Sunday, January 29, 2006

TRIN - Questioning a market internal Index Part II

Skunk informed me, that my formula used to calculate the TRIN was wrong in the last article. And he was right of course. I made a mistake.

So let’s look at the TRIN again:

TRIN also known as the ARMS Index

It’s calculated as

             (Advancing issues / Declining issues) 
TRIN = ————————————————————
             (Advancing Volume / Declining Issues)

I found a good interpretation here. As you can see there, the threshold is the Number 1. And if you are not interested in the number itself, but just look if the TRIN has crossed the threshold 1, then of course you don’t need to change the Index at all.

You just need to know that the market is Bullish if the TRIN is < 1 and bearish if the TRIN is >1

But let’s look again at the example market I introduced in my last articleGlobetrader_190
This market assumes, that the Ratio of advancing to declining issues is equal to the ratio of advancing / declining volume. And as you see the TRIN remains at 1 or neutral in such a market.

Let’s look now at a market, where the Ratio of Advancing vs Declining issues remains equal, just the Volume is changing.
If there is a lot more volume in Advancing issues vs declining issues the TRIN is below 1 and we all would consider such a fact as a bullish market, even if the number of issues going up vs the issues going down is neutral.

Now a different market:
Volume remains neutral, but is distributed differently. TRIN becomes bearish, the moment there is huge Volume on fewer declining issues vs advancing issues.

Now let’s look at my KISS rules for any indicator or index I use in trading:

  • I assume that a positive number means prices go up as well
  • it uses a linear scale
  • if a number is near 0 it’s a flat market and
  • a negative number tells me to expect prices going down.
  • And to make it really simple please have the bigger numbers tell me that the trend is stronger than when seeing lower numbers

Does the TRIN follow these rules?
No, obviously not. It is centered at 1 instead of 0. It never goes below 0 and it is non-linear (TRIN 4 relates to TRIN 0.25, the 4 in a bearish market, the 0.25 in a bullish market).

Now the next question is, if we can transform TRIN to follow these simple interpretation rules without changing the index.
And as you might already guess, if you read the last article: Yes we can.

We distinguish between the TRIN being >1, 1 and < 1.

Rule 1 (for the bullish market): Here TRIN is <1 and > 0. So calculate it as
new TRIN = (1 / TRIN) -1 to shift it to 0

Rule 2 (for the neutral market): Here TRIN is 1.
new TRIN = TRIN -1 to shift it to 0

Rule 3 (for the bearish market): Here TRIN is going from unlimited to 1
new TRIN = – TRIN +1 to shift it to 0 again
No problem for the computer to calculate this. But I know, that for anyone having traded with the TRIN this might get confusing, as you have learned to interpret the positive TRIN number as being bearish.
For me, who has never traded with the TRIN it is actually easier to interpret the negative number as meaning a bearish market, while the positive new TRIN means a bullish market. Still I think having a linear scale on the TRIN is worth the re-wiring of the interpretation paths.

TRIN - Questioning a market internal Index

TRIN also known as the ARMS Index

It’s calculated as

TRIN = Number of advancing issues / Number of decreasing issues

To tell the truth even if I show the TRIN on my FuturesTrader platform right next to the TIKI number, I have never used the TRIN in my trading. Why?

Because this indicator is not linear. To understand the number, you need to think, actually if it’s below 1 you need to think twice what it is telling you. Let’s look at an imaginary market with 10000 individual shares and let’s calculate some TRIN numbers for this market.


One objection I have against this indicator is the jump in the numbers once the number of Advancing over declining shares crosses a certain threshold. ADV went from 8000 to 9000 and the index jumped from 4 to 9, even if we all can agree imho, that it makes not a lot of a difference for our trading whether we have a very strong or an even stronger trend. ADV 8000 or 9000 makes no difference, but going from ADV 5000 to ADV 7000, which shows in the trin as a jump in numbers from 1.00 to 2.33 is sure a very interesting change, as this means that first we had a consolidating, most likely flatish market changing into a trend-up market. Still the difference is just 1.33 points in the index, while the unimportant change (ADV 8000 to 9000) actually gave you a 5 point change in the index.

But my main objection is, that your mind will never treat the change from 1.00 to 2.33 equal to the change from 1.00 downto 0.43.

Our minds treat numbers linear and in trading you need to keep it simple. You don’t have a lot of time to contiously think, you need to give a lot of these number interpreting tasks to your subcontious mind and rely on it to tell you, when important thresholds are crossed. Have enough screentime and you know, what I’m talking about.

For me, if I have to interpret an index, I assume that a positive number means prices go up as well, if a number is near 0 it’s a flat market and a negative number tells me to expect prices going down. And to make it really simple please have the bigger numbers tell me that the trend is stronger than when seeing lower numbers (My main problem with the cci btw and the reason why I took me so long to learn it’s patterns).

So is there a simple way to transform the TRIN to conform with these rules without actually changing the TRIN index?
Sure is. You just need to distinguish between 3 conditions:

1. Advancing issues > Declining issues
2. Advancing issues = Declining issues
3. Advancing issues < Declining issues

Rule 1. The TRIN formula remains as is, just substract 1 from the result to shift the TRIN result to 0 instead of 1, when the advancing issues become nearly equal the Declining issues.
Rule 2. If ADV = DEC the result is 0. So calculate the TRIN as is and substract 1 from the result.
Rule 3. Here comes the real change to the formula. Now the TRIN is calculated as:
TRIN = – Declining issues / Advancing issues + 1 (plus 1 to shift the TRIN result from -1 to 0, so we have no jumps in case we chart the TRIN)

And here is the result you get with the new TRIN

Now the numbers go from 8 to 0 to -8. (The 9999 result was just added to show you, that the TRIN really is non-linear, you won’t see this in real trading)

I think, that’s something you can easily grasp even with a cursory look at the TRIN, just to confirm that your chart signal is accompagnied by a jump in the TIKI, is really happening with the current market trend and therefore worth taking.

Nice, nice you might think, if you followed me so far. But I trade with IB and IB gives me the TRIN as is, and it does not give me the raw numbers. Fortunatly you don’t need them. Just take the TRIN and let your chartprogram calculate the new number. 
If the TRIN is >1 the formula is:

  • new TRIN =  old TRIN -1

If the TRIN is < 1 the formula is:

  • new TRIN = (1 / old TRIN) + 1

Monday’s FuturesTrader release will have the new TRIN integrated in a new Cockpit like Window.


From top to bottom it shows Price, Trades/minute, Total Bid/Ask Trades, TIKI and the new TRIN on analog meters, as I thought, there is a reason why we still use analog meters in our cars to measure velocity or even in the most sophisticated planes to display different flight parameters. And my first week trading with this cockpit has shown me: It makes a difference. You can spot changes a lot faster on an analog meter compared to watching numbers going up or down. If there is enough interest I’m thinking about taking this cockpit and a few other windows from FT and actually offer them as a seperate program for those interested in just this functionality.

Tuesday, January 24, 2006

Chart description

I received some requests to explain, what you see on my charts:
Let's start with the feature, most will think is really unimportant:

Most charts I know have a black background and use harsh colors for bars, trendlines or any other feature  on the chart. Consider this: As daytrader you are sitting in front of your charts for quite a long time per day. So go easy on your eyes.
1. As background use a color, which does not tire you, even when you look into the screen for hours.
2. For trendlines on the chart, use colors which are shades lighter or darker than the background color. This way the colors you see on the chart are harmonic. Also think about, what you consider as important information and what is secondary information. The more important an information is, the better visible the color used for this feature should be.

My charts have 2 sections: The main section for the pricechart and a subsection for the oscillator used.

