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RUT Weekly Calendar Trade #2

On Tuesday morning, April 21, I got filled at 7.25 in about 30 minutes. I caved 0.15 over that time and got filled 0.05 off the the mark. Breakeven points at expiration were 1248 and 1283.

The trade was never challenged. I had a contingent GTC order working to close for 8.09.

I watched the trade all day yesterday. At 3:50 PM, the market was 7.9 / 9.0, which is a mark of 8.45. My order was therefore 36 cents off the midprice and still not filled! I was a bit surprised.

At 3:58 PM, the market was 7.4 / 8.8, which is a mark of 8.1. I figured I surely wouldn’t be filled since my order would need to be at least 20 cents under the midprice if not more than 36 cents to be hit!

Then at 4:02 PM, What do I hear at 4:02 PM, after the regular session had ended:  Ding!  Ding!

Indeed, my order for 8.09 was filled! The market at that time showed 7.0 / 8.9, which is a mark of 7.95. My order got filled 14 cents better than the midprice!  That is a shocker but, of course, I’ll take it any day.

Nothing should surprise me yet since I’m still observing and learning how these things work.  This was only my second trade, after all.   Once I have a larger sample size of experience then I can look back to determine what is unusual and what is not.  Maybe I’ll see a handful of trades executed after the close like this.  Who knows?

For this week though, 8.09 – 7.25 minus a few dollars for transaction fees gives me a return of 10.4% in four trading days.

I look forward to the next one!

RUT Weekly Calendar Trade #1 (Part 3)

Today I will continue and complete the postmortem on my first live weekly time spread.

In the last post I illustrated the differences in risk graphs.  That’s huge and something I need to eventually figure out.

The final point is retrospective:  should I have closed this trade at the first adjustment point?  My profit target is 10% with a 15% max loss.  In the backtesting I tried to do, if I was anywhere close to max loss at the adjustment point then I wanted to exit the trade.  After slippage, I’d likely be at or beyond max loss after adjustment and it can only get [much] worse from there should the market continue moving against me.

The problem here was that I had no idea I was so close to max loss.  It came fast (within one day) and the market did not seem to move a great deal to get there!  Between OptionVue and my TOS account, I just did not have it modeled acceptably.  I probably need to get this into my DDE spreadsheet and then maybe I can create an “after adjustment P/L” cell to project where I would be after 0.10 slippage is applied per leg (for example).

On this trade, I lost 21.2%!

However, in legendary terms, “I’LL BE BAHK” [phonetics mine].

This is why we trade small:  to learn the nuances and how the trades work. I think this was a case of whipsaw; the market ran up forcing an adjustment and then ran down even harder. I was going to check before I went out this morning and had I been at the helm, I probably could have saved some of the loss.  Market activity like this is just not going to work for this trade, however.

So was this a fluke occurrence or does it happen on a semi-regular basis?

Only time will tell.

RUT Weekly Calendar Trade #1 (Part 2)

I previously gave an overview of my first live weekly time spread. Today I want to run through a few more details.

Compare and contrast:

Figure 1

Figure 2

Figure 3

Figure 4


Which pictures portray the correct representation?!  Figure 1 has breakevens of 1253/1277 whereas Figure 2 has breakevens of 1249/1281.  Figure 3 has breakevens of 1265/1282 whereas Figure 4 has breakevens of 1262/1283.  These differing breakevens can significantly affect when to adjust.  In addition, the Figure 3 expiration graph is downright ugly!  That’s a trade I might not even want to keep.  Figure 4?  That trade looks to have much more potential.

The only way to truly understand which risk graph is more likely to be accurate is to get a number of these trades under my belt.  As the days go by, I’ll be able to see my live P/L and compare that to what the risk graphs tell me.  The risk graphs might change over time too and morph into something better aligned with my P/L.  Again, only by trading these and learning will I gain the necessary experience to understand.

It’s hard enough to figure this stuff out by trading it live.  It might have been foolhardy to ever think I could backtest these with OptionVue, at least, given data in 30-minute increments.  Maybe another tool offering finer data (like 5-minute increments) could give me a fighting chance to accurately represent.

I’ll “stick a fork in it” with my next post.

RUT Weekly Calendar Trade #1 (Part 1)

This is the week I decided to junk the backtesting and try a real one live!

On Tuesday, RUT opened down on the day. I entered an order to buy 2 @ 7.40, which would have been around the mark or a little better. RUT rallied to 1265 and I did not get filled over the next few hours.

I canceled that order and did get filled on a 1265 spread for 8.14. The order was placed at the midprice and sat for two hours before I caved 0.10 and got filled about nine cents off the mark.

The market rallied on Wednesday and around midday, I rolled one of the 1265 spreads to 1280. I did this for six cents but I was down nearly 15% on the trade when it was done. I caved about 0.20 off the midprice to do this: one dime off each spread.

Today, the market tanked out of the gate. I ran some errands and came back 30 minutes into the session to see the market around 1256. I entered an order to close the DC at the midprice around 10:01. The market fell over one point in a minute and I ended up caving 0.95 over two minutes. I got filled 0.08 off the then mark, which ended up being 0.43 off my original limit price and 0.52 better than the modified order I had submitted to close. My total loss on the trade was an ugly 21.2%.

Think about that slippage for a moment: 0.43! I suppose that’s not horrible. That is roughly 0.11 per leg, which is usually the worst I would include in backtesting. The long options here were pretty expensive too and those spreads are pretty wide. One of my short options was 1.50/2.50. That seems a bit absurd. In fast-moving markets those spreads will widen and I guess given that, it’s not horrible to lose only this much in slippage.

I’ll cover a few more details about this trade in my next post.

Truth in Backtesting (Part 11)

In my last installment of this blog mini-series, I discussed… well honestly, I don’t know.  That was well over two years ago!  I am happy to have found this link now, though, because now I have some items to add to it.

I just finished reading Building Winning Algorithmic Trading Systems by Kevin Davey (2014).  For anyone looking to get into algorithmic trading system development, I would definitely recommend this book.  I’ve read a few on the subject and this gave me a few new ideas that I had not read before.

According to Davey, incubation is the phrase of trading system development where I should wait and watch system performance before I start trading it with live money.  He gives reasons for doing this but one reason he doesn’t need to trade with real money during this phase is because he has been careful to avoid certain pitfalls in backtesting that would falsely exaggerate live-trading performance.

One pitfall to avoid is buy (sell) orders that fill at the low (high) of a bar.  This rarely occurs in real life, Davey says.  Unscