A Mechanical Strategy Journal

[Dogpile]

Thought it might be fun to track a mechanical strategy that looks highly interesting and do it as a journal here. I am not a mechanical trader -- but I definitely think there are some interesting aspects to mechnical trading.

This strategy is one from Art Collins book: "Beating the Financials Futures Market"

The strategy that I really want to investigate is from Chapter 41 and called 'The Continuous 66 Percent Momentum System'
(coded in the appendix as 41.3)

Not sure how long I will stick with this journal but thought I would start the thread anyway. For Tradestation users, here is the code (copied exactly from the book):
-----------------
vars: mp(0),hc(0),lc(0),xx(0),a a(0);
hc=highest(h,9)-c;
lc=c-lowest(l,9);
if hc>lc then xx=hc;
if hc<lc then xx=lc;

mp=marketposition;
if mp<1 and hc>lc then buy next bar at o of tomorrow+(0.66*lc) stop;
if mp=1 and barssinceentry>0 then sell next bar at entryprice-(1.32*xx) stop;
if mp>-1 and lc>hc then sell short next bar at o of tomorrow-(0.66*hc) stop;
if mp=-1 and barssinceentry > 0 then buy to cover next bar at entryprice+(1.32*xx) stop;
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The reason I chose this one was because of its robust results and interesting methodology. In this system, you are exposed to the market 95%+ of the time (sometimes long, sometimes short) and the vast majority of the time you simply reverse your position at the same price when the rules trigger it.

The concept is simply that of buying/shorting a reversal using the last 9-day range. If you are low in the 9-day range, you will have a buy-stop order to go long. If you are high in the 9-day range, you will have a sell-stop order to go short. The order-entry system needs to know the opening price in order to calculate the next entry.

Here is an example,
you are trading low in the 9-day range and therefore looking for a buy signal. This signal occurs when price moves away from the next days opening price to the upside. In the strategy, you first calulate yesterdays close minus the lowest low of the last 9 days. You buy if price trades above the opening price in an amount sufficient to trigger a 'reversal' -- which is calculated as 66% of the distance from yesterdays close to the 9-day low.

Attached are some Tradestation screen shots of the Russell 2000 Futures using this strategy (using a single contract). The idea here is to ultimately see how I can use something like this in my own trading. Mechanical strategies have a tendency to do really well and then "drawdown" badly (ie, blow-up). This one has beaten the market without big drawdowns. Let's see how it does going forward.

[Dogpile]

Decided I am going to use the S&P's for this. Fits better with my focus on that contract in general... Also, I like the 5-day mechanical system... (this is a learning exercise -- reminder, I am not a mechanical trader -- I may even skip signals if Market Profile context or something else strongly favors it).

The 'system' is currently long... will start on next short-signal.

Today will have an entry (short) at 1485.50 on a sell-stop.

This calculation is computed as

(Opening Price - X)

where X = 0.66*(5-day high - Yesterdays Closing Price)

So, 1492.00 - .66*(1507.75 - 1498.) =

1492.00 - 6.44 = 1485.56

Short 1 ES Contract on Sell Stop (good until 4:15): 1485.50

[TinGull]

What ES contract are you trading? You rolled over, right?

[Dogpile]

esz07

I am not actually trading this yet... actually got short at a better level than this strategy... but the strategy gives me some addedconfidence given its excellent results....

[TinGull]

Oh...I thought your last part of the post that said "Short 1 ES Contract on Sell Stop (good until 4:15): 1485.50" meant you did get short there. I was confused because price hadn't hit that yet. So far...that's the low of the day RTH.

[waveslider]

Dogpile,

It's a good project. The system is simple and has no parameters, that's great. I think the problem is where you said "I may even skip signals if Market Profile context or something else strongly favors it".

So what exactly is your mission statement here? I think its great to add mechanical aspects to your trading.. its an objective signal staring at you in the face. Problem is the objective signal is no good if you pay no attention to it.

Maybe you could just use the strategy as a filter - so you would only take long trades (using market profile, or whatever) when the system is long. Then if you decide to go against the system you could track how well you are "beating the system".
I know Art Collins is pretty opinionated on over-riding systems, you probably read that in the book (is it a good read by the way?)

The problem with just tracking the system mechanically real time is that its really boring. The chart you put up has the system going sideways (commissions included?) for over a year. Most people would drop the system or over-ride it in that time.

I think that is the one of the main attractions to discretionary trading - the idea that you can outsmart the market with your own intelligence. I run a daytrading system on all of the minis that makes money. I basically babysit it and trade my clients money on an end of day basis (hence why I am here typing). So it makes money -that's the point. But its boring. Someday when I feel super financially secure I will start trading using discretion -for fun mostly.

I think you are embarking on a good project! By watching mechanical systems trade real time, you actually can learn quite a bit, especially when you juxtapose the results with your own bias and emotions.

ws

[Dogpile]

waveslider, cool -- I hope you stick around to offer some ongoing commentary.

<<The chart you put up has the system going sideways (commissions included?) for over a year. Most people would drop the system or over-ride it in that time.>>

a good system is probably cyclical. it might be a 'go-with' after it draws down for a while -- especially following the significant run it had earlier

<<I think the problem is where you said "I may even skip signals if Market Profile context or something else strongly favors it". >>

This is why I stated that I am not a mechnical trader.

Let me elaborate. I believe in discretionary trading whole-heartedly. I am a 'pattern-guy' --- but I do like statistics.

Obviously, I could build 5 filters into Arts code and try to have various switches and end up with a super complex system which I wouldn't have to override much... But that wouldn't be consistent with what I believe in.

If I see something like a downside 'breakaway gap' -- I am not going to go long the next day because the system advises such -- its only doing so because you are 'low in the 9-day range.' The idea here is to just think hard about what the system is saying and whether given the 'structure' of the market, it is a 'go-with' or not.

In my opinion, the market is just too complex for someone like me to build some supersystem. That said, I do think their are exploitable statistical biases. So I am doing this experiment. I am keeping the system super simple and using right-brain thinking in conjunction with it. I freely admit this goes against what Art advises. I just don't agree with Art that being 100% mechanical is the best way to go.

Art suffers very, very significant drawdowns -- but his returns are excellent. I wouldn't mind increasing my drawdowns a bit for incremental returns. This is why I am doing this...

attached is todays 'system entry'.. I actually covered my own short for a 3.5 pt profit just above where this system went short --- so goes to show how I am using this so far...

[Dogpile]

the thing that is most interesting about this strategy is that of the 'concept' behind it. it is basically using a simple strategy of 'momentum off opening price' as its core principle. traders should try understand the power behind this concept. sometimes, this trigger will just be a 'bad price' as the momentum won't carry and you will be whipsawed big-time.

I actually was in a chat room with Art Collins earlier this year and I saw him act in real-time for a few months (the chat room no longer is in existence due to lack of subscribers -- not failure of his system). I watched him absolutely crush the market sometimes --- and then I watched him get absolutlely nailed with horrible entries and big-time drawdowns. He would agree that 'systems trading is not pretty to watch' --- but good systems do work.

The system I picked here seems to be best aligned with what he was doing -- using 'momentum off opening price'... you will catch all those trend days with this system -- and you will get nailed in those whipsaw days -- that is the volatility of this system.

[Dogpile]

btw, here is the equity curve for the '5-day ES strategy' I am following here...

[Dogpile]

I realize now that Tradestation continuous contract information is faulty. I will re-start this thread as the calculations are off. this is already a useful journal as I would have had a faulty entry today if I had taken it. I have never traded mechanically before so this is all new to me.

nevertheless, trade information for the last completed contract (ESU07 -- the Sep futures) shows results very much in line with what I posted in this thread -- therefore the concept embedded in the strategy appears to be valid. Art Collins wrote the book in 2005 and the Sep 2007 futures show very nice results.

I will do a new journal with the December futures contract.

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This thread has officially been ended.