The main feature obviously are candlesticks colored light blue for bars closing up, red for bars closing down.
Then you see a lighter/darker than the background colored zone, which has some lines in it. That’s my Moving averages zone. I don’t buy the idea, that prices turn right where a certain moving average is calculated to be. That’s like staying in front of a train at full speed and calling: Stop and Reverse right here on the spot. No a train needs some space to stop and turn and I see the same happening with prices reaching a moving average. Sure price turn somewhere, and you might have the impression, that they often do it atthe 20 sma or a 34 ema, but in truth, the turn near these moving averages. That’s why I introduced the Moving Averages Zone (MAZ) one border is a 10ema, the other side is a 55ema. Inbetween you see a 20ema and a 34ema. The ema lines change colors depending whether they trend up or down and the zone changes color depending on the placement of the shorter ema compared to the longer ema. The effect is, that the MAZ is darker than the background in a downtrend and lighter in an uptrend.

In addition to the MAZ I have a 204 and a 340ema on the charts, as they provide information, if prices are near them.

Then I have standard Bollinger Bands on the chart (20, 2) and (340, 2) used to be reminded that moves will not go forever.

Recently I added a Least Square Moving Average (or Regression Curve) on the chart, as there are some price patterns, which will not form a double top or bottom, but test the LSMA (14) instead. It’s a thin line, as I’m not yet sure whether it is worth keeping it on or not.

As usual the subsection is reserved for an Oscillator of some kind. I’ve tested and traded with most of them on the chart. For a very long time I used the CCI, then I used a Stochastic, then the RSI or combinations of them. Recently I finally saw, what confused me most with these oscillators. They are detrended, meaning they work nicely in range markets, but fail miserably in trending markets. To compensate you usually are advised to use multiple Oscillators of different length, but that does not really help either.

I was introduced to the Advance / Decline Indicator (ADX) on Akuma’s Blog, but to tell the truth, I could not trade with this indicator, which has 3 lines, one going up in a downtrend, the other going up in an uptrend and a third going up in trendmarkets. Looking at a chart with ADX you have to think, you need to look at the chart and first identify which line is which, before you get the information needed. I have 6 currencies and 5 indexes on my screens and I need information fast, I can’t bother looking exactly at my chart saying, well this line is up, that one is down…oh the trendline is down as well, so no trade here.

On the other hand the ADX made sense to me. It looked like an interesting indicator worth investing time into. So I designed a formula, which reduced the indicator to 1 line without losing too much information. The result is seen on my chart labelled ADX and shown as blue/red line:

new ADX = (ADX up – ADX down) * ADX trend

In the subwindow you also see a Moving average of the ADX to show me the longer trend of the ADX and standard Bollinger Bands to announce extremes of movements.

The color band at the bottom is just the standard ADX information telling me we are in an uptrend/downtrend or consolidation at the moment using the standard definitions of the ADX. It’s actually redundant information, but sometimes it’s better to get information twice, than taking the risk to ignore it.

Monday, January 23, 2006

Missing Trades

Oh Shit! No! That's not true! I really can't believe it!
Regret, frustration, a nearly impossible urge to jump on the train at full speed, followed by a loss.
I think, you all know this situation and the feelings and emotions you experience at these times.

10 minutes! You were making a coffee, taking your dog for a short walk, were engaged in a chatroom discussion or watching NakedNews.

You missed it! You missed the trade you waited the whole day for! Or worse, you saw it, you had the urge to press the trigger, but something, some little voice of caution held you back, let you miss THE TRADE. The trade which would have meant a real shortcut on the trader's road to immeasurable wealth and happiness.

Why do I write this today? Because Euro made a 100 tick run tonight. It opened at 1.2180 Sunday evening and while I slept in just 5 hours it made 100 ticks. Not gradual, oh no, within 10 minutes. If you had to pee during these crucial minutes, you missed it.
For me it was a contious decision not to take the trade at midnight my time. Not because I had no long signal, not because I could not see Euro 100 ticks higher this morning. No, I did not take the trade, because I did not want to take the risk. I want to follow the trade in front of the screen. I can not sleep with a trade open, I lost too much with trades open overnight, but especially: It is one of the situations, where I'm most likely to violate all my Stoploss rules. Euro is very thin during asian trading hours, so you need to use bigger stops to protect against flukes, spikes against your position, which will be reversed immediatly.

