Steve's Basic System for Retail Traders

[SunTrader 10]

Anyone and everyone that posts on TL including the so-called educators are "retail" traders.

 

Why direct posts this way?

[eqsys 10]

All of these systems look promising ON PAPER, and may work in real time trading under some favorable market conditions. However, one has to be able to code and backtest a system to know the profitability and risk of drawdown over long periods of time, otherwise one is simply getting set up for a huge "out of sample" (or, black swan) loss.

 

What I do in my own trading is backtest all systems with Tradestation, then I look at the highest drawdown over the past couple of years, then assume that this drawdown can and will occur at any time in my real time trading, then I make sure that when this happens that I will not have a loss greater than 20% of my account balance at the worst. Under 10% is preferable, but 20% will absolutely stop me from trading the system immediately.

 

Once I know the potential max drawdown (and future drawdown WILL be higher under some unexpected circumstance) and I know the potential gains, based on what the system has gained in recent years, then, and only then, will I be in a position to know if the system or technique is a good one to trade, and how it compares with other systems and other trading entities - different futures, stocks, options, etc. A simple ratio of average monthly dollar gain divided by max drawdown is a starting point for comparing various systems.

 

There are many ways to lose money trading and eventually wipe yourself out. Not knowing the historical drawdown is right at the top of my list, along with fear, greed, and over enthusiasm. When I first started trading I wiped out several times before coming to my senses.

 

Without a clear knowledge of potential losses any trader is risking losing all of his or her money - and, based on statistics, most do.

[steve46 12]

All of these systems look promising ON PAPER, and may work in real time trading under some favorable market conditions. However, one has to be able to code and backtest a system to know the profitability and risk of drawdown over long periods of time, otherwise one is simply getting set up for a huge "out of sample" (or, black swan) loss.

 

What I do in my own trading is backtest all systems with Tradestation, then I look at the highest drawdown over the past couple of years, then assume that this drawdown can and will occur at any time in my real time trading, then I make sure that when this happens that I will not have a loss greater than 20% of my account balance at the worst. Under 10% is preferable, but 20% will absolutely stop me from trading the system immediately.

 

Once I know the potential max drawdown (and future drawdown WILL be higher under some unexpected circumstance) and I know the potential gains, based on what the system has gained in recent years, then, and only then, will I be in a position to know if the system or technique is a good one to trade, and how it compares with other systems and other trading entities - different futures, stocks, options, etc. A simple ratio of average monthly dollar gain divided by max drawdown is a starting point for comparing various systems.

 

There are many ways to lose money trading and eventually wipe yourself out. Not knowing the historical drawdown is right at the top of my list, along with fear, greed, and over enthusiasm. When I first started trading I wiped out several times before coming to my senses.

 

Without a clear knowledge of potential losses any trader is risking losing all of his or her money - and, based on statistics, most do.

 

Nothing wrong with any of this..I absolutely agree.....except with respect to the idea of stopping trading....stopping and then what? How do you fix it....what interests me is that people want to offer profound comments about my thread but cannot provide the additional value add that is needed by real struggling traders how are having a tough time trying to make a living in this market.....Anyone can say what you have said...great wonderful...now how about putting on a bit of information about how to interpret and fix the most common issues facing traders (how about starting your own thread where you show us all in detail how this is done)?

 

Thanks so much

Steve

Edited August 29, 2012 by steve46

[steve46 12]

and now I want to continue to show what the distribution looks like at the end of the day...

 

Again to remind folks this distribution is created at the end of the previous session, from the past 5 & 10 day periods...the 5 day period represents the action of short time frame particpants, while the 10 day represents the actions of longer time frame participants....I create them separately and then combine them on my charts....the logic (the arrows pointing up and down next to the lines serve to remind me where each group is likely to act.

 

Notice if you will that today, price stayed mostly within the midpoint, probing each way periodically to look for buyers and sellers....

 

In markets dominated by professional interests, it is not uncommon to see this occur as participants wait for news (primarily Euro news) before making a committment to a long or short position.

 

The general drift of this market is up (obviously) and if you go back to my first post today, you will see that I include the comment that the initial trade sequence is called "short to long sequence".....the phrase "short to long sequence" means that after the open, we want to prefer long setups just below or at the bottom of the blue rectangle (represents the midpoint of our distribution).....

Edited August 29, 2012 by steve46

[BlueHorseshoe 10]

and now I want to continue to show what the distribution looks like at the end of the day...

