trader-X's blog is where I really learned to appreciate gap open setups.  I've created a system to determine the probability of a gap fill based on the number of points the RTH ES opens from the prior day. Certain gap open setups, after backtesting over 10 years if data, have resulted in a surprisingly consistent and profitable outcomes.  I've also discovered a great website that covers gap fill strategies and statistics.  One interesting takeaway from that website I'll investigate further is incorporating the location of the gap open in relation to the prior day to determine even more refined probabilities.
So where does this all take me?

I'm very likely headed down the path of becoming more automated with my trading.  I've always believed that a great discretionary trader can make much more than an automated trading system, and Electronic Local has also written about that topic.  Note the emphasis on great trader, which is far from common or ordinary.  I'm pretty certain a great discretionary trader can make more in a few days (or even a day) than a solid algo can do on average over a month.

As a discretionary trader, it's quite obvious I'm not there yet

I'm the first to admit that my execution skills and inability to get beyond revenge and rogue trades has cost me plenty, so I'm still working on those challenges.  Therefore, having some algos auto trading in the background, chipping away at generating some consistent profits might be a new direction as I continue to develop as a trader.  The level of progress I make executing with patience and discipline as a discretionary trader, will determine how much focus systems trading will become.

Systems results -- theory vs. reality

In the meantime, I'm currently tracking a few different automated algos and trying to determine the real life potential.  What I have found is that what looks good in backtesting, will not do quite as well in SIM -- which means that when traded live, performance will suffer a bit more.  I'm utilizing limit orders for profit and entry orders.  But the stop market orders are always a bit of a wildcard, especially if the trading system is turned on overnight during certain hours when the markets are thinly traded.

Crawling but making progress

So although I feel like I'm back to crawling these days, I'm still learning a lot through the process of researching, developing, and testing automated trading systems.  There is good spillover effects for my discretionary trading.  The work has helped me to gain even more confidence with certain trading setups, as well as putting to rest certain setups that just don't do as well as I had thought.  Now if they could simply make a pill that makes me avoid revenge and rogue trades...

It's also good to see how everything is building up on all the great knowledge I have gained from Trader-X, SMB Training, Diamond Setups, and others who have heavily influenced my trading.  I'm slowly moving ahead, becoming more comfortable with the slower pace, and will continue to work on creating and refining a trading system and process that fits my personality and style.  But I do admit, there's still an element of chasing success...

Hopefully, I'll be back to walking and perhaps running again in the next month or two, at least once summer is over.  Until then, I'll keep chipping away.


Trin Café said...

Good honest post! Are you trading part time or trading for a living. I find that part time trading and SIM trading changes my mindset. I have less patience and time to be in the markets which leads to taking trades intellectually I know I should not take. With out the element of risk, SIM trading for me is only useful to practice a specific method.

Trin Café said...
This comment has been removed by the author.
Trin Café said...

Disregard the question asking if you are trading full time, I just saw your About info.

Grove Under said...

Hi Trin Cafe,

Thank you for the comment. Great point, I completely understand your SIM and part time perspectives.

SIM is a great way of building up the mental muscle memory, assuming you practice properly. But putting real money on the line does change things.

For those who play golf, it's similar to practicing on the driving range, vs. playing for $ on the course. It's different on many levels.

But one thing is for near certain -- if you can't even hit the ball consistently well on the driving range, don't expect to get anywhere near par when playing for real.

Thanks again, and good luck!

Anonymous said...

Hi Grove,

I've been reading your blog for a little while and really appreciate you sharing about your journey in trading.

You've written a couple great reviews about Diamond Setups and it's definitely got me interested, I just have two questions if you could offer your opinion. Are the setups in the material much different from other courses and material you've studied in the past? Also, are the rules decently objective or does it require a good amount of discretion from the trader to make good trading decisions based on the set up? For the 2nd question I mostly ask because you've expressed that the difficulty you've had with it is more with revenge trading and not so much with the set ups, I was curious if part of the struggle was connected to not being able to see as quality of set ups as the creator of Diamond Setups. I know discretion is always involved but wasn't sure how much is expected with this material.

Thanks so much!

Grove Under said...

Hi Grant,

Thanks for the comment. I haven't taken too many online courses or services, although I have read a lot of books. But depending on what you've read about trading, it incorporates more of a levels based approach (trading around support and resistance).

There are definitely some unique approaches I learned from Renato that I will likely continue to use in the future.

