Friday, January 29, 2010
Scenarios 1 & 2 are based on a 2 strike spacing while 3 & 4 are based on 3 strike spacing. The thing I like about butterflies is that risk is capped (so is potential gain) and it's often best to exit these positions (or at least of portion of the position) once 50% of the target returns have been achieved. That decision, of course, is premised on the proximity of the current price relative to the maximum gain target and it's worth monitoring these positions intraday in order to capture potential profit pop surges.
The other thing I like about the butterfly is that you can skew the spread to neutral, bullish or bearish, depending on the target strike. Increasing strike spacing can produce a very wide opportunity window, while a narrower spacing decreases the net debit and typically increases the max risk/reward ratio . . in this case (scenario #1) 1.64/-.36 and opposed to scenario #3 . . 2.22/-.78. I'm currently inclined towards scenarios 1 & 3, especially after Thursdays drop back down to $ 38.41 . . close to the $38.65 price which produced a BUY signal on Wednesday.
Thursday, January 28, 2010
So, while scrolling through the components of my Telechart rotation model, I was struck by the current "situation" in XLF and EEM and decided to explore a little further.
As of Wednesday's close both XLF and EEM fired BUY signals through Project Z . . XLF with an 82% probability, EEM with an 88% probability.
Both ETFs share a similar beta (1.47 & 1.60) and both are dead on the bottom of the rotational model (ROT) components with values of -32 and -35. This low weighting in the ROT in no way reflects the potential turnaround possibilities for these 2 ETFs . . it just indicates that positive momentum as measured by the 6 period moving linear regression on 3 day bars has not yet become apparent.
If I rely on the Project Z defined momentum cycles for my entry, then I know my target exit is 8 to 12 days away, if not sooner. Tomorrow I'll take a closer look at the possibilities for a low risk spin off trade based on the "situation".
Wednesday, January 27, 2010
Tuesday, January 26, 2010
As with many of my previous projects, things tend to take longer than originally expected and various programming glitches along the way have caused me to fall substantially behind schedule. Those who have dabbled in the world of quantitative analytics appreciate the time that minor problem resolution may require and I've had to postpone my typical afternoon naps to try and catch up. Bottom line. . Project Z is not likely to see completion until at least mid February.
In addition, I'm going off grid for a bit testing day trading opportunities with the Project Z indicator on 30 and 60 minute bars. These aren't typical daytrading bar increments but, following my previously voiced arguments for keeping your equity curve growing . . . trade what works.
Monday, January 25, 2010
ETFs. The big news, hands down, was the 55% pop in the VIX last week, accompanied by a sudden appearance of volume, which helped cascade the majors through the lower LR30 lower bands. For the week: IWM down 4.5%, Qs down 4.8% and SPY down 5%.
This is the first major violation of the weekly LR30 band since the late 08 recovery began and we are now faced with the possibility of a "kiss the channel good-bye" scenario and a variety of yet to be defined support levels.
Previous uber enthusiastic surges in the VIX have exhibited a 3 day span and then displayed a 10-15% pullback and that's that's probably worth a small side bet. Other than that, I'm on the sidelines, busy refining Project Z parameters and deconstructing the PDQ Dashboard to fathom why it exited the long VXX position on Wednesday's close and left a lot of money on the table.
Friday, January 22, 2010
I've previously posted on possible free commission trading opportunities provided by the SCHF. Here's a swing trading approach using 130 minute bars. With 390 minutes in the equities' trading day, this little bar system breaks the day down into 3 increments and provides a quick snapshot of how price is trending from open to close. I'm still applying my standard stable of indicators and I've highlighted the ATR indicator in the lower chart pane as a reference for a point I'll make later on in the post.
The lessons to be learned here: if you're going to trade the low volume SCHF and take advantage of the free commission deal, then best to pay close attention to the much bigger EEM (regardless of the time frame). While SCHF may lead or lag the EEM for short spurts, mean reversion to the EEM trendline will inevitably occur and using a simple SCHF chart with an EEM overlay can keep you from being on the wrong side of the trade. I also rigorously adhere to my previously discussed 8sma high/8sma low channel to define my risk tolerance.
The other metric I track is the dynamic ATR8. If you knew that one of the largest US prop shops, trading a couple hundred million shares a day, routinely used a conditional 1/3 ATR10 as one of their stops for NYSE daytrades, would that effect how you set your stops? I try and front run that tsunami by using a 25% ATR8 stop as a component in my stop basket. The parabolics, the 3,7,12 smas slope, and the 8/8 channel round out the rest of the basket and when any 3 of them fire, being out is never in question.
