Dom's notes

Despite having been hammered for posting my sincere feedback re. ATW in the appropriate thread (or may-be, because of ...) I am starting this thread for the benefit of all waanabee traders.

I have no intent of sharing my exact trade setups, however I will share as much as I can - the good, the bad & the ugly, and if someone learn something from this then it won't have been a waste of my time.

I have been a student of the market for over 4 years now. I actually started my education with Investools PhD program (which was a lot of money for not much outcome in my case), trading stocks then options, then started to focus on the SPX (directional Calls/Puts then credit spreads), at some point I discovered the futures / ES in particular and that was a "revelation" ... 1/4pt spread vs 2pt spread for the SPX options, I was sold in no-time.

I purchased Todd Mitchell's system (TradingConcepts), which was a lot less money than Investools but no more outcome in my case, at least it triggered my interest in Fibs (back then, retracements only) and I did a lot of research / backtesting using Fibs - but at the end of the day, the real challenge resides in figuring out which fib level will "hold", and to this day I have to admit I have not solved it.

Anyway, I then spent a lot of time in a couple of "free" trading rooms
learning pure price action, the person that was offering his time teaching PA free for several months later offered a paying program, which I took, but I still couldn't make money live. I took another mentor, recommended on a free forum, and despite he being a nice guy (and why wouldn't he be when students are paying), this also was a failure.

I was about to throw the towel when I found ATW, started with the 101A education, added 3 weeks later the mentorship education, and have been studying / backtesting a lot for now a full year. I reached a point where I can "consistently" make fake-money on sim, however the transition to live trading is a real challenge for me, because of fear I pass on many trade setups and I deviate from my trade management rules.

So, that's the background. I trade CL (Crude Oil "big" contract) which is very liquid, has 1 tick spread throughout the European & US session, and is nicely volatile (day range is on average 250-350 ticks, some days even more - like today : 450 ticks). I find CL to have a lot of momentum, it shows very repetitive "patterns" (at least, for the fib user that I am).

I don't use any indicator, I trade price action using a lot of price projection techniques (best book IMO on this topic is Robert C. Miner "Dynamic Trading").

If I have one advice for new traders, it is look for another way of making a living ... but if you are truly in love with the markets, then I believe it is a must to 1) find an excellent education (this is way more than just reading books, and frankly, there is probably no one-stop education shop) and 2) find a mentor to accelerate your learning curve.

Now that this is out of the way, a brief summary of my week :

Tuesday - tried 1 trade early morning, entry hit no fill, that made me mentally sick for the rest of the day, I passed on 2 setups (both wins), the last setup I tried but my entry wasn't even close to be hit.

Wednesday - 2 setups no-fill, then 1 small winner (got out at 1/2 of my target for pseudo-good reasons - really, lack of discipline), and I passed on the last one (another wouldabe winner :( )

Thursday - passed on 5 setups (4 wins / 1 loss), took 1 small winner (1/2 target again, same lack of discipline), and missed the best setup of the day by being away for 5min

Friday - passed on 1 setup (win), no fill on next 2 setups, then I couldn't focus & called it a day.


Bottom-line - only 2 trades this week, I made ~10% of what I should have made if I had the discipline to follow my plan.

It is going to be short post tonight as it is more than time for me to get to bed ...

Monday:
CL Impulse system : no trade ... the system did chase short most of the day, and came one hair to getting a fill just after CL reversed at what turned out to be the LoD (I would have had some solid reasons to cancel that trade given where the LoD was made, but I was out and the system was running unattended).
Discretionary trading started good with a long in the 1st pullback after the open, but I got caught in CT attempts during the down move.

Tuesday:
CL Impulse system: 1 trade, win @ target-1 & BE on the 2nd contract (after being up +33-t ... I wish I had better ways of protecting profits on the 2nd contract). I decided to turn the system off around noon (FOMC policy statement at 2:15pm).
Discretionary trading: 2 wins, both trend-trades.

