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Market Wizard
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Everything posted by BlueHorseshoe

  1. Hello, I'm trying to work out whether I can use options to implement a simple directional strategy. I can't be bothered reading any more books and thought I'd take a hands-on approach for a change, so I'm trading the strategy using a simulated options account. Yesterday I bought an at the money Dec14 Call on VB expecting it to rally, which it has done. I bought at $2.50 and the mid is now $3.02, so if I sell at $3.02 I'll realize a profit of $52. If I'd bought and sold 100 shares of the underlying at the same time I would have a profit of $94. Why has the price of the option increased less than the underlying? Am I correct in thinking that if the option expired now (rather than me selling it) its change in value at expiration would have to be equal to the change in value of the underlying? Is the reason my option hasn't risen by $94 (or whatever) because there is still lots of time for the underlying to fall again? 100 shares of the underlying would have cost $11,566 and the option cost $250. Am I correct in thinking that I have had 55% of the return that I would have got from the underlying for round 2% of the outlay/exposure/risk? If I had "known" that the underlying would rally fairly quickly, would it have been better to purchase the November Call that is just a few days from expiration? Should probably have done both yesterday so that I could see exactly what happened! Many thanks for any help anyone is prepared to give. BlueHorseshoe
  2. Hello, You're basically concerned about the possibility of an extreme event and unexpected event with little or no historical precedent (an outlier, a black swan, whatever you want to call it). Such events are precisely those that aren't expected (and their suprise usually contributes to their extremity). The fact that the S&P has never "crashed up" (or more generally that historical volatility tends far more to the downside) doesn't mean that it can't, or won't. The question you should be asking is "How much can I afford to have it crash up by? How do I manage this risk?" BlueHorseshoe
  3. And the rest. Seemed like a good idea at the time . . . turns out the vendors were what made the market. BlueHorseshoe
  4. NinjaTrader (the charting platform) have just launched their own brokerage arm (well, bought out Mirus Futures). Their marketing angle appears to be "no hidden costs, no volume tiers, just transparency" - might be worth a look? BlueHorseshoe
  5. Until the end of time, no doubt. Regards, BlueHorseshoe
  6. Hi SIUYA, My lack of clarity again (and sadly I've had neither beer nor wine for several days). The "Stock A/B" example I gave was purely by way of explaining that reinvested returns could be allocated with a separate criteria to the one used for rebalancing. So profits would not have to be distributed back to the poorer performing components. This isn't what I'm doing though . . . So I get that you are now reweighting across all portfolio instruments. Regardless of where the PL came from. That's correct. I dont think compounding makes much difference as to how you are getting it as it looks more like you are capturing a little bit of both trend following and mean reversion. That's what I have concluded, although the intention was to capture the former (as my swing trading account focuses on mean reversion and I wanted diversification of styles across the two accounts). As always, thanks for your thoughts and help. Regards, BlueHorseshoe
  7. It's probably me not explaining myself clearly enough to be honest If you are rebalancing your whole porftolio, then you must be doing it taking into consideration all parts of the portfolio if you are doing it properly, Yes, but this isn't necessarily linked to the compounding aspect, is it? For example, suppose I draw off any profits so that the account always remained at a fixed amount by month end, but still rebalance the portfolio each month based on a consideration of all parts of the portfolio. The allocation of reinvested profits could differ from the allocations of the rebalanced portfolio aside from these. For example . . . 10k account with 60% (6k) allocated to Stock A . . . 1k portfolio profit at month end . . . Monthly rebalance, 70% of 10k (7k) allocated to Stock A, but only 30% of profits (300) allocated to Stock A, so position size is 7,300, and not 70% of 11k (7,700). ....or are you simply doing the 'dogs of the dow ' theory and buying laggards but with extra leverage on top of a evenly balanced portfolio. Quite the opposite - it's basically "relative strength" - increase position size for the leaders, reduce position size for the laggards . . . then a load of fancy machine-learning thrown at it (purely for my own gratification and entertainment - think basic strategy returns 13%, me playing around with code for a year might add at best 2% and smooth volatility of returns if I'm lucky!). You can see the shifts in weighting of each component in the subpane of the curve I've attached. One component always has a weight of zero (at the minute, metals). We're talking very long term outlook here So my guess is all you can do is simply test and see what happens over the long run and what you can live with....sometimes its great to be full tilt othertimes not. Sure. I've done this, and I'm pretty comfortable with what I'm doing. In a previous thread here I argued that the individual components of a portfolio should be 'rewarded' with increased position size dependent on their unique performance; I now find myself doing the opposite and spreading the benefit from components that have performed strongly to 'reward' equally those that have underperformed. And yet that's what masses of testing tells me is the right thing to do. Cheers, BlueHorseshoe