Did I feel regret this morning: You bet!

Did I feel the urge to join, to urge the Euro to make another 100 tick run to make good of my "loss", because that's actually how it felt. A missed trade feels like a loss and the answer your subcontious mind provides is jumping into the market to make good of this loss. Fortunatly I have been down this road already, have done it already in the past. And knowing, that Euro after 100 ticks needs to consolidate, before it can tacle the 1.2250FX (1.2300 futures price) round number resistance, I thought, I will not trade Euro this morning. I will not trade currencies at all. The reason: I did not trust my judgement in the Euro, as I still felt this imaginary loss, this missed trade I wanted to make back.

I traded the spanish IBEX35 instead (IBEX35 G6-MEFFRV | 10Euro/tick | 460 Euro margin/contract with IB). It's a thin market, usually moving in sync with the german DAX and I came to really like it in the last weeks and months. It made a nice Gap down and offered 3 nice and clear setups (of which I was able to take 2) for a profitable start of the week giving me the opportunity to make 80% of my daily goal in 1 hour.
Yes I had to say goodbye to the shortcut on my trading road, hoping that maybe the next time I will take it, but it's behind me now. I replaced it with the knowledge, that taking the longer road will let me reach my goals as well. You don't need the shortcuts, you need the consistency of the numerous small wins to build your account.

Sunday, January 22, 2006

Link List

I took some time to update the Linklist with the Links I really use for trading.

See them to the right.

Thursday, January 19, 2006

Stop Theories

The most difficult question in trading for me is deciding: Where is my Stop. Use a small Stop and you might die the slow death of a 1000 stops, use a wide stop and a few Stops in a row have the power to really hurt you.

The Stop should not be determined by your account size. Imho it needs to be a logical Stop determined by your charts and your trading plan. You have to decide in advance: Where am I wrong. At what pricelevel will my tradesignal no longer be present.

It all boils down to something not very appreciated in our fast instant gratification world: Screentime.

Know what you trade...really know it.
It's one of the reasons I left the stockworld and now trade futures. There are just a finite number of futures worth trading. And after a time you know them. Sure they still can surprise you, but usually they behave within their personalities, which allows you to decide in advance, what Stops are appropriate to trade a specific futures contract at a certain time of the day.

Taking a Stop means your account goes down, because you have to admit you are wrong, that the position was a failure, that you lost and admitting that we are wrong is something humans are not good at. Sometimes I have the feeling, that women are better traders than men just because they are not as stubborn as men when it comes to admitting failure.

Now there are different ways to deal with Stops:
1. There are the traders, who use no Stop at all.
2. Some traders use very small Stops (2 to 6 ticks)
3. Some traders use dollar-based fixed stops. EG the Stop is always 10 ticks or 125$/contract
4. Other traders determine certain Support and Resistance levels and place the Stops around (usually outside) of these levels.
5. Or Stops might be calculated based on a certain percentage of invested capital respectively based on a Risk : Reward calculation.

Is any of these methods wrong? Just the first one most of you will agree. But nonetheless it?s the method implemented by most of the traders around the world.

Trading with no Stop
Markets fluctuate. It was none but Alan Greenspan telling this truth about the markets when asked for the reasons for the Black Monday.
And there is a lot of truth in this statement. If markets fluctuate, if they swing back and forth there is no reason why you should lose in the Stock market. Unless you happen to be the unlucky trader who picked the Top or Bottom prices will return to your position and you will be able to get out with a profit.

Just as an example of so many Stocks maybe you remember JDSU

JDSU was a 1 digit stock and is now again a 1 digit stock. Nothing happened. If you went short at 10$ in 1999 and covered last summer around 1.50$ you made 8.50$ / 1$ invested in the short. 850% not a bad return for a 7 year investment. Of course you saw your short going to above 153$ in between. Markets can remain illogical a lot longer than you have capital to finance it.
But this example is great to show you, why you need to use Stops. Your capital was frozen in the short for 7 years. During that time a Stop/Reverse strategy could have made a lot more out of the same capital invested.

Take a Stop at 20$, go Long for the ride up, cover and reverse when the double Top was in place and make not 850% but

Short at 10$, cover and reverse at 20$,
Long 20$, cover and reverse at 100$ for +80$
Short 100$, Cover and Reverse at 1.50$ for +98.50$

Total: -10$+80$+98.50$=168.50$ or 16850% increase on the invested capital in the same 7 years

Btw. If you happen to think GOOG is expensive right now, take a look at the frenzy just a few years back. JDSU as a lot of other stocks made it from 1 digit stocks to 3 digit stocks. GOOG started around 100$ and quadrupled until today. That's like JDSU or another stock going from 10$ to 40$, something which was common place in the second half of 1999

Trading with small Stops
It has some appeal. You risk maximum 50$-75$ per contract, if you give your position 4-6 ticks room. But unless you have extraordinary good entries, you will face a lot more Stops than Winners. Also you will see quite a lot of trades go your way after being stopped. 4-6 ticks is less than the intrabar range on 1 minute bars of most of the futures I trade.
Of course, if you trade for a profit of 4-8 ticks, then a 4-6 tick Stop is reasonable. But you can?t expect 40 tick winners regularly, if you are willing to risk just 4 ticks. The markets take care of that. Most traders trading with small stops will therefore face the death of a 1000 Stops. 50$ here, 75$ there (plus commission of course), might not sound a lot, but with a 60% loss rate, it can and will make sure, your account will go down to zero sooner or later.
You have no 60% loss rate. Great! But most traders trading with small stops usually will have it, as timing the entry so good, that you usually hit the top or bottom with 3 ticks room is nearly impossible. Trading requires taking financial risks and to make profits, you will have to accept, that your positions go a few ticks against you during the trade.

Trading with fixed Stops
It has the big advantage, that you always know exactly, what you are willing to risk in the trade. And if the amount is set in a way, that you won't get wiggled out of your position by a small movement against your position, there is nothing to argue against trading with a fixed Stop. Just one thing. Take your entries in a way, that your Stop will be the other side of a clear support or resistance line.

EG: If you trade Eur/USD with a 10 tick Stop. You go long at 1.2005, Stop 1.1995 as you know, that 1.2000, being a nice round number, will provide support in case Euro tests this level again. On the other hand an entry at 1.2012 will place your Stop at 1.2002 something to be avoided as we all know that the market likes to test round numbers, so it might hit your Stop and immediatly reverse to goto your target at 1.2025. Something really frustrating and to be avoided by better trade planning in advance.

Stops around Support and Resistance levels.
That's the Stop which makes most sense to me and a lot of other traders as well, which is actually a drawback for this type of Stop. Because the market knows where the Stops are clustered and will try to take them out just to turn and rally right after taking them. Still, if you have a clear Support/Resistance and you take the trade on the presumption that this S/R will hold, placing the Stop on the other side makes the most sense to me, as when hit not only your signal failed, but also the S/R on the chart is broken and you might in fact look for a reversal trade.

Stops calculated to be a certain percentage of invested capital:
The Stop being a percentage of the invested capital makes sense on the one hand, as it makes sure, you have enough left, when the trade goes against you. But it faces the problem, that the Stop might not be the most logical choice, if you use charts and technical analysis. Consequence is, that you need to consider your Stop, when you take your entry and that you can't take some signals your system is giving you.

