[optiontimer]

Optiontimer’s Project: Using Trend, Momentum, & Timing with Strategy, Patience, & Discipline to Trade Well


What prompted me to start this project was a series of private messages sent to me by another traderslaboratory forum member. Here, in part, is what he said to me:

"Optiontimer,

I am not a good trader. I have good setups, and can make money for awhile, but I don't handle all conditions too well…I have many times thought of getting out of trading altogether, because it was not supposed to be like this. I was supposed to learn how to trade…I have been doing this for 7 years now. It is not coming together…Is there anything I can do to improve the way I am trading? I am unsure if it is strategy or choice of market, or the execution of my trades that is the problem. I have tried to trade using Price Action alone, and I have tried to trade using other people's systems. I have also used indicators like MACD, Stochastic, Ehlers Fisher Transform and Inverse Fisher Transform - all designed to get the turning point of trends earlier…Where should I be looking and researching? What are you doing that is different from myself? How am I defeating myself? I know I can do this - else I would have ditched the whole scene after a couple of years. But something is still eluding me, and I don't want to die without finding out what it is." - Traderslaboratory forum member, and in my opinion, a good guy

Do you recognize in his words your own experience, either past or present? I do. And having gone through it yourself, could you ignore such an honest plea for help? I couldn’t.

And a quick glance at some of the recent threads here at traderslaboratory and elsewhere, show that he and you and I are not alone in these feelings and experiences. In fact, during the course of the above exchange, I had noticed an uptick in threads whose theme is essentially, “What am I doing wrong? How can I have spent this much time, effort, money, sweat, and tears, my whole soul, in fact, on learning to trade, and still I fail, falling far short of my goals?”

I remember very well having felt this same way for a long period of my life. Even today, after years of generally successful trading, I still manage, to my ongoing chagrin, to defeat myself on occasion. But in spite of these brief defeats, I think I can nonetheless be of some help to this fellow traderslaboratory member in need, and perhaps a few others also.

This project will be my attempt to answer the important questions posed by our fellow struggling forum member: “Where should I be looking and researching? What are you doing that is different from myself? How am I defeating myself?”

Toward that end, I am going to construct and trade a trading system that I will use to trade futures. The system is meant to address what I believe to be the key mechanical issue of trading – that of Timing, and it will do so by defining both the long-term Trend and identifying the potential end of short term reactions against that Trend using waning adverse Momentum in order to Time entries and exits.

I will start with a limited but reasonable equity of approximately $25,000. As the importance of capital cannot be stressed enough, I will treat this account as though I am a new trader just starting out and wishing to grow his capital. Therefore, in addition to what I hope to be the accrual of trading profits, I will also, from time to time, add small amounts as savings from current income in order to help grow this seed money. In other words, I will manage this account as I would suggest that you manage your own trading account if you are starting fresh with a limited capital.

I will trade this account according to what I hope proves to be a well-defined, easily understood, repeatable strategy, and my hope is that neither my discipline nor my patience fail me during the course of this project.

This project will be informed and inspired by the teachings of futures trader Stanley Kroll. In his book, Futures Trading Strategy, Kroll wrote that

[t]raders who stress accuracy of trade timing, both entry and exit, can start with as little as $15,000 or $20,000. This modest opening equity leaves very little room for error. Nevertheless, the market has always functioned as the great equalizer of wealth, rewarding the patient, disciplined, and able players while punishing the careless and inept ones, regardless of their starting capital. It is possible to rack up a consistent and impressive score from modest starting capital, to which I can attest from personal experience. The annals of finance are replete with true to life stories of powerful and wealthy accumulations that began from small but talented operations in the futures markets (Kroll, Stanley, Futures Trading Strategy, p. 19).

So it is with “very little room for error” that I will attempt “to rack up a consistent” score from my “modest starting capital.” At the very least, I hope not to go to ruin.

How shall I avoid ruin? Well, there is no way really to ruin-proof your trading other than to stop trading. But I do wish to minimize this risk. As Kroll teaches, “[a] technical approach to commodity investment, coupled with sound money management and a focus on trend following … are really the best ways to operate” (Futures Trading Strategy, p. 21, emphasis in the original).

Money management will be addressed shortly. For now, I want to focus on the topic of Timing. My trading breakthrough (perhaps one of several breakthroughs) came when I realized that the key to my being able not to defeat myself laid in my ability to time my trades so as to avoid taking too much initial heat on my winning positions while allowing me a reasonably close, technically correct stopping point for cutting my losing positions.

Kroll, in responding to the question, “Why do so many traders lose?” answered that it “is primarily a consequence of inept tactics and timing, rather than a plot by “them” to get you (and me) out of the market with big losses (Kroll, Futures Trading Strategy, p. 22). That is, it is our poor timing, and it is our poor tactics that result in our trading losses. It is not that there is some other trader, a black knight in terrible armor, waiting to strike our equity from our accounts, plundering our meager capital. If you wish not to lose, first take responsibility for your losses.