  8. Hi SIUYA, The strategy is best termed 'relative strength' rather than 'breakout' - I just tend to lump anything that is directional and not mean reversion together as 'go with' - trend following included. I may be misusing the term alpha . . . I was considering an equal-weighted portfolio of the components (ie a 'passive' investment in the portfolio) as the benchmark. The portfolio as I have implemented it, with variable weights, shows (historically) a greater return than this benchmark - is this not usually termed alpha? The key question I'm asking though is this: when profits can be traced to a particular portfolio component, should the "benefit" of increased position sizing be passed to just this one component, or to the portfolio as a whole? What I have found in this instance is that performance is improved when the benefit is passed equally to every component in the portfolio. This must mean that the improvement in performance is the result of increasing position size for poorer performing components, surely? Cheers, BlueHorseshoe
  9. Hi MM, A few are equity indices, but it's pretty well diversified with things like metals, energies, interest rates, and timber woodland in there as well. The weighting of each component in the portfolio is a dynamic feature, so the allocation to equities may be minimal (as it was in 2008 for example). The strategy has underperformed the S&P500 throughout the past few years. Kind regards, BlueHorseshoe
  10. Hello, I've just begun trading a second account today (18 months in the planning and research), with rather different and more conservative goals to what I've done elsewhere, and I wanted to share some thoughts . . . Here's some basic info: The strategy is long-only a portfolio of 12 ETFs Positions are rebalanced monthly Allocations are the result of a rule-based adaptive algorithm Leverage is configured at 0.96 A position is held in all 12 markets at all times So here's the conundrum . . . The strategy shows a greater edge, when the simplest of money management approaches (reinvestment of return, reinvestment of dividends) is applied, than when position sizing is based on a static account size. How can this be? Imagine investing in 4 shares of single stock. After a strong month, during which the stock rallied 100%, you liquidate your position. Your equity has doubled. Does this mean that you now go and buy 8 shares of this stock? Of course not: the stock now costs twice as much. You can only buy 4 shares. Now imagine you split your equity evenly between purchases of shares of two equally priced stocks, with 2 shares in each. The first doubles in value; the second exhibits no change whatsoever. Your account has increased in size by 50%, and so some of this increase in available equity is passed on to your new position size in the second stock (the one whose value remained static). You can only buy 2 shares of the first stock, but you can buy 3 shares of the second. The second is the "weaker" stock - the one that has demonstrated the least return for a long-only trader. Now consider my long-only strategy, which is designed to benefit only from price increases. When returns are compounded evenly in allocation to all components of the portfolio, and the strategy becomes more profitable with this type of compounding, then the increase in alpha MUST COME FROM THE WEAKER PERFORMING COMPONENTS. That's right: the strategy has been designed to benefit when price goes up, but the money management element will increase returns purely by increasing allocation to those markets that have gone up the least (or even fallen). What do people make of this? In a strategy predicated upon relative strength, breakouts, trends and outliers, is the money management actually drawing out additional alpha from mean reversion, of all things? Kind Regards, BlueHorseshoe
  11. Set its nest on fire. Beaky little bugger. Failing that, the tree in which it nests, or generally resides. Try not to set your house on fire though. We all respond negatively to fire . . . BlueHorseshoe
  12. Hi SIUYA, What does the term 'gearing' mean? Is this simply the amount of leverage that is used? Kind regards, BlueHorseshoe
  13. Probably a Guppy, by the sounds of it . . . BlueHorseshoe ps I have laboured to make that joke easily translate - naturally I'd say a minnow - do people in the US even know what a minnow is?