Stops calculated on a Risk:Reward basis
Trading literature suggests you should not trade unless you expect a 1:4 Risk:Reward outcome of the trade. That means for every 100$ you risk in a trade, you expect to earn 400$. Literature and reality differ, at least for me and most of the daytraders I know. If you get a 1 : 2 rate on average you are good, 1 : 3 is exceptionell and 1 : 1 or worse is the reality for most. You can still be profitable with a 1 : 1 rate, if you have more winners than losers, but it's getting difficult.
Let's look at a common example:
A trader trading the Russel 2000 futures. On a 3 or 5 minute chart the ER2 has a 9 - 10 tick wiggle range, meaning on average a 3 or 5min bar is 9 - 10 ticks. A reasonable stop on the ER2 should be outside of this wiggle range or you risk getting stopped on a valid signal due to the volatility of the contract. Say you use a 12 tick stop, so based on the above you should enter only when you expect 24 or 36 ticks profit. Unfortunatly most ER2 runs go just 20 or 30 ticks before you see it stalling and reversing. The move might continue or the move might really turn. You can't know it in advance. As most of the signals don't get you in at the low or high and the same goes for exit signals, you have 10 to 17 ticks potential profit in your trade before you have to expect a reversal. 10 to 17 ticks profit calls for a 5 to 8 tick stop, if you use a 1 : 2 ratio trading ER2. For me, that's too small as my entries aren't so good to allow these small stops on ER2. There are traders who can trade with these stops but most I know use 10 to 12 ticks and are happy to take 5, 10 or 15 ticks in their trade. So in effect they trade with a 1 : 1 ratio and know or hope, that they have significantly more winners than losers.

Does that mean: Forget about Stops based on Risk : reward. No. But you need to know the timeframe you trade and know, what you can expect from the trading vehicle you trade. The longer the timeframe the easier it is to use a Stop based on Risk : Reward.

EG: A Euro trend run goes 100 to 120 ticks. It takes as long as it takes, but usually no more than 24 hours. So based on this knowledge, you take your signal, use a 20 or 25 tick stop to give the euro enough room to work and go shopping. Take look again tomorrow and see, if you were Stopped or not. It takes conviction to trade this way, but take a look at the 2 hour chart below. I marked the big runs. Give them 15 ticks for the entry and 10 ticks room for the exit, so you take 75 ticks for the winning trade and 25 ticks for a Stop. 1 : 3 ratio working nicely in this case. Use a daily chart and you can trade with a 1 : 6 ratio successfully, using say 50 tick stops and 300 ticks profit.

Sunday, January 15, 2006

Analyzing Bid/Ask volume

I have to give credit to Ingo from IRC:Othernet:#tradingspace who with his SVOL indicator measuring the breadth of the US market gave me the idea to look deeper into Bid/Ask volume.

Bid / Ask size, you have it often on your trading platform, but do you really use it when trading futures? Unconsciously maybe, but as part of your conscious trading decision process leading to the press of the trigger, I doubt it. In most of the futures markets we trade Bid/Ask size changes too fast and especially in the currency markets with MarketMakers present, it is considered misleading at least.

Still Ingo, whom I respect as trader making great calls in the room, told me, Bid/Ask volume is important. And in one thing he is sure right:

The moment you have made your trade at a specific price your influence in the market is over. You are at the mercy of other traders seeing the trading landscape as you saw it, for the trade to go in your intended direction. Most traders watch price and price dependant indicators, which explains, why price matters – a self fullfilling prophecy. But in fact the market is influenced by the traders on the sidelines about to make their trade, not by the traders already committed, who, if anything will influence the market against your position, as to cover a Long they need to sell and vice versa for a Short.

The question remains, how can we see the intentions of the traders on the sidelines. Is it possible to somehow calculate their influence, put it in a number which then tells us either by dynamic direction (the number going up or down) or by a static level whether the majority of the traders on the sidelines, intend to go Long or Short.

I did a Google search for “Buy Sell Pressure based on Bid Ask volume” and got a reference to this article: which told me:

Hey Chris, maybe there is something to it, it’s not a totally crazy idea you have had here. It might be worth persuing these ideas and think a bit more about it. I have some interest in mathematics, but I have to admit the mathematical modell the authors are applying is beyond me. And it goes against my KISS approach I always apply, when introducing something new anyway. Trading is not complicated and the more elaborate the mathematical models the farther away are they from the reality happening right in front of me.