Thursday, January 21, 2010
Dr. Brett over at Traderfeed made a great comment last year that should resonate with thoughtful traders. He said,"If you're the smartest person in your group, then you're in the wrong group." For traders trying to adapt to market dynamics this is sage advice. And for those willing to put in the time to expand their knowledge here's a link to free MIT courses in a variety of subjects and with a variety of complexity. This is easy peasey learning, trader buddies . . no grades, no weekend beer parties and no time pressure. You want to delve into probability theory and algorithm construction? Dig right in. I've circled a few courses in the Mathematics Dept. that might be useful to anyone seeking to explore the world of quants. I love the first item . . 18.098 .
Wednesday, January 20, 2010
Before proceeding with the Project Z posts I'm taking a quick look at the Schwab Strategy Matrix on the SSPro platform. Several in the Schwab active trader group have asked for my spin on this platform feature and over the past week I've been testing it out. Other platforms have dashboards with similar features and the Schwab version leaves a few things to be desired before deploying it as a reliable daytrading tool. What is it good for is tracking a macro view of market momentum. The matrix provides a fractal snapshot of any stock or ETF based on a menu of user selected systems and system settings. Unfortunately, the list of systems available for inclusion in the matrix is rather constrained and focuses mostly on MA oscillators in various forms. The addition of a parabolic SAR and linear regression line/channel would be a good first step in improving the stable of testable systems, and other users probably have their own favorite systems they would like to see added.
One additional bogey using this and other dashboard approaches to trading is that in order to be effective each model should be "tuned" to the beta of the underlying stock or ETF. From an operational standpoint this beta differential translates into the need for several dashboards or Matrices that can be linked with the appropriate underlying equity. For users like myself who trade a very small basket of stocks and ETFs this isn't a big deal. For daytraders scanning the markets for momo candidates and the hot stock of the moment the use of the Matrix incurs a bit more uncertainty and should be used accordingly.
If you want to see how a fractal trading platform looks and acts check out http://www.fractalfinance.com/ and look at the Quant Trader. This is a stand alone program and is not free, but offers some impressive features. I have no tie to this outfit.
Tuesday, January 19, 2010
The lower VXX PDQ is comprised of the currencies and the single short signal against BZF is also brand new.
My approach to trading is a bit more flexible, fractal and largely reliant on the mining of various opportunity niches that I believe provide me with probability edges.
For daytrading I rely on the VIXEN and its permutations although for the time being, due to the floating nature of the VIX/equity crosses, it's been difficult to backtest the efficacy the those trades. The VIXENs are my faith based, albeit discretionary, mode of trading.
On the other hand, having devoted thousands of hours fiddling with TradeStation code and a variety of other linear and non-linear algorithms, I do have a certain confidence in system trading and deploy significant portions of my capital based on those signals.
Over the last 2 years the VIX (and more recently the VXX) have become two of my most important system trading tools, providing dynamic and reliable market momentum indicators, while at the same time providing revenue capture opportunities in pair trades.
This week our little VIX style box is a bit cloudy. The VIX/VXX and the dollar are looking technically oversold while the Qs are looking tired and prone to an excursion back down to the lower LR30 channel band at 45.
Last week our Telechart rotation scan picked IWM as the potential momo leader for the week and the results (kind of) bear out that forecast. For the week IWM was down 1.3%, Qs were down 1.5%, EEM was down 2.89% and DBC was down a heafty 3.98%. IWM didn't advance any but it held ground better than the other rotation candidates, reflecting its relative strength.
Friday, January 15, 2010
This is post #3 of Project Z.
Today we're taking a look at the relative linearity and performance of the DBC/VXX pair as a component of our rotation model.
The DBC is the PowerShares double commodity index and has a current beta of only .66 . . considerably less than the previous rotation model components we've examined.
I could have used the UYM (beta 2.92) the PowerShares ultra basic materials or the XLB (beta 1.25) Spyder sector basic materials to reflect the materials/commodities component of the rotation model, but for illustration purposes we'll just track the DBC.
The XLB has the most robust option chain of the 3, the UYM has the thinnest.
Just as an aside, the UYM works almost as well as the DBC in the Lazy Man model.
One of the consequences of the DBC's low beta is a resultant higher N day value (15) than we've seen before. I've allowed the bands to run 2 more days before initiating the fixed bar stop.
There's still a little problem with the fixed stop algorithm timing as shown by the red highlights and Jeff is currently addressing that issue. We actually had a double entry on the last trade confusing the stop algorithm into thinking there was still time to run. That will be corrected and the trade entered on 12-16 would actually end on 1-6 with a resultant %2 loss in lieu of the -19.66% shown. Another difference between the DBC and the previous ETFs is the balance of long and short trades . . in this case 4 shorts and 5 longs.
Thursday, January 14, 2010
Today we look at the QQQQ component of our Lazy Man trading model using the VXX lens.
Once again we're looking at a divergent pair and in response to a comment by Gary on yesterday's post, keep in mind that I'm really not interested in taking both sides of this trade . . I'm just using the VXX to gauge the relative volatility and linearity of the rotation model components.
Just as a point of reference the current beta of the Qs is 1.1o, while the beta of the EEM tested yesterday is 1.47.
Both the Qs and EEM have eerily similar equity curves and linearity values. The Qs produce 16% more P&L gain and this may be traced to my tightening of the N day stop to 7, while I let the EEM ride out to 9 days. The Qs have a habit of acting a bit more squirrelly than the EEM so I'm inclined to rein it in as much as possible. One result of this short stop is that whereas the EEM pair generated all long EEM signals, the Qs variation produces 6 longs and 2 shorts.
After we examine the metrics of all 4 components we'll check the alignment of the signal dates to see how much deviation from SPY momentum can be detected. This is the process I term "basket weaving" and was explored previously with the FXY PDQ model.
Tomorrow we'll look at the DBC.
Wednesday, January 13, 2010
First, over the next few days we'll look at each of the 4 ETFs . . EEM, DBC, QQQQ and SH through the lens of the VXX , the ETN derivative of the VIX that trades like a stock.
Utilizing the ETF Rewind pairs analysis should help provide a perspective on the relative volatility and technical linearity of each ETF while at the same time detecting the highest probability entries, exits and, perhaps most importantly, holding times.
In this case that stop is set to 9 days, providing a little breathing room for the reversal but not allowing it to run wild. These 2 little mods improve performance significantly and eliminate all marginal and over extended losing trades.
Over the 6 month test period the system kicked out 7 trades with an average hold time of 7+ days, leaving us with cash about 70% of the time that can be deployed into other momentum candidates.
Note that all the trades are Long A (EEM) and Short B (VXX) and effectively detect positive surges in EEM momentum, which is really what we want to exploit.
Next up . . . my leeettle friend, the Qs.
Tuesday, January 12, 2010
Monday, January 11, 2010
That was an unusual situation as the underlying VIX crossed into new territory, stayed sub 20 all week, closing on the week's absolute low at 18.13. Unfortunately, the PDQ isn't providing any guidance this week with all the signals currently OUT as of Friday's close.
While most technicians are strongly favoring a VIX pop back above 20, a look at the weekly VIX and VXX charts (not displayed) shows the VIX and VXX planted firmly AT THE TOP of the LR30 channel, suggesting the VIX can actually retreat back to about 15 before becoming oversold. That's a long way down for the VIX and a long way up for the majors.
Whether that scenario will play out remains to be seen.
With the majors already riding new highs and earnings season about to kick off, that may provide the catalyst for at least a short term pullback/consolidation before a resumption of an uptrend.
Friday, January 08, 2010
Over on the Schwab Trading Community site we'd been looking at GE S&R levels and I was looking for a break out at 15.47 back up to 16+ levels. We sure got that today with a whooping 185M shares in play.
The actual VIXEN cross on 2 minute bars occurred at 10:30 at $15.56 with the parabolics already in a bull mode and price riding the 8MA high line.
In an incredible juggernaut ride, GE then took off like an F-18 for the next 2 hours as volume continued to accelerate. We got a little .10 retracement at 12:30-12:45 before a revisit to the $16.45 high. At 13:00 the parabolics fire a SELL (cover), and with the double MACDs already downslope I quit the trade at $ 16:36 ( a shade below the midline of the MA8 hi/MA8 low channel).
The trade captured a nice $.80 gain in a little over 2 hours and is by far the best GE VIXEN of the last 12 months. In the past we've seen mostly dimes and quarters coming off these trades so I consider yesterday's pop a true gift. Thanks GE.
Thursday, January 07, 2010
Wednesday, January 06, 2010
Before proceeding further I need to clarify that my own trading timeframe is very short. I prefer daytrading and swing trades of 10 days or less as a means to manage my risk exposure. I also employ longer term option premium decay strategies for a large portion of my account, but these are basically market neutral positions, heavily hedged and yielding a slow but steady rate of return. That's just my comfort level.
Just to put things in perspective I've been trading now for 25 years, with over 35,000 hours sitting in front of my monitors, putting on some 30,000 trades and sucking up about 4000 hours just programming TradeStation code. I've tried most trading platforms and brokers, quite a few of which are no longer in business. I've bought thousands of dollars of trading software, attended seminars, workshops and trade shows and read some 200+ books on trading. I'm old and I'm tired, but I still go at it almost every day for most of the day. And my trading style today is substantially different from the one that I used 2 years ago.
I use a quantitative approach to trading because my education is grounded in mathematics and economics and my brain is hard wired to favor pattern recognition. It's a curse, but I think in algorithms. I pay little attention to fundamentals because I believe price reflects fundamentals, news and sentiment better than any other indicator and there are lots of folks out there with a lot of expensive infrastructure that have access to that intel much quicker than I could ever hope to attain. I've never met a PE that I didn't like.