  14. You're talking about net loss though, right? Traders don't have to be losing traders rather than winning traders, yes? You don't mean that traders following your method will literally never have a losing trade again. That a strategy will be 100% profitable is the sort of stuff that snake oil vendors suggest - I assumed your thread title was a self-aware and ironic take on this. Kind regards, BlueHorseshoe
  15. I've never paid the BMT forum any attention either. There's a post (seemingly from moderators or 'Big Mike' himself) clearly aimed at discrediting a vendor whose (totally free) blog I have followed and found helpful. I'm not really sure why AMP would ever get so concerned over the allegations unless someone in senior management there is somewhat pious and self-righteous? How many out-and-out con men are out there with dozens of websites proclaiming them as such, yet continue to swindle unsuspecting marks to the tune of millions a year? Why would AMP get wound up over a few bad reviews on a forum or whatever? Haven't they got more important things on their mind? BlueHorseshoe
  16. Hi Lightstar, Great question! Firstly, I recommend Scott Patterson's highly enjoyable and non-technical book 'Dark Pools' for an explanation of these order types and exchanges. A dark pool is simply an exchange that is 'dark' - by which it is meant that not much information about what is traded there is available. Information about when and how much you or any other trader is prepared to trade is invisible. Dark pools are less regulated, which means they tend to support all manner of dubious order types. Consider this scenario: you're watching the ES futures contract with price and volume. Suddenly, the market begins to fall sharply on very low volume. How? What might be happening is that large sell orders in underlying and closely arbitraged products on other exchanges including dark pools are being executed. The ES keeps tandem with these changes - some participants begin to sell it short in anticipation of the drop, and everyone else who is 'informed' steps out of their way rather and pulls their bid . . . a low volume sell-off, where the true volume was done in a dark pool. Hope that helps - I'm no expert! BlueHorseshoe
  17. I'm pretty sure the thread title contains a degree of self awareness and irony . . . BlueHorseshoe
  18. Hi Duarte, This looks interesting . . . Have you looked at adaptive asset allocation models at all (I can drop you a few interesting links if you wish)? Kind regards, BlueHorseshoe
  19. Yesterday's chart (below) shows this same concept - "all you need is a horizontal line". The market tested both extremes from Thursday's very sideways price range, and then buyers became willing to do business at higher prices above the 1126 line. Where anyone would enter this move would depend upon their individual entry method. The precise location at which you draw your line in the sand probably isn't too important - the VAL/VAH method here just relates to how the prior day's volume was distributed, but simply using the prior day's high (as per the TRO 'wick' method) would have worked just as well. What's best to do - try and hold through a move like this (at a hypothetical very best there, you'd net $1000 per contract), or try and keep smaller bites at high probability points as it climbs higher? This is the question that JPennybags seems to be raising. I'm guessing that most exchanges are observing some kind of holiday today? BlueHorseshoe
  20. Sure - I had avoided the details for fear of people getting bogged down in them, but they may be helpful . . . Symbol is @TFm14 9 Tick Range Bars The grey lines are the VAH and VAL from the prior day's trading (see opening post). Up bars are painted green only if they follow another up bar; down bars are painted red only if they follow another down bar - this helps to highlight periods of momentum Dots identify periods in which price action diverged with volume (eg a bar that closes higher despite greater volume on the bid than the ask) - these often signal turning points. 6 Period CCI - this allows me to judge the depth of a pullback relative to prior price action (you'll notice that trades 2 & 3 ignored this - seconds after the open I was counting on momentum to carry these trades). Histogram shows volume delta for that cash session. I look at how this changes between price swings to try and identify places where other traders may have become trapped in losing positions - then I try and piggyback the run on their stops. The bottom pane is kind of like an idiot's version of auto-correlation. All it tells me is what percentage of bars were followed by a second bar closing in the same direction - the market's ability to produces short term trends. An MA has been applied - ideally I want to see the percentage line above 50 and above the MA - that's what strong trending sessions look like. Finally, you'll note that my actual entries in SIM (the white arrows) do not mirror the 'ideal' hypothetical ones I marked on the first chart. Anyone got any thoughts about this or want to discuss? There are plenty of you on here daytrading . . . Kind regards, BlueHorseshoe
  21. Here is a post with my actual entries (in SIM) from yesterday marked in white. Why is this in SIM? I don't pretend to be any better than you. I've spent years (the last 36 months or so my swing trading has gone well) trying to get a handle on daytrading. It's difficult. It requires a bizarre combination of statistical bias and discretion (computers just don't do 'context'). If everyday was like this I would be in clover . . . If you can improve what I do then I very much welcome your suggestions! I'm trying to share where I've got to so far . . . Kind regards, BlueHorseshoe
  22. Okay, so with regard to the post above, take a look at the attached screenshot for yesterday . . . Price rejects the VAL (this doesn't mean it appears to bounce off it, but that it actually does bounce off it, registering a higher high). It climbs to the VAH (several opportunities to get long during that after the higher high). Then it begins to sell off (Did you really know what was happening in real-time there? I didn't - I just watched it until it came back through the VAL). Once it came down through the VAL then there's good opportunity to short. This is below the "2 Sigma" area where most of the prior day's business was done (only about 2.2% of yesterday's trade was done in the area into which valuation has now progressed). So how do you do it? That's up to you. If you're aggressive you start shorting as soon as it starts to head lower (could be something as simple as "as soon as I see a down bar"). If you're more conservative you might wait for a break of the prior swing low (I like this - those who got long in the upswing anticipating a bounce will most likely have their stops situated around this low - your short trade should get kick-started with a stop run, and if there's no follow-through you'll have a couple of ticks to play with to hoick your stop to breakeven). You might have some kind of supply/demand or support/resistance line that you would like to see broken. You might have some purely discretionary read on momentum, or watch the DOM for order flow . . . Disclaimer: I don't daytrade a live account with real money. Like you (maybe), I'm still working on sussing all this daytrading stuff out.