More R&D tonight on CL Impulse system, working on identifying and filtering low odds setups like the short yesterday early afternoon ... 1st go at it last night was a bit disappointing, but the 2nd pass this evening is a reasonable success ... 5% of all trades filtered (24 out of 510), P&L pretty much unchanged globally, all in all a (small) improvement on the average per trade. Probably not done with this yet, though.

Wednesday

CL Impulse system: no trade - came 1 hair of giving a fill that would have been a minor win.


Thursday

CL Impulse system: no trade


Friday

CL Impulse system : 1 win (20-t + 10-t).


So, a (small) positive week. Reviewing the system performance over the last 4 months clearly shows that the 2nd contract's performance (w/ 50-t target) has been declining month after month, now reaching negative territory (for the 1st time in 14 months). 1st contract's performance is also declining, although it is still marginally profitable over the last month (when I say "month', I really look at the performance over the most recent expired contract).

At this point, I am very tempted to stop trading this system altogether - even considering that CLF0 was the weakest performing month in the 2010 series, so there might be a bit of seasonality here. I have already decided to step aside from Dec-24 to the end of the year, and for the last 4 trading days before then I am going to reduce size (back to 1 contract) and trade only for target-1, which will also be the case in the new year.

Day's summary:

CL Impulse system : no trades (2 setups / no-fill)

Day's summary

CL Impulse system : no trade

I am looking forward to CL breaking out of this 87.50-90.50 trading range ... price action is very unusual, vertical spikes both ways with little to no pullbacks :(

I actually stopped trading the Impulse system after my last post on Dec-21, 2010. At that point the system was in a drawdown (from last equity peak) that was already 70 trades long, and I felt I should just stop and regroup.

I did only discretionary trading throughout the 1st half of 2011, and to be honest my results were not meeting my expectations ... a combination of psychological issues, and fundamentally flawed trade management principles ...

... but the screen time did help identify a reversal pattern for which I started to develop new rules (and software) in April - by the end of May, I had something I wanted to "try", and I started trading that pattern on a discretionary manner. Which didn't work too well either, and early July I decided to get back to the drawing board with that reversal setup idea. It took me a good 2 months of more than full time R&D to get to a point where I know that setup has a definitive edge, and my trade management techniques are sound and apt to get the runner to do its job, ie. run (I have set the target for that runner to 1.5pt - CL, and about 15% of the trades reach or exceed 1pt MFE). I did backtest on the last 23 months of CL data, approx. 440 trades, with a P/F of about 2.0 (the win% isn't that exciting, only ~60%, but the avg-win/avg-loss is greater than 1.3).

I went live with this fully automated trading system on Monday, Sept. 12, and so far the performance has been pretty good (7 win / 3 loss / P&L +2,340 for 2 contracts). Of course this is very much anecdotal, but it is always nice to start trading a new system on a pretty strong start.

I doubt I will get back to posting daily updates with charts, but I will try to post a summary once a week.

@dom - can you describe your thought process in coming up with and refining a viable strategy? I'm sure that would help many reading this. i.e. how did you move from initial idea to validation to refinement etc.

Friday only had 1 trade in store for the reversal system, a crisp max loss - of course, I could analyze it to the Nth degree, but the reality of trading is that some trades are going to be losers. For a change, that one had positive slippage on the stop exit (2-ticks on 1 contract & 1 tick on the other), I have to admit I do not remember the last time I had even 1-tick positive slippage on a stop...

So the current performance since I went live is 7 win / 4 loss / P&L +1760 for 2 contracts.


To start answering partially DT's question, what made a difference when I got back to the drawing board was doing what I (& everyone) should have started with, and this is measuring the directional edge of the setup. For this, I simply used a target size = initial stop size minus 1-tick, so that a same size move would either fill the target or trigger the stop, and without any trade management at all I measured the win% (& P&L, but this is less important) using various initial stop placements & entry placements.



In that spreadsheet, the last line ("Edge") in simply the ratio Win% / Loss%.

Where the edge is max (1.70), the win% is about 63%, and on each side of it you can see the edge decreasing (on the left side, entries are more aggressive, hence the largest number of trades is on the left columns, & decreasing going to the right) (the initial stop is also tighter on the left side, and goes wider going to the right).

