Testing: Zen in the markets

As I already said in my last article: I’m interested!
And for a trader that means: Let’s test it

But how todo it?

For a software developper it’s easy

As input the best source seems to be an ESignal Tickfile, which covers the last 10 trading days and contains every tick in an Ascii-file.

And to setup the Backtest-Tool my FuturesTrader software already has most of the necessary routines already build in. So it was just a few hours work to build the first implementation of a System, which takes a trade always with the trend and reverses positions, if the trend changes.

For the time being I use 1 tick/trade for commission and slippage. In my real trading I usually have no slippage as I trade with Limit and Stoplimit orders only. So 1 tick/trade should be sufficient, but a later implementation might use Bid/Ask information contained in the Tickfiles for Entry and Exits.

While on ES in 10 days the system lost 2 ticks overall on 16 trades with no trailed stop or at least a stop moved to Breakeven after a certain amount of profit, on the Euro the results weren’t as good:

44 ticks lost on 22 trades.

But there is a lot of room for improvement on the system and as I said, I’m interested and curious, if this is the way I can find a profitable autotrading system.

Future implementations will consider a Breakeven +1 Stop, a trailed Stop, once the position is in the profit, taking targets and most important: Statistics, so it becomes easier to compare different sets of parameters. Sure all this is finetuning and may fit only the data I have, but you have to start somewhere. And I might expand the range of acceptable input files in the future, so the program is able to read minute barfiles, which can go back over a very long time. But for the time being I’m happy to have the ESignal tickfiles, which are all that’s needed to backtest current market conditions.

ZEN in the markets

The title of a book by Edward Allen Toppel, which I recently came across and whose approach really fascinated me.

I thought I already had a KISS approach to trading, still some huge market moves just did not trigger in my trading system, regardless what indicator I used. Just to name an example: Look at some V-shape moves, the market makes. On my favorite Euro that means 25–40 ticks down, bottom made, no retest, just 30–60 ticks up. As I say a V.

For me having acquired discipline it means: Watch it, wait for your signal, you will get one, be patient. And sure enough there is a signal long after 45 ticks, but Euro being 55 ticks up, followed by a retracement of 10 ticks does not mean the direction is now up again, regardless what your indicator tells you. The direction is choppy sideways.

‘Till reading Eddie’s book, I just did not get a decent entry signal to these moves.

The Zen approach to the markets is quite different. We all rely heavily on TA, PA, on indicators telling us what to do, giving us probabilities of future movements: If the Turbo-cci makes a sling against the regular CCI, the probability is high, that a retracement has come to an end and the trend will be resumed. If price touches, bounces and then crosses the 34ema, the probability is high that a trendchange has happened. If a double top has been made, go short.

Zen is different: It accepts, that noone knows the future. Actually Eddie states, that you can’t predict the future from past pricemovement. I won’t go sofar, as imho, while you can’t predict the future with TA, you can say there is a 75% probability, that such and such pattern will develop, if you see such and such pattern on your chart. So TA can give you a statistical probability, that such and such pattern will win over time. Simply speaking: TA gives you an Edge.

Fine. But…it leaves you standing aside, when the market is doing some huge moves, which do not fit any pattern you have in your tradeplan. And we all know: To pay for your stops, to really succeed in the markets, we need to be in the markets at times, when the big moves occur.

So, why am I writing this, what holy grail does Eddie’s Zen approach have, which TA does not give us?

It is KISS. It is so basic, that at least for me I have to admit, that it became buried under a ton of market knowledge, of indicators, of looking at charts, until I was no longer seeing the obvious.

ER trading at 661.0, 661.1, 661.2, 661.5

First trader willing to pay 661, next one paying 661.1, next one 6661.2 and then 661.5

You all are able to visualize this plotted on a chart.

You can’t know if the next trade will be at 661.6 and then 661.8 going upto 663.0. Your indicators might tell you 661.5 is a good entry for a long, but let’s look at the series again:

The only thing you know for certain is, that prices go up. And what is the prudent thing to do, if prices go up? Go Long, trade with the trend, don’t stay in front of a freight train.

And if the trading goes 661.5, 661.3, 661.2, 661.0, 660.9?

Prices go down. You have to assume that a trend will continue until it reverses. Therefore you go Short.

The only thing you need to introduce in your trading is a kind of Switch parameter, something which tells you the previous trend has reversed and it’s time to turn around and look in the other direction.
It’s like swimming in the ocean. You go up, up, up with the wave, you are carried over the crest and then it’s down, down, down into the trough, from where it’s again up, up, up.

But when do you know you have really made the top? You can’t know it. Simple as that, so don’t try to predict the top.