 

Again to remind folks this distribution is created at the end of the previous session, from the past 5 & 10 day periods...the 5 day period represents the action of short time frame particpants, while the 10 day represents the actions of longer time frame participants....I create them separately and then combine them on my charts....the logic (the arrows pointing up and down next to the lines serve to remind me where each group is likely to act.

 

Notice if you will that today, price stayed mostly within the midpoint, probing each way periodically to look for buyers and sellers....

 

In markets dominated by professional interests, it is not uncommon to see this occur as participants wait for news (primarily Euro news) before making a committment to a long or short position.

 

The general drift of this market is up (obviously) and if you go back to my first post today, you will see that I include the comment that the initial trade sequence is called "short to long sequence".....the phrase "short to long sequence" means that after the open, we want to prefer long setups just below or at the bottom of the blue rectangle (represents the midpoint of our distribution).....

 

Hi Steve,

 

I've not looked at this thread for several days, so just catching up . . .

 

Am I correct in thinking that the generalised approach is to take longs below the midline of a 5/10 day donchian channel, and shorts above it, when price hits a bollinger band?

 

I'm sure there must be more to it than what I've described . . . By using the distribution in this way you seem to be combining both a short term (BB bands) and a longer term (Donchian mid) expectation of reversion to the 'mean' (I always use that term to refer to any situation where a market spends most of its time backing and filling, as opposed to movements towards an average of any specfic type). This seems sensible to me, but perhaps not to others. You mention trend - where does an evaluation of trend come into the picture, how, and in what frame of time reference?

 

Many thanks,

 

BlueHorseshoe

[Manihi 10]

Interesting read.

 

I can see where you are going with this stuff,even though I don't trade that 'style'.

 

Personally, would like a fill at 140475...:missy: Got stuck earlier on flips.

 

Always found that when testing any strategy I apply the 5 consecutive losers to see if it will "fit' with my psyche. If not, it is dead. Kept me out of trouble.

 

Will follow your thread to see how it winds up.

 

Manihi

[SunTrader 10]

..... but look else where if you want to learn how to trade.

Oh I am not looking to learn how to trade. I pick up bits and pieces here and there but follow my own path.

[steve46 12]

Blue Horseshoe

 

Its not a donchian channel...and yes I have a logic that is similar to what you suggest. The general outline is about right....I want to trade inside out or from the outside toward the middle and ultimately to the other side....

 

As I have stated there are two distributions and what sets them apart is not only the characteristics of each distribution but the way that price acts as it probes and tests the various levels...for example...when we have trending price action, several things are in play...for one, as we get to the extremes, longer time frame participants are more likely A. transact at or near the high/low....in contrast if we have a balanced market, we are likely to see a smaller distribution, and price will act differently within that distribution...

 

Another issue to resolve is as regards to "value"...with the 5 day distribution, if short time frame players are controlling the action, then it is more likely that "value" (as in "previous day's value area high and low") can be determined by the range extremes.....in contrast, when markets trend and are "imbalanced"...it is virtually impossible to accurately determine value...

 

The simple logic I have developed shows me who is in control helps me to decide whether to stay with a favorable trade anticipating continuation, or to get ready for a reversal

 

Best of luck to you

[steve46 12]

Oh I am not looking to learn how to trade. I pick up bits and pieces here and there but follow my own path.

 

excellent idea...good luck

[eqsys 10]

Nothing wrong with any of this..I absolutely agree.....except with respect to the idea of stopping trading....stopping and then what? How do you fix it.

 

What I meant by stopping trading was to stop trading that particular system on that particular entity. If the losses begin to pile up and the max drawdown is exceeded, then it means that something is not working right - the system backtest was likely unrepresentative of current and future conditions, or the macro environment that is effecting the entity has changed.

 

After 20% drawdown I re-evaluate and recalculate my systems, and try to figure out some system modification that would have prevented me from losing the 20% - in other words, I try to learn from the loss, rather than to keep trading that system. Often, at that point, the system "comes back", or, it may start working again some months later.

 

Here's a real time example. Last spring I was trading silver. It ran up to 50 then collapsed. My system took me out in the low 40's after that silver fell into the low 30's and just chopped around. My system stopped making money, and the dollar moves were too large to keep trading. So, that was it for silver. Then, I started trading gold futures. Same thing happened - they ran to above 1900 then collapsed. One day gold moved 100 basis points!