Kroll notes the oft-repeated trader’s lament that “I watch while the market moves in the direction of my analysis … [but] when I take the position, prices abruptly reverse and careen in the opposite direction” (ibid).

I am sure I am not the only one here who has taken a position at one time or another only to watch the market turn tail on me. “Look at what they are doing to me!” “They,” indeed!

“In fact,” Kroll goes on, “the accumulation of ineptly timed buy or sell orders by under margined speculators … are what makes tops and bottoms … The result of such careless and poorly timed trading is predictable – big losses and small profits, with an overall tendency to red ink” (Kroll, Futures Trading Strategy, p. 23).

I will cover the exact timing mechanism I will use in the next section. While I will be using this system to trade futures, I welcome participation by any members of traderslaboratory who wish to trade their own chosen instruments using this system as well to post trades, charts, questions, and comments. Your trades can be real money or paper. I only ask, that for the purpose of this project, you only post charts and trades that you believe you are taking in accordance with the system as I lay it out.

This is not because I believe that my way is the best way or the only way - far from it! I ask that we limit this discussion to trade and market analysis in accordance with the system I will be using here because, as Kroll also points out, a good technical system is just half of what we need. The other half is the Discipline to follow that system and the Patience to stick with it and out to stick with our winning positions. I want this project to be comprehensive in its scope – and this requires consistency and clarity throughout.

This discipline and patience is a requirement regardless of the system you trade. As Kroll teaches us,

You [must] stick to your objective analysis and market projection based on whichever method or technique has proven itself viable to you, and you revise that strategy only on the basis of pragmatic and objective technical evidence. Such evidence could be a signal from your charts, from your computer system, or from your friend the margin clerk, who reminds you that you your position has moved adversely and your account has become under margined (Kroll, Futures Trading Strategy, p. 23 – emphasis added by optiontimer).

So we will stick to the system that I will be laying out shortly. That system is composed of indicators that were selected by public polls here at traderslaboratory.com. The long term trend of any market will be determined by the relation of the 21 EMA to the 65 EMA. Our short term timing mechanism with be the RSI, or rather, the stochasticRSI, which is simply an application of the stochastic formula to RSI measurements. I will be using the 7 period stochasticRSI. Once our timing mechanism has identified a potential opportunity, price action will either pull us into a position or not. The full details, as well as a discussion of money management, will follow.

For now, I wish to leave this project’s beginnings with the following thought. Douglas A. MacIntyre, former publisher of Financial World Magazine, wrote of Stanley Kroll that

when you meet Stanley Kroll, you are immediately impressed by how little this expert on commodities claims to know. This is one of the greatest strengths of most real experts. They do not get overly confident and pretend omniscience. Better constantly to assume that you don’t know enough and investigate your assumptions and numbers (from McIntyre’s forward to Futures Trading Strategy, p. viii).

I hope that I never come across as an over-confident, omniscient know-it-all. If I have any pride in myself at all, it is that I tend toward humility – which, as a trader, is good, as the market is a great humiliator! I welcome participation here in this project. In fact, I hardly think this project will go very far or for very long without active participation by forum members other than myself. But let us all participate in the spirit of Kroll, and assume we do not know all, and that we may learn something new and valuable, even from the newest and least successful trader among us.

Thank You,

Optiontimer

PS Once I get all the initial ruminations and details posted in this thread, I will edit and compile them in a single pdf file. I will then ask the moderator to insert that file to this initial post so that anyone who wishes to have a “carry along” hard copy to mark up, question, and take notes on can do so. In the meanwhile, I will use this larger font for any "project foundation" type of material, to make it easier to find and identify, while I will of course use normal traderslaboratory font for the more typical, day to day type of posts.


UPDATE:

Link: Kroll On Futures Trading Strategy Book

Bonus: other goodies from the Reading Charts thread (after window opens search for ".pdf")

[Ingot54]

Originally Posted by optiontimer »

For now, I wish to leave this project’s beginnings with the following thought. Douglas A. MacIntyre, former publisher of Financial World Magazine, wrote of Stanley Kroll that when you meet Stanley Kroll, you are immediately impressed by how little this expert on commodities claims to know. This is one of the greatest strengths of most real experts. They do not get overly confident and pretend omniscience. Better constantly to assume that you don’t know enough and investigate your assumptions and numbers (from McIntyre’s forward to Futures Trading Strategy, p. viii).

I hope that I never come across as an over-confident, omniscient know-it-all. If I have any pride in myself at all, it is that I tend toward humility – which, as a trader, is good, as the market is a great humiliator! I welcome participation here in this project. In fact, I hardly think this project will go very far or for very long without active participation by forum members other than myself. But let us all participate in the spirit of Kroll, and assume we do not know all, and that we may learn something new and valuable, even from the newest and least successful trader among us.

