Thoughts on Slow Stochastics and RSI?

[Thoughts on Slow Stochastics and RSI?]

Using the RSI as you describe can work well, but you'll need to use a much shorter lookback period or 'length' setting. Default settings demonstrate no edge. The Stochastics is less useful - stick with the RSI with a setting of around 4 (intraday), or even 2(swing trading), and then combine with a simple trend filter, such as only taking long entries when the RSI is oversold but above a 200 period moving average. Another useful indicator to consider for this type of strategy is the Commodity Channel Index.

 

I hope that's helpful to you . . .

[Why the S&P E-Mini Stinks]

 

Some of the directors of the CME are owners of those HFT outfits, so I see a bit of a conflict there, which I will try to address.

 

I am very curious how the role of arbitageur could explain the equal number of buys and sells in these volume spikes ? Does anyone know about this? If they are in and out quickly where is the arbitrage in a trade like that?

Thanks for the input!

 

I believe that, as well as directors of the exchanges, many HFT firms are also operated by former super-successful floor traders (the likes of Tom Baldwin etc). I imagine that they would benefit from the same advantages in terms of influence at the exchanges.

 

I'm afraid that I am not able to answer your question about arbitrage, although I would hazard a guess that though they're in and out incredibly quickly, any small profit made is greatly magnified by the number of contracts traded and frequency with which the strategy is implemented.

 

Your remarks about gas and heating oil are interesting - I'm not familiar with these instruments. Pressumably they're still relatively heavily pit-traded? And pressumably the thin liquidity makes any institutional activity more conspicuous?

[Algorithmic Trading for Individual Investors - a Survey for My Course Paper]

Hi Audrey,

 

It might be helpful if you could define what you mean by 'algorithmic trading'. Technically, anything that involves a specific series of sequential steps could be considered 'algorithmic', such as starting my car, or making my favourite cocktail, but the term has generally become synonymous with High Frequency Trading.

 

Assuming that you have the latter in mind, you may wish to reconsider the topic of you thesis. HFT is dependent upon a distinct technological advantage that costs tens of millions of dollars. The maintanence of such a system, let alone its development, requires the input of dozens and dozens of people with world-class specialist experience and skills. In short, it's not something you can do in the back of your garage on a laptop, and the notion of an 'individual algorithmic trader' is nonsense.

 

I hope that this post comes across as constructive and is not just dismissive of your request.

[RSI Fade System]

You trade the system when the equity curve is above the moving average and stop trading it when it falls.here.

 

Though there's nothing -wrong- with what you're saying here, you're presenting one side of the 'equity curve trading' picture.

 

Assuming a strategy has a definite edge, then losing periods can be expected to follow winning periods, on a reversion-to-the-mean type basis, and so many would argue that it makes more sense to commence trading when the equity curve falls below its average (on the assumption that it will soon rise above it), and cease trading when it moves above it (on the assumption that a losing period is most likely just around the corner). This is the opposite to what you describe.

 

I am also guilty of not presenting the full picture; because the equity curve of a profitable strategy is likely to spend more sustained periods above its moving average, then ceasing trading above it is questionable. A sophisticated hedge fund approach may subtley adjust position sizing dependent on the state of the equity curve relative to its moving average, but unless you're lucky enough to be flipping hundreds of contracts, then this isn't much help to you.

[Is 100% Mechanical Trading Possible?]

I run two systems that I've developed that are 100% automated in TradeStation.

I also do discretionary trading on the side. Actually, I 'm learning discretionary trading on a simulator during the market hours. I hope to actively trade non correlated markets against my automated systems for diversification.

 

Not that I'm wanting to suggest that this is what Sansjr is doing, but this can be a great approach for those who struggle against a need to watch the markets and constantly be involved . . .

 

Assuming that you have enough capital, it's perfectly plausible to run several profitable autotrading systems trading multiple contracts, and then to trade around these with a single contract on a discretionary basis. The latter can almost become pure amusement, gambling, or 'vanity trading' - it doesn't matter if the amount that is lost is small compared to the amount that is made by the profitable systems. This puts you in no different a position to, say, a multimillionaire who makes his money selling crisps, but likes to dabble in financial spread-betting at 50p per point 'for a bit of fun'.

 

If, at the end of it, you do uncover some hidden intuitive knack for discretionary trading, then great; otherwise it's no big loss.

 

Having said all this, Swansjr has obviously taken an even more sensible approach by confining the development of his/her discretionary trading to simulated accounts.