Know your market and then use a parameter, which tells you, that if your market retraces x ticks from the top or bottom, the trend has changed. Will you be right every time? Sure no, that’s what Stop’s are for. But using this approach at least the market has already told you, by trading in the new direction for x ticks, that traders are already taking profits and looking for the market to reverse the trend. And the only thing you do is assuming that this new direction, this new trend will continue.

I’m new to this approach, to this thinking. But applying it to my charts I see one thing: I have tradesignals everytime my indicators tell me to go long or short as well, plus quite some, I don’t get with my indicators. Now it’s up to backtesting to see, whether this new approach gives me a better overall performance, better statistics, than the TA based approach.

I will let you know, what I find out.
For the time being, what i can sure say about Zen in the markets: 
It is a great KISS approach to the markets, and it let’s you concentrate on the really important aspects of your trading system:

Trade management

BTW:

The very last question I ask myself, before I press the trigger is now:

Are prices going up? Yes…Go long

Are prices go down? Yes….Go short

Worth investing in?

Dr Bing asks,

“how can we determine if a trader is great or his software is worth buying?”

You ask me as trader and developper of Futures-Trader, which is my own trading platform.

But does it really matter? You ask 2 questions which have nothing to do with each other.
One is relatively simple to answer, the other, well you can believe me or not, but first the easy one:
Is my software worth buying? The software is a tool, so you expect it to do what you want to do with it: Enable you to trade futures.

To decide, if it is doing that, you can download it from my website and test it in Simulation-mode for as long as you want. If it convinces you, then you can get a 2 week trial and test it in real trading to see, that it works real as good as it does in Sim-mode.

I use Futures-Trader for my own trading, actually I started developping it, because there was no software doing, what I considered necessary for my trading when I started with the project. I followed some blind paths in trading over the last 3 years since I switched from stock trading to futures and the software shows some of these paths, which I followed, but then abandoned, because for me they were not profitable, they were not my style. But as I have customers using some of these functions, they stay in the software. And as as traders we often go circles I myself have come back to some of the tools I abandoned 1 or 2 years ago to use them now with better market wisdom. Of course that also means, that the software has become a complex tool over time, which needs some learning time to use all of it’s features.

The benefit you have, that I’m not only a software developper, but also a trader is, that I use the software daily myself for my own trading, so the features I add are used right from the start by myself for my own trading, as otherwise I would not add the module to Futures-Trader (unless of course someone in my Yahoo-Group proposes an Add-On which intrigues me and which I think might be a worthy Add-On, making my trading day easier as well).

So do you need to know, if I’m a good trader to decide, if you like my software? I don’t think so.

But you also asked, if I’m a great trader?

No, I’m not. But I’m becoming every day which passes a better trader. I’m taking it one step after the other and I’m going forward. I have set-backs as we all have them, I find myself for some time in a range, then I leave that range just to find myself in the next range. That’s trading, that’s the business we are in.

Do I post live trades, do I post my results?

No, no longer. I did so for quite some time, when I started with my 2.500$ account 2 years ago to learn futures trading. I posted hopeful developments and nasty setbacks, just to show, that most of us have to go this hard route. There are just a few born traders, the others have to learn it and we all pay our tuition fees. So why did I stop posting live trades or results?

Because it was distracting, because it put myself under unnessessary pressure. I don’t need to show someone something, I get no ego-boost from being the great trader in a chat-room, knowing others might start mirroring my trades. I need noone, I have never spoken to before, querying my trade, when it is hanging around and not performing as I expected or, when it is going as it should, someone coming along accusing me to have posted my trade late, (so he could not jump on the train, which had left the station 2 minutes ago). No, there is no reason to do that. I’m responsible to just one person: Myself.

I want to be able to look in the mirror and say: Hey Chris, well done, really well done today.

Do I know, if the traders writing the blogs I read trade real? No. Do I care? No.

I read the blog and decide, if what is written there makes sense to me. Take an example: Sport in his Traders Paradise Blog is often accused of not trading real, so he is now posting pictures of his Trading setup, showing his chart with arrows on it. I really don’t care, whether Sport makes money trading his system. I think he does, because I follow him now for years and someone doing that in Sim-mode would have no reason to do, what Sport is doing for 3 years now (he trades longer, I just know him for 3 years I think). But whether he trades 1, 2 or 20 contracts. It makes no difference. The only really interesting bit of information on his last entries were the charts with the Autotrading signals on it. These I took and checked whether I got a signal on my charts as well. I’m not interested in Sports tradesetup or his Mother of all Shorts system, but I’m sure interested in seeing if his setup matches my own signal. And if he has a winning signal where I have none, I try to see, why, where do we differ, what indicator, what PA signal is he following, that gives him his signal, while I got none. (Of course using the same timeframe.)