So I thought: Let’s start with the basics. What has to happen for price to tick up. Here is an example of a fictious ES trading scenario


You see the price behavior between 1300.00 and 1301.00. I have displayed the maximum Bid/Ask volume at T1 to T10. You don’t see the tradevolume at each level, as right now we say, the trades which have happened no longer matter, they are history, they can not influence the market other than by convincing other traders, that now it is time to commit themself to take a trade.

Now let’s see if we can use these numbers to get a meaningful indication, that the market will stall and turn at T7.


For price to advance to a new level eg. going up, the Buyers need to take out all the Sellers at the current Ask pricelevel or the sellers still in the queue have to decide, that they might be able to get a higher price for their contracts and withdraw their offer.

We start at T1 with a setting of Bid 200 at 1300.00 Ask 300 at 1300.25. The next we see is Bid 200 at 1300.25 Ask 150 at 1300.50.
How did the market go there? The Buyers either took all the 300 contracts offered at 1300.25 or the Sellers at 1300.25 withdraw their offer to sell, to move it up to a higher pricelevel.
Be it as it is, there was enough Buying pressure to overcome the 300 contracts offered at T1 and there are still Buyers which want to Buy 200 ES contracts at 1300.25 at T2.

That’s the reason, the moment the market ticks up, I took the maximum Asksize at T1 added the contracts Bid at T2 to get the reading of 500 Buyers at T2, the 150 reading for the Sellers is just the new Asksize at 1300.50. Now the moment the market goes flat at T4, T5 and then at T7, there is an equilibrum between Buyers and Sellers and I take just the maximum Bid/Ask volume to measure the influence of potential Buyers and Sellers.

The numbers we get as Total already alert us of price stalling, but in real trading they will not help you, as they are static and changing too fast. Let’s calculate a trend instead, by cummulating the numbers:


Now this looks interesting at first glance: The numbers go from negative up when the market is advancing (T2), keep you in the trade at T4, T5 and reverse one Timeunit earlier (T7) than the market is really turning (T8).

I already have implemented a first version of this new Buy / Sell pressure indicator in a beta version of my trading platform (Futures-Trader) which handsomely kept me in a 20 tick profit cable trade on Friday, which otherwise I would have covered at a 4 tick profit (as prices were actually reversing against me), but there is still something missing, which is the reason I’m writing this whole article and why I have not yet released the BSP Indicator to my customers.

Iceberg orders: Say the Bid is showing 200 and downticking, there are 1000 contracts traded at the Bid and still the Bid remains at 200, goes down to 10 and mysteriously the 200 Bid reappears. The market is trying to sell-off, but there is one big order which holds the market and takes all the contracts offered. Once the market realizes this, the sellers vanish, buyers reappear, step in front of the Iceberg order and the market reverses. There is no indicator I know of which is telling me that at a certain level there are iceberg orders hidden, but there might be an indication:

The number of trades at the Bid is either a lot bigger than the Bid actually shown or you (actually the computer) is able to identify situations, where the Bid would go negative with the last trade reported and instead shows the 200 reading again. I’m not yet sure, if I should somehow add these Iceberg orders to the Buying or Selling pressure measurement, or just give an indication, that there are possible Icebergorders at the current pricelevel.

If you have followed my explanations sofar and have any ideas, let me know them.

Wednesday, January 11, 2006

FuturesTrader Support room

Start FT, Click ?/ Join FT Support Channel and get connected with the FuturesTrader room on IRC:othernet. If I'm there I will try to answer your questions or solve problems you might have with FuturesTrader

The Window is a floating window, which can be moved anywhere on the desktop, stays automatically on top and can be resized. When you open the window you will get automatically connected to the Support Room. If you close FT with the Supportroom open, at restart of FT you will have to press Connect to get connected again. You might join other Channels on IRC:Othernet as well, but be aware that the IRC client in FT does not support colors or other codes. It will just display the control codes instead.

Tuesday, January 10, 2006

Russel near a Top?