 

Hope that's helpful to some of you with bucket loads of capital and thirst for constant action!

[RSI Fade System]

I have quite literally scanned over the EasyLanguage that you have given, so may be about to completely misrepresent it, but would make the following suggestions:

 

a) the basic concept is not that disimilar to the 'swing trading' strategies described by Larry Connors, amongst others, in that it involves buying a short term oversold market back in the direction of the longer term trend. While this approach unoubtedly backtests well on daily charts, its performance is typically less impressive on intraday timeframes, where it will often produce highly profitable periods followed by similar losing periods.

 

b) I am not a big advocate of 'filtering' trading signals using multiple price-based indicators. Nevertheless, there is no denying that this particular approach benefits from such multiple indicator confirmations. Try combining the RSI with the Commodity Channel Index and a Value Chart, and then only taking those signals that meet at least two of the oversold conditions.

 

c) this type of strategy, in backtesting in the stock indices, shows a bias towards long positions that cannot be ignored. Though many would argue that this is an undesirable trait and an unjustifiable approach to trading a market, it is somewhat understandable; a large proportion of investors, both retail and institutional, are 'long only', and will look to buy a discounted market.

 

d) Has your 9 period setting for the RSI been properly backtested? I would strongly recommend that you examine the performance of this system with shorter RSI settings.

 

e) Are you confident that employing the ATR in your strategy is increasing its edge? What happens if you replace it with a stop and target derived from the MAE and MFE of past trades?

 

Hope that's of some help to those on this interesting thread. If I've misundertood anything let me know and I will read through the original code more carefully.

[New Trader with a Question]

So, my question is, do some of you traders adjust the amount of contracts you trade to reflect the conditions of the mini s and p, or do you wait for conditions to improve to start trading?

 

The number of contracts that you trade should be adjusted mechanically according to you account equity, in line with whatever money management formula you employ.

 

If your system is volatility-dependent, which it sounds as though it may be, then you should only be in the market when volatility is high. You should have some objective criteria for the level of volatility that must be met before you begin trading, although this could be adaptive (for example, only entering when the volatility measure you use is above a moving average of that volatility measure).

 

All in all though, as others have asked, has your strategy been thoroughly backtested across a wide range of market conditions and over a significant period? Without wishing to sound patronising, something that would have been incredibly profitable in the last months of 2011 may lose these profits (and then some) in the first months of 2012. You need to endure your trading method is profitable over a substantial period of (historical) time before you commit to it.

 

Hope that's helpful!

[Why the S&P E-Mini Stinks]

I've heard many times that some of the HFT's are owned by high level people at the CME and that have co-located servers in Chicago, that helps them get the speeds and fills that they do. I would imagine that some seat owners would also have their data servers, if they owned their own, located at close as possible to the exchange as well.

Does this makes sense to anyone on this thread?

Thanks for the inputs.

 

Colocation of servers, not just in Chicago, but actually within the exchange buildings, is standard procedure amongst the HFTs. This has nothing to do with any kind of exchange corruption, per se, or 'high level people at the CME', but simply the priorities and resources of the HFT firms.

 

A few encouraging things to bear in mind, however, are the following:

 

HFT firms operate most extensively in individual stocks, where the superior speed of execution has largely usurped traditional market-making. When they do operate within futures markets such as the @ES, it's largely in the mode of arbitrageur, hedging off a position against a basket of underlying stocks (or a similar contract such as the SPY).

 

The HFT firms, as the name suggests, employ 'high frequency' strategies, and seldom hold positions for more than a few seconds. Their trading models are incredibly sophisticated and are very far removed from anything that you (or I) are likely to be using. In this sense, their demands are unlikely to intersect with yours, the retail trader. So although they might want to have an order filled at a particular price that is the same as yours, it's not because they're going through the same trade decision making process as you, but then somehow getting in there faster.

 

Worrying about the actions and effect of high frequency trading is a bit like an athlete about to run a marathon worrying whether certain celular metabolic processes will take place efficiently within his body. HFT occurs on a 'microscopic' level far beneath that of day traders (and that's whether you trade momentum, volatility, reversion to the mean . . . anything), and apart from the fact that it makes contracts highly liquid it can be ignored. To look at it from a different point of view, do you really think that the big trend-following funds, who hold positions for many months or even years, are interested in what a daytrader is doing to affect the market at any particular time, or fretting over the few ticks of slippage that result?

 

I hope this post doesn't sound too confrontational - I'm just trying to offer a helpful perspective (plus, it's my first post on here!).