So, I will not start posting live trades again, at least not in public. And I won’t post my balance on a regular basis. It’s up to you to read my blog, to decide, if this Globetrader (or croc), whom you know from a picture and whose real name you know is Chris is real or not.

I will not help you with this decision, because I really believe, it won’t help you on your way. I met some great traders on the way, with some of them, I’m now in daily contact and it was always the same in the beginning: Trust. I trusted them to trade real, to tell me no BS and to have no hidden agenda. They trusted me to respect them, to be worth of their trust in me, when they confided in me information not to be released to the public.

Of course I also met some not worth of this trust,and it sometimes hurts to learn the truth. But that’s life. I have decided to live my life, to trust another one with the risk of getting hurt. The emotional joy of meeting someone worth of your trust is sure worth it. But I’m telling you nothing new here. As a trader you know this all too well. At least if you trade real yourself.

Is it really this difficult

Suddenly the Sidewinder is again in every mouth after it disappeared for a while from the chat and blogs I follow.

But what is the Sidewinder? It’s a green light to take a ZLR. Simple as that.

So your Trading Plan says:
I take a Long, if the CCI hooks up from around the zeroline and the Sidewinder is green.
I take a Short, if the CCI hooks down from the zeroline and the Sidewinder is green.

The Sidewinder is a filter in your Trading Plan, keeping you out of “bad ZLR’s” or better ZLR’s with a lower probability to succeed.

Now let’s ask the 100.000$ question: Which ZLR’s have a lower probability to succeed?

… Yes, you will have to do your homework yourself. So print-out a few days of the contract you trade and mark-up all the ZLR’s you see.

(You wouldn’t believe it anyway, if I told you, that the Sidewinder is just telling you the obvious.)

Multiple Time Frame analysis

The big picture or why great looking setups in your trading timeframe sometimes inexplicably fail:

• Every time frame has its own structure.
• The higher time frames overrule the lower time frames.
• Prices in the lower time frame structure tend to respect the energy points of the higher time frame structure.
• The energy points of support/resistance created by the higher time frame's vibration (prices) can be validated by the action of lower time periods.
• The trend created by the next time period enables us to define the tradable trend.
• What appears to be chaos in one time period can be order in another time period.
  

Author Perry Kaufman, Trading Systems and Methods -Third Edition published by John Wiley & Sons

Intuition

A traders most precious tool.

I couldn’t say it better than this Innerworth article told it.

Intuition: It May Be Illogical But It's A Trader's Most Valuable Asset

Btw. I can only recommend that you subscribe to the free Innerworth newsletter

Blown out...again

I found this post on Trader’s Paradiese

On September 5th, 10.11pm Anonymous wrote:

WOODIE WHEN YOU READ THIS...
xxx xxxx.
you have mislead me just because i'm a new trader. i have lost all my money following your cci trades and calls.

Sorry, that I have to say this to the trader who posted this above, but you deserve it. And I can only hope you have something set aside to start again.

(And  I have to say Sorry to Woodie! I just took him as example. You can replace his name with any other trader or chatroom moderator, it’s always the same)

Following someone else to make/decide about your trades is a common failure on your way to become a trader. Just that a lot of prospective traders never are able to take the next step, because they have blown their account and had nothing set aside to start fresh.

What failure you ask:

1. You take no responsibility for your actions. You take the trade, you have to bear the consequences. But you blame Woodie for your actions.

2. You have no trading system. You want to trade Woodies system, following his calls. Forget it. You can use his system to build your own. But as long as you just follow his system, you won’t make it.

3. You have no money management system. If you would, you would have taken measures to avoid blowing your account earlier.

What to do:

1. Say goodbye to all chatrooms.

2. Analyze your trading and make a list, what went wrong. Why did you take each single trade. Did you adhere to your Stops, were the Stops to small, too big for the trade setup you traded. Meaning, would a wider stop have led to a profitable trade or was it clear, that the trade was a loser already before your Stop was hit. Did you hold your profitable trades until at least 50% of the potential maximum profit was reached? What was the maximum attainable profit for your trades and what did you get? And so on…Use my Homework spreadsheet to see what I mean.

3. Make a trading plan and decide which Setups you want to trade.

4. Setup your charts adding only the indicators you need according to your trading plan

5. Decide about the timeframe you want to trade and Sim-trade your setup until you have the statistics to prove, that your setup is profitable, that it gives you the edge necessary to survive in this business.

6. Open 2 accounts and start small. You’r a novice, a learner. You’r losses are your tuition fee to be paid to learn this business. But make sure you have something set aside to start your business, once you have learned trading, once you have found YOUR edge in the market.

Do your homework

and never ever let someone else make a trade for you.