That campaign of measure was key, not only in helping assess where the optimum entry level is, but also - and mainly - in showing that this setup has a real directional edge, and that both the entry level & initial stop placement, although important, do not "kill" that edge unless being extremely aggressive on the entry + tight on the initial stop (the leftmost column, IMO, doesn't show enough of an edge to be a trading candidate, but from the 2nd column, the edge is strong enough to warrant further investigation).

The 2nd key re. getting to a reasonably good performance level, was working on trade management ... since this is a reversal setup, I do expect a decent % of these to go a long way from the entry, so I worked a lot on trailing stop techniques, so that I could both capture as much as possible of these big moves. Believe it or not, maximizing the system overall performance pretty much means accepting to "give back" quite a bit of the paper profits of the current trade, and in the end the win% is certainly lower (for a larger P&L) than trying to protect those paper profits on a trade by trade basis.

For everyone's benefit, moving the stop to breakeven proved to be a major performance killer, regardless of where that decision would be taken ... stop placement needs to be logical, and the entry level (nor any distance away from it) didn't appear to be logical enough.

In the same vein, the basic trailing stop N-ticks from the current move extreme also proved to be an extremely poor choice, regardless of that distance N.

What's working best (based on this sample set) is (for a Long) moving the stop a few ticks under the last pullback low, once price makes a HH. Of course, this isn't everything I am using in the reversal system, but when I did throw away the basic trailing stop and simply replaced it by this one, the performance level just jumped about +50% for the 2nd contract.


Daily P&L curve 19-Oct-2009 to 23-Sept-2011:

I can tell there are only 2 reasons why you don't place a trade when it comes around.....1) scared money......2) don't trust your rules..........remember stops are part of your plans.....if you don't have a written trading plan stop till you do.

I did attend a trading seminar last week, and despite the travel (& the seminar itself) I managed to trade my systems (I actually have 2 that I currently trade) pretty much all week long, except for Thursday morning as I was on my way back home (on a very red-eye series of flights ... LV-Ottawa through LA & Newark).

All in all, the week was pretty bad for both systems. The reversal system experienced 2 wins for 4 losses (of which I missed 1 win + 1 loss on Thursday morning, but those combined were a little less than break-even), net -1520 for that system on the week, taking it back to a cumulative P&L of +240 for 15 trades since I started trading it on Sept.12. Nothing to worry about, but still an unpleasant outcome for the trading week.

I am quite pleased by my own progress in terms of discipline! This has been what killed me in the past, and it seems that trading this reversal system for which the max-win is > 3*max-loss is really conditioning me to be disciplined ... the prior fear of losing has been replaced by a fear of missing or screwing the next bin win, and this one is much easier to deal with, as the answer is to stay disciplined!

The week was pretty tame for both systems.

The reversal system had 6 trades, 3 wins / 3 losses, for a net result of +300. Wednesday had a frustrating missed entry (limit hit / no-fill) for a trade that would have been a max-win (over +2,000) - that would have made this week real good...

My other system had a break-even week, 1 win / 2 losses, for a net result of -15.

There was a scheduled 6h power outage on Thursday in my neighborhood, I took my 2 trading PCs (laptop + desktop) and 1 UPS to a friend's place, and managed to trade from there w/o any glitch (but I wasn't rewarded for that, as there were only 2 losses for the reversal system on that day). All in all, I am not disappointed, I achieved for the week my #1 goal which is to execute both systems trades automatically and without errors.

On the R&D front, I finished the documentation & clean-up of the current operational version of the reversal system, then addressed 4 CRs (*) all in Trade Management - discarded 3 out of 4 ideas, the only one that I kept is only the optimization of an existing feature, but I took advantage of working this to fix a minor bug in it.

(*) CR : Change Request ... for each system I track all bugs, improvement ideas, etc... as "Change Requests".

I already set my goals for next week (mostly working more CRs on the reversal system), now I am truly ready to enjoy the week-end!

Dom that equity curve looks too good to be true so I'd be scared but hope it trades like that in real time....what became of your trading contest...? how did Chuck Huges do ? He wants me to spend almost 4 k on options recomendations