Here is a picture of the weekly Russel


I applied 2 ABC patterns to this chart. One starting in August 2004 which called for a 716 top in September 2005 and a second on (red) starting in April 2005 which now predicts a symetrical top at 723. Of course the uptrend in the Russel is still intact, so it has still room to rollover. But never forget: What goes up, must come down

Wednesday, January 04, 2006

Developing a trading system

Everybody and his cousin tells you: You need to have an edge, you need to have a system to trade the markets.
But, if you are like me, sorry, but that sounds so great, so hollow. A trading system! If there were one widely available, we all would be millionaires a long time ago.
Have you met really successful traders? Me, I can count them on one hand and have some fingers left!

A tradeable trading system isn't something available round the corner in the next traders bookshop.

Maybe you noticed the one word I added in the last sentence: TRADABLE

The problem is, there a quite a few trading systems available and I can prove, they are successful in backtesting and in today's real markets.

the problem is, you need already a lot of money to trade them, because they all have periods of nasty drawdowns and with a small account you can't afford such long, statistically irrelevant, drawdowns.

The truth is: You need money to make money

And there are just a few traders, who have the luck, determination and persistence to make the step from small account to big account.

Yes you need luck, because no persistance, no nothing helps you, if you start trading a trading system in one of it's nasty drawdown periods. And add worse to misery, you don't have the knowledge to know when to deviate from the trading system, if you just start out.

There are ways, ... not to shorten the learning curve, because I no longer believe in that nonsense. There is no shortcut to trading success and if someone tries to tell you otherwise: Run like hell or you will pay a far bigger price than you are prepared to pay.

I will post the way, which made sure I still have an account to trade today, even if I made huge mistakes in my career, even if not so long ago I blew 50% of my account in one day and 75% in a week.

Right now, we are looking for a tradable trading system:
I won't give you one right now, maybe, if there is interest, we can try to develop one together. But I will tell you what to do, if you think you found one.

A tradingsystem MUST be backtested. Why?
Because, if something did not even work in the past, you would be foolish to assume, it works now. It might, but are you really this arrogant, that an idea you just had will make you money, if testing it on past data shows you, you lose?

That means the test for the existence of a tradesignal has to be made on Bar Close, otherwise you can not backtest it.
(There are a few exceptions I know to circumvent this statement (especially if you test for the existence of certain bar patterns), but generally you need Bar Close tradesignals, as all indicator values will be calculated just once and not in a range like an OHLC bar.)

The reason you use Bar Close tradesignals is simple: If you use intrabar tradesignals, in backtesting you will see just the working tradesignals, while all the tradesignals, which are present intrabar, but not at bar close will not be seen.
And guess what: Each and every one of these disappearing tradesignals will have been a loser. Why? Because if not, the tradesignal would have been present at Bar Close as well.


I hope you see an Alert at the bars where you thought you would have gone long or short.
Now scroll back your chart in time and do your first backtest in visual only. Look where you got tradesignals based on your newly defined rules.

Usually you end with too many tradesignals or actually none at all. And that means back to the drawing board. ask yourself: Why. What is missing, what additional parameter is needed.
Do you have every ingredient identified, do you need to add some salt or pepper to the soup, a little filter here, a little tweaking there.
Sure that's curve-fitting, but that's making sure your tradesystem does work at least with the chartdata you currently work with. The reality test comes later.

You don't need a 100% system, you need a tradeable tradesystem. So look for about 70% winners and 30% losers. Make sure the stops necessary for the winning trades to become profitable are managable and within your risk:reward parameters.
Unless you design an alltime in the market system, don't introduce reversal trades early in the system design. It just adds extremly to the complexity of the whole system design.

Don't be discouraged, if your first efforts to develop a trading system are met with failure. If it were an easy and simple task, everyone would be a millionaire already.
Trading systems based on the widely available indicators usually perform good either in trending or in ranging markets....but not in both types of markets. Knowing in advance when to use which system is the big question. And if you have the answer to that question in realtime, you will do very good in the markets.