I got out of that.

 

I began to work on a modified system, and eventually came up with a "fix" for my previous system that kept the gains, but reduced the losses. I have let that system run for many months now on the GC without placing any trades - just monitoring the system performance - and it seems to be handling the recent movement very well.

 

So, I am ready to get back to trading the GC again.

 

I hope this clarifies what I meant by stopping trading when the losses pile up. The markets always present opportunities. There is nothing wrong with taking a break once in a while to go into cash, get some sleep, and re-evaluate what you are doing.

[SunTrader 10]

excellent idea...good luck

Thanks, appreciate the sentiment. I have been on my own path for 15 years now and likely will be the rest of my life.

 

But luck doesn't exist except in the dictionary under the letter L.

[steve46 12]

Thanks, appreciate the sentiment. I have been on my own path for 15 years now and likely will be the rest of my life.

 

But luck doesn't exist except in the dictionary under the letter L.

 

I have a lot of respect for folks who follow their own path...I can't know what you have experienced but I can guess that there have been plenty of ups & downs along the way

 

I wish the best of luck and I will try to help as best I can

[steve46 12]

Nothing wrong with any of this..I absolutely agree.....except with respect to the idea of stopping trading....stopping and then what? How do you fix it.

 

What I meant by stopping trading was to stop trading that particular system on that particular entity. If the losses begin to pile up and the max drawdown is exceeded, then it means that something is not working right - the system backtest was likely unrepresentative of current and future conditions, or the macro environment that is effecting the entity has changed.

 

After 20% drawdown I re-evaluate and recalculate my systems, and try to figure out some system modification that would have prevented me from losing the 20% - in other words, I try to learn from the loss, rather than to keep trading that system. Often, at that point, the system "comes back", or, it may start working again some months later.

 

Here's a real time example. Last spring I was trading silver. It ran up to 50 then collapsed. My system took me out in the low 40's after that silver fell into the low 30's and just chopped around. My system stopped making money, and the dollar moves were too large to keep trading. So, that was it for silver. Then, I started trading gold futures. Same thing happened - they ran to above 1900 then collapsed. One day gold moved 100 basis points!

I got out of that.

 

I began to work on a modified system, and eventually came up with a "fix" for my previous system that kept the gains, but reduced the losses. I have let that system run for many months now on the GC without placing any trades - just monitoring the system performance - and it seems to be handling the recent movement very well.

 

So, I am ready to get back to trading the GC again.

 

I hope this clarifies what I meant by stopping trading when the losses pile up. The markets always present opportunities. There is nothing wrong with taking a break once in a while to go into cash, get some sleep, and re-evaluate what you are doing.

 

Thank you Sir (or Madam)

[TheDude 10]

All of these systems look promising ON PAPER, and may work in real time trading under some favorable market conditions. However, one has to be able to code and backtest a system to know the profitability and risk of drawdown over long periods of time, otherwise one is simply getting set up for a huge "out of sample" (or, black swan) loss.

 

What I do in my own trading is backtest all systems with Tradestation, then I look at the highest drawdown over the past couple of years, then assume that this drawdown can and will occur at any time in my real time trading, then I make sure that when this happens that I will not have a loss greater than 20% of my account balance at the worst. Under 10% is preferable, but 20% will absolutely stop me from trading the system immediately.

 

Once I know the potential max drawdown (and future drawdown WILL be higher under some unexpected circumstance) and I know the potential gains, based on what the system has gained in recent years, then, and only then, will I be in a position to know if the system or technique is a good one to trade, and how it compares with other systems and other trading entities - different futures, stocks, options, etc. A simple ratio of average monthly dollar gain divided by max drawdown is a starting point for comparing various systems.

 

There are many ways to lose money trading and eventually wipe yourself out. Not knowing the historical drawdown is right at the top of my list, along with fear, greed, and over enthusiasm. When I first started trading I wiped out several times before coming to my senses.

 

Without a clear knowledge of potential losses any trader is risking losing all of his or her money - and, based on statistics, most do.

 

Cant agree with this. It's a very common approach. You're assuming the biggest loss possible is the one in your historical database. Thats fine until the next, bigger black swan comes.

 

Thats why professional traders are generally at their desks during market hours - even if they are position traders. On the first sight of trouble, you should puke. Dont sit round hoping it will come back, only to see 20% evaporate. You can always get back in if it was a false alarm.