Recent articles in the popular press (Active Trader magazine, Futures, SFO, and Stocks & Commodities) have noted the failure of many popular trading setups such as naked put selling, trend following, consolidation breakdowns, inside day breakouts, moving average crossovers, MACD zero line crosses, etc.
My reaction . . . So what ???
If you expect market mechanics and market dynamics to remain constant you've got a rude and expensive awakening coming soon. David Varadi had a great timely post on this topic and I recommend every serious trader read it several times. David isn't a daytrader, but the points he makes are salient regardless of your trading timeframe.
Adaptability is the key . . and that implies a willingness to be open to adaptive opportunities. That can translate into finding your own niche away from the daily tsunami of momentum, finding a few stocks/ ETFs that you track and trade in various time frames (my preference), trading different markets, trading a basket, diversifying your tactical approach, trading multiple time frames, joining a prop shop and scalping pennies and nickels with other people's money, OR ???? Adapting is a process. . . an ongoing learning process.
Consider this . . would you want to fly an airplane after watching a few webinars, reading a couple books and attending a seminar or two. Maybe so, but I wouldn't want to be a passenger.
Would you consider performing an appendectomy after watching a few videos on the procedure and attending a workshop on emergency surgical procedures. Sorry, but I wouldn't want to be that patient. Trading for a living is a on-going learning process and here's the shocker . . not everyone makes the cut.
Forget the TV ads and blog banner ads promising risk free 80% returns in the first month of trading. Forget the slick magazine ads promoting expensive seminars and workshops with "guaranteed" trading success. It isn't gonna happen. The only people making money on these deals are the seminar promoters.
For several years I was on the board of directors of the largest trader support group in SoCal with a rotating membership of about 400 traders. The group was mixed and traded a variety of platforms and a variety of products - Forex, futures, options, stocks. Some traded million dollar accounts while others traded with $10,000 or less. It really didn't matter, the idea was to network, share war stories and learn from each other. We had well known speakers come in every month and deliver their perspective on trading. Most of them also sold books, educational CDs, training workshops, etc. We always endeavored to vet speakers before inviting them to assure that we weren't part of a snake oil promotion. That group has now disbanded and the reasons can mostly be traced to lack of commitment, disillusion with realities of trading for a living and an almost universe feeling of ennui. I'm still in contact with a core of about 20 traders from that group who are still plugging away, but that's a pretty high attrition rate.
While TV brokerage ad hype might lead you to believe there are millions of daytraders out there, my own culling of NYSE and NAZ databases shows that there are probably fewer than 150,000 active retail daytraders. And that number is going down. When Cybertrader was shut down the rumor is there were only 3000 accounts. That's not a lot.
Sad to report, but over the past two years I've seen more than a few skilled and experienced traders either blow up their accounts, become so scared of the markets that they could no longer pull the trigger and/or decide they really couldn't make a living trading. The collateral emotional damage including personal anxiety, frustration and feelings of inadequacy and failure that accompany such reversals should not be underestimated. Such fallout can seriously damage a psyche and threaten a marriage and family ties. I've seen it close up.
I've often heard it said that one year of daytrading is the equivalent of 3 years of intensive psychoanalysis. Believe it.
Trading ain't easy and anybody that tells you otherwise is a liar (probably trying to sell you something packaged as an edge). There are a few nuggets out there . . finding the ones that fit with your mindset, capital resources and risk tolerance is a very complicated and time consuming dance. Expect a few missteps and falls along the way.
Hopefully, you don't break your neck.
That's the process of becoming a winner.
Tuesday, January 05, 2010
PDQ signals will be provided through a new dedicated PDQ site or as a TradeStation add-on.
Until then, here's a quick look at yesterday's early pivot action in the NYAD, SPX, QQQQ, IWM and GE. "Birds of a feather flock together" and in an evolving market environment where HFT capitalizes on every arbitrage disparity almost instantaneously, the striking similarity in behavior on these 4 charts displays the tendency for equalization among the indices.
For daytraders looking for "how far, how soon" setups, watching the action of the underlying major indices against the pivots can be extremely helpful. Days like Monday when equities make a PP to R2 pop and then level off provide an opportunity to see what's really strong and what's being carried along for the ride.
In this case GE stands out for it's breakout action up to R3. Long time traders who watch the pivots know that pops from PP to R2 across the majors are a fairly rare occurrence and typically result is sustained strength for the remainder of the day. While there are rare days when the majors will pop to R3 or R4, these are true outliers and usually the product of some uber-hyped news event.
Monday, January 04, 2010
While clearly not the strongest signal we might imagine, this bullish signal for equities does coincide with forward looking signals generated by the 4 panel style box below.