Thank You,

Optiontimer

Thank you OT.

Still reading the Kroll .pdf and appreciate the quality of that document.
I hope to participate in this thread.

Cheers and thanks again

Ingot

[optiontimer]

Originally Posted by Ingot54 »

Thank you OT.

Still reading the Kroll .pdf and appreciate the quality of that document.
I hope to participate in this thread.

Cheers and thanks again

Ingot

Maybe the moderators could attach a copy of the Kroll pdf to the first post of this thread. If not, I could download it from Thales's thread and post it here in its own post. I think it would be more helpful if we could have certain materials in a centralized post at the beginning of the thread.

Thank you,

-OT

[MadMarketScientist]

Originally Posted by optiontimer »

Maybe the moderators could attach a copy of the Kroll pdf to the first post of this thread.

Done and you also got a Bonus!
MMS

[SIUYA]

edit: done by MMS...........

[optiontimer]

Here is the list of futures that I will be trading as this project progresses. As starting capital is modest, and with little room for error, it will not be possible to take every signal in every commodity/future.

Money management and risk assessment will play a large role in determining which trades to take and which to pass. I will have more to say on money management as it relates to this project in an upcoming post.

Here is the list:



Some of these symbols may not be familiar to all, so I will translate, in order of appearance:

Australian Dollar
Bean Oil
British Pound
Corn
Cocoa
Canadian Dollar
Crude Oil
Cotton
EuroFX
Dollar Index
ES e-mini
Feeder Cattle
Gold
Copper
Heating Oil
Japanese Yen
Coffee
Live Cattle
Lean Hogs
NQ e-mini
Oats
Orange Juice
Soybeans
Sugar
Swiss Franc
Silver
Soybean Meal
Ten Year Note
30 Year Bond
Wheat
YM e-mini

Given the small size of the account, it is safe to say that three to four contracts total would be the limit of the current equity. These three to four may be one contract each of three or four markets, or three or four contracts in the same market. While exchange and brokers minimum margins are a guide, given current volatility, I think that $6000-$8000 dollars or the exchange minimum margin, whichever is higher ought to underlie any futures contract.

Some of these markets, e.g. silver, cocoa, will be watched, but unless and until equity reaches $50,000, these markets will likely not be traded with this account.

I think the selected list should have something for everyone as it includes at least one future from the main groups - Forex, Interest Rates, Energy, Metals, and Stock Index futures, as well as some standard old-time commodity futures from the meats, grains, and softs. If there is any futures market that I have not listed here that someone would like to have me follow (I'll make no commitment to trade it, however), please send me a PM with your request, and I'll let you know if I will include it or not.

Thank You,

-optiontimer

[traveller]

Originally Posted by optiontimer »

Here is the list of futures that I will be trading as this project progresses. As starting capital is modest, and with little room for error, it will not be possible to take every signal in every commodity/future.

Im new here and fairly new to Forex/Futures and have to say its great to catch the start of someones new project and not have to scroll through a fair chunk of replies to find the pertainent initial posts. So good on you. I watch with great interest and hope fully a few contributions.

regards
Traveller

[optiontimer]

Here is a daily perpetual contract chart of Cotton with the indicators that we selected for our trading system.



The Red moving average is the 21 EMA

The Black moving average is the 65 EMA

The oscillator in the subpane is the 7 period stochasticRSI

Here is our system. I would think it should need very little tweaking. I have tried to make it easy and clear to follow. Please, if you have questions, and if anything seems unclear to you, let me know here. As I said in the previous poll threads, I have two goals with this project - 1) Not to lose too much, and 2) to keep it simple, very, very simple.

When the 21 EMA is above the 65 EMA, we do not want to be short, and we may be looking for a long entry signal. Only oversold readings of the stochRSI are relevant, and they are relevant if and only if price has retraced back to a level between the EMA's or even slightly below. A long entry is signaled when stochRSI has turned up on a closing basis, and entry is made the next day if price makes a higher high than the prior day.

When the 21 EMA is below the 65 EMA, we do not want to be long, and we may be looking for a short entry. Only overbought readings of the stochRSI are relevant, and they are relevant if and only if price has retraced back to a level between the EMA's or even slightly above. A short entry is signaled when stochRSI has turned down on a closing basis, and entry is made the next day if price makes a lower low than the prior day.

Here is the same chart, and I have boxed the relevant areas.



It may be a good idea for you following along to study this chart and also to apply these indicators to your own chart of a market that you trade or in which you are interested in trading and see if you can identify the signals as they occur on your own. Anyone is welcome to post charts and trades to this thread so long as they are using this system for the purpose of those posts.

I will post some more charts myself in the coming hours and days.

I am open to comments & questions at anytime.

Thank You,

-optiontimer