  23. Not really . . . For every trade there is both a buyer and a seller. When you see that big green candle and a massive volume spike, you need to remember that every one of those GREEDY buyers was counter-partied with a PATIENT seller. And were they really being GREEDY, scrambling to get long into an upward price move, or were they really FEARFUL, scrambling to bail on a losing short position? That's probably a better approach. If you want to get more analytical, you can break the volume down into trades executed at BID and ASK, and then find probability distributions that describe whether these trades were likely establishing new positions (useful information: you know how other traders are positioned and how they might behave depending on how those positions play out) or exiting existing positions. BlueHorseshoe
  24. I thought it might be useful to see what the concepts shared by three others on TL might have in common (this is my interpretation, and isn't endorsed by any of them!). All three are vendors (or have been), but all three have put lots of useful stuff into the public domain. THE RUMPLED ONE "All you need is a HORIZONTAL LINE on your chart" The latest posts on TRO's thread suggest trading in the direction that price leaves the 'wick' of the prior day's candle. Everything between the high and low is where someone was willing to "do business" yesterday. But not much trade is likely to have been done in the area that becomes the wick because by the close of the session traders were unable to sustain interest and find counterparties at these levels. How is this reflected in what happens in today's session? If we move from the wick into the body of yesterday's candle then this suggests that the valuation of the market is little changed from yesterday - most trade is being done in the area where most trade was done yesterday - yesterday's valuation of the market is being accepted in the today's session If price moves above yesterday's high or below yesterday's low this suggests that the market may have revised the valuation of what constitutes a "fair" price. All of this is only going to give a very vague picture because it tells us nothing about how much trade was done at each area of price. Maybe lots of business was transacted at each of the high and the low, and very little in the body of the candle? DB PHOENIX "If you can draw a straight line" DB's threads have always placed an emphasis on understanding Price Action in terms of Supply and Demand. Lines needn't be horizontal, but can be diagonal to reflect the dynamics of price change. But the key idea is the same. Yesterday there was no demand from buyers at prices above the high. Quite literally, nobody was willing to do business above that price. So, if they're willing to buy above that high today, then the market's valuation of "fair" price may be changing. One key insight from DB seems to be that the blocks of price action you pay attention don't need to be constrained by daily divisions. Areas of consolidation are obvious on charts, and may not respect the arbitrary start and end of a cash session. This goes some way to addressing the difficulties of the TRO wick approach. ELECTRONIC LOCAL "Market Profile for context, bar chart for timing" Market Profile tells you how much volume was transacted within a daily candle. It also tells you where the bulk of trading took place - between the VAL and VAH. Think of this in terms of a candle - everything between the VAL and VAL is the body of the candle, everything between the Low and VAH is the lower wick, and everything between the VAH and High is the upper wick. Very little business was done within these wicks, so you can imagine that once price accepts value within the wick, the market's valuation is changing from yesterday. You get two horizontal lines, and they should tell you something meaningful about how the market is valued versus how it was valued yesterday. SYNERGY This is not a strategy or trading system. What happens if you just try and and buy breakouts from these levels? You'll get whipsawed. What happens if you try and fade these levels? You'll get whipsawed. For this information to be useful you will still need an entry and exit strategy that has an edge. When the market begins to re-evaluate "fair" price, you'll still need a specific methodology to manage your trades. All the lines could do is give you a bias . . . "There's plenty of business being done at higher prices than yesterday - maybe the consensus is that the market should be valued higher today - maybe the next time I get a long entry signal I should take it?" Hope that's all a helpful synthesis of the thoughts of others, and proves useful to someone. Kind regards, BlueHorseshoe
  25. No, but this will get you started if you use TradeStation or Multicharts . . . There is one input, and it is for the start time of the session you trade. input:startT(0930); vars:vdelta(0); if t>=startT and t[1]<startTthen vdelta=upticks-downticks else vdelta=(upticks-downticks)+vdelta; plot1(vdelta); if vdelta>0 then setplotcolor(1,green) else setplotcolor(1,red); I am not totally convinced by the statements in the opening post. Volume at the Ask can only ever be Volume on Upticks - when the market ticks up it trades at the Ask. Buy stops and market orders counterparty with sell limits there. What you really need to try and find is a way to work out is whether the volume that is traded on any particular leg (lots of buying, say) is mostly traders buying to establish a new position, or traders buying to exit an existing (short) position. If they're buying to establish a new position and you know that a load of traders just got long, and then the market begins to move against them, then you know there are a whole bunch of people sitting on a losing position that they're going to have to bail. Now, can you predict where they will bail? Where are their stop losses all sitting? As soon as their stops start to get get hit, that's just going to drive the market even lower . . . Hope that's some help. BlueHorseshoe
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