You mention how much discretion, and I'd have to say that it's one of those subjective topics. I used a somewhat similar approach to DS back in the '90s, so my learning curve was relatively short, and I bought into the method and caught on to his setups quickly.

However, it could very well be that his method may not suit your personality or style. Or maybe you have no experience with methods similar to how he trades. So in that case, it will take longer to learn, and then you'll have to find out what aspects of his system works best for you.

For example, with regards to timeframes, you might be a swing trader at heart, but he does several trades a day, which may feel like overtrading to you. He also has both with trend and counter trend setups, so one style might work better for you personally.

With regards to my challenges, I really don't believe it's due to not being able to see the setups -- when I see a clean setup, I can feel it.

Most of it had to do with boredom or the need to make up my losses (revenge). I start to see setups that do not exist, just to get a chance of making up my losses. I started thinking of money, not waiting for and trading the proper setups. All mental challenge, not the trading method.

I feel pretty good about making some progress lately to get over those mental challenges, and my efforts into systematic trading might also be helping out in some ways.

But the point you make of being able to determine the quality of the setup because you're the developer of the system has some truth. If you developed the system, spending years adjusting it to match your personality and style, you will always have a greater ability to determine the quality of the setups.

Renato always stresses that you need to learn what he has done, and then to make it your own. He's a great and patient teacher, so that's one of the strengths of his service. If you join him, make sure you proactively engage with him to learn as thoroughly as you can.

Hope that feedback helps, but let me know if not. Thanks again and good luck!

Anonymous said...

Hi Grove,

Thanks for the response, I really appreciate it. One more question from your experience if you don't mind:

I've mostly focused on level based trading in the past (day trading futures with volume profiling and Fibonacci retracements), so this could be right up my alley. I've learned how to use some different "tools" and how to evaluate what price action is doing to a degree but the problem I've had is putting it all together into something cohesive with an edge.

Does it seem like the material provided is straight forward enough to give you a trading plan to work with? I know that requires understanding the material, the concern I have is that in the past what I've studied and read is more about the theory side of things and less about specifics. I hear what you're saying of how Renato says to learn what he teaches then make it your own, just not sure if that means taking his "recipe" and adjusting it to your own taste or personality, or if it means trying to formulate your own set of rules and set up parameters entirely.

I've spent a decent amount of time doing trial and error and trying to create something of my own, but it's hard trying to fix something when you don't know what it should look like in the first place. It would be great to see what someone else is doing successfully, copy it as best I can (though I know that copy would be different from the original) and then adjust it so that it becomes my own. I don't know if that's the best way to go about it, but it sounds helpful.

Hopefully that makes sense. Thanks again for your input!

Grove Under said...

Hi Grant,

You mentioned "it would be great to see what someone else is doing successfully..." So there were a few different aspects of his service that I found great value.

One thing I found useful about Renato's service was that you would see him post his trades before they were executed. Since trades are entered using limit orders, you usually have several minutes or more before they would get hit or cancelled.

That way, you can ask questions if you don't understand why it was generated.

So although his website his website has examples and specifics on the setups to look for, I found the value of actually watching Renato trade and having the ability to ask him questions to be one of the biggest values.

Just for example purposes, let's just say you start when he's on a losing streak, and you also find out his system is not at all compatible with your personality.

You might think it's entirely a waste of money and time -- like you got on board a dud. But I would strongly disagree.

Another way to look at it is to study how he operates every day. See how he treats his trading as a business, day in and day out, regardless of whether you're making or losing money.

I've found that how a person behaves and acts when they're on a losing streak, shows their true character.

It's great to see trading discipline in action, especially when compared to my weaknesses. When the markets are not doing anything, you won't see him do random or revenge trades.

But he is human, and when he makes a mistake or does something outside his rules on a rare occasion, he'll be the first to admit it.

So for me, one of the biggest values I got was to watch someone every day for half a year, operating his trading just like a real business. He's a hard worker, disciplined, with lots of perseverance, and puts in an amazing number of hours a week.

I saw him through good times and through difficult times, and I was there to see how he handled those situations.

So in the end, it wasn't just the setups and trading system that I walked away with -- it was the ability to watch how one successful trader handles various aspects of the business, both good and bad.

Hope that's helpful, but feel free to ask any other questions. Good luck!

Anonymous said...

That's really helpful to hear, thanks so much!