 

Ok, so you may bet a gap down or something. In that case, you'll take the hit.

 

The only real defence is listen to the old adage - only trade with money you can afford to lose. Generally, the only money you should have with your broker is enough to cover margin for your size + worst case scenario. That means your risk per trade will typically be a magnitude significantly higher than this 2% risk bull shit everyone blabs on about. If your black swan does turn up, then Im sure your broker will be taking steps to liquidate your position before you can! You cant guarantee it, and you do have ultimate liability, but rest assured your brokers business is more important to him and his risk manager than your business is to him!

 

If your holding many positions in a diversified portfolio, then 2% is fine, but as traders, not investors, it's a spurious, silly idea, taken out of context. 2% came about from asset managers, not traders.

 

Im not saying every trade should be all out. That of course would be silly. What I'm really saying is that most of your trading funds shouldnt really be with your broker. They should be elsewhere earning a return, but readily available at short notice if needed.

 

JMO..

 

I digress....

[TheDude 10]

Nothing wrong with any of this..I absolutely agree.....except with respect to the idea of stopping trading....stopping and then what? How do you fix it....what interests me is that people want to offer profound comments about my thread but cannot provide the additional value add that is needed by real struggling traders how are having a tough time trying to make a living in this market.....Anyone can say what you have said...great wonderful...now how about putting on a bit of information about how to interpret and fix the most common issues facing traders (how about starting your own thread where you show us all in detail how this is done)?

 

Thanks so much

Steve

 

Thats easy -

 

The most common issue facing traders is all the spurious and misleading crap that supposed educators force down them. Thats not directed at you (as Ive never really paid indepth attention to your methods).

 

Technical Analysis,

Risk management,

Stop losses and how to use them.

Realistic expectations

 

Its all marketing BS put out by the brokerage community to get people to trade more.

 

TA is a case in point - its easy to learn, and appeals to people as it seems to simplify the ordered chaos. Its also easy to prove in hindsight. The reality is however, is that when some guy is buying that support because of some fib number, indicator, or line he has drawn - this only exists in his imagination, someone else (with a time horizon of 3 months) could be clicking on the big SELL button for 2,000 lots. Where's your support now? Whats worse, is that he really wants to buy 6,000 lots, so he's trying to get a lower price. He probably doesnt even look at a chart. Or, he may look at a chart (unlikely - but lets entertain the idea), but he has different lines to our friend who just blew another $1000 with his stop loss placed below support - just like the mentor/book told him). The bigger trader had a different indicator setting, and so sees things very differently.

[steve46 12]

Thats easy -

 

The most common issue facing traders is all the spurious and misleading crap that supposed educators force down them. Thats not directed at you (as Ive never really paid indepth attention to your methods).

 

Technical Analysis,

Risk management,

Stop losses and how to use them.

Realistic expectations

 

Its all marketing BS put out by the brokerage community to get people to trade more.

 

TA is a case in point - its easy to learn, and appeals to people as it seems to simplify the ordered chaos. Its also easy to prove in hindsight. The reality is however, is that when some guy is buying that support because of some fib number, indicator, or line he has drawn - this only exists in his imagination, someone else (with a time horizon of 3 months) could be clicking on the big SELL button for 2,000 lots. Where's your support now? Whats worse, is that he really wants to buy 6,000 lots, so he's trying to get a lower price. He probably doesnt even look at a chart. Or, he may look at a chart (unlikely - but lets entertain the idea), but he has different lines to our friend who just blew another $1000 with his stop loss placed below support - just like the mentor/book told him). The bigger trader had a different indicator setting, and so sees things very differently.

 

I think you make the mistake of thinking that I care whether a retail trader directs a comment TO ME OR "AT" ME.....

 

IF YOU HAD PAID ATTENTION at some point you would know that I don't use traditional TA

 

In fact most skilled professionals do not use it.....or more likely, we "use" or knowledge of it, to trade failures of traditional TA rules....its actually quite profitable to use it that way...

 

For example the distributions I am using now reflect my own understanding of market action not traditional technical analysis..

[steve46 12]

Here is the result TO THIS POINT IN TIME, of the distribution for today...

 

Interesting that I am now getting inquiries from old students and folks wanting to know how I calc the lines....

 

About today's action....either you had a way of getting short early or you didn't....if you didn't, you had choices....A) try to get on board as price moved south or B) wait patiently for price to reach a wholesale level (where institutions like to buy inventory back at a discount)...

 

For the chart of the right (the ES) you can see two things....the extremes hold when tested and the logic works well as price tests but cannot take out the extreme...our logic system (down & up arrows on the chart) indicate areas where longs and shorts can be initiated.

Edited August 30, 2012 by steve46

[steve46 12]

I tested this distribution calc over a range of markets, so its not surprise that it works well for the NQ futures

 

Here is today's screen

[johnw 10]

Hi Steve46,

 

Given that The Price is turning, or at the very least 'shuddering' at your horizontal lines,

why do you choose to introduce Bolly Bands into the game.

 

Surely the BBands are a derivative of the supply/ demand lines in which case they work

because you already know how to select these horizontal lines.

 

Since you say that you do not use them in your own work and I couldn't agree more with you, then why muddy the waters when generously explaining your work to others.

 

I know the argument for 'training wheels' but given that the failure rate in trading is somewhere near the success rate of riding a bicycle ... why not just offer up your trading beliefs as they are and people can either sink or swim as they absorb the concept.

 

cheers

[steve46 12]

Hi Steve46,

 

Given that The Price is turning, or at the very least 'shuddering' at your horizontal lines,

why do you choose to introduce Bolly Bands into the game.

 

Surely the BBands are a derivative of the supply/ demand lines in which case they work

because you already know how to select these horizontal lines.

 

Since you say that you do not use them in your own work and I couldn't agree more with you, then why muddy the waters when generously explaining your work to others.

 

I know the argument for 'training wheels' but given that the failure rate in trading is somewhere near the success rate of riding a bicycle ... why not just offer up your trading beliefs as they are and people can either sink or swim as they absorb the concept.

 

cheers

 

John

 

the BB are simply a visualization device....not everyone has the ability to read a description and then see what I am talking about...so I try to accomodate a range of skills, experience and aptitude..

 

I hope this makes it clearer

[johnw 10]

John

 

the BB are simply a visualization device....not everyone has the ability to read a description and then see what I am talking about...so I try to accomodate a range of skills, experience and aptitude..

 

I hope this makes it clearer

 

 

Well no, it doesn't make things clearer at all.

I appreciate that you are trying to create a visual explanation of your method, but people wind up addicted to BBands which they most probably don't understand in any case.

 

Frankly I think you are loading yourself up with too much responsibility for the students success, but good for you for all your efforts.

 

cheers

[steve46 12]

Well no, it doesn't make things clearer at all.

I appreciate that you are trying to create a visual explanation of your method, but people wind up addicted to BBands which they most probably don't understand in any case.

 

Frankly I think you are loading yourself up with too much responsibility for the students success, but good for you for all your efforts.

 

cheers

 

Well John....I have to admit I know nothing about this problem of Bollinger Band Addiction that you mention....I willl give it some thought...Thanks for bringing it up

 

Best Regards

Steve

[johnw 10]

Well John....I have to admit I know nothing about this problem of Bollinger Band Addiction that you mention....I willl give it some thought...Thanks for bringing it up

Best Regards

Steve

 

I am just using BBs to address TA addiction in general ... the more people are feed TA, the stronger the addiction becomes as you know.

[steve46 12]

Here is the day's last trade. This last setup is fairly easy to anticipate. With folks waiting for Bernanke to speak, it is the short time frame participant who is in control today...knowing that I waited for this time period to get a final short in as short time frame participants continue to take profits.

 

The initial signal (wide range "up" candle followed by a reversal candle) occurred at 12:30 which is one of my "preferred" times to trade...the pattern is completed by the three "test" candles, and notice that last one has a little wick....they couldn't find buyers so down they went.....

Edited August 30, 2012 by steve46

[steve46 12]

and this is how the trade finished...at least for me...I usually enter looking for 5 or 10 and this one is not going to 10 because we are running out of time.....this turns out to be the best trade of the day...

 

Typically I get out just before the cash final, because of the possibility of automated spike or "sweep" trades that occaisionally pull the rug out from under folks at times like this..

 

One more thought...I would like to help folks but clearly there are some out there who would like to spend my time and theirs arguing...I would prefer otherwise..I notice that at the bottom of the screen it shows many folks simply lurking and reading but not participating...thats fine.....if you want to do it that way...but for those of you really struggling, please feel free to PM me if you need extra help..and don't want to get into arguments with the ones that seem to want to resolve their personal problems here...

 

Good luck

Edited August 30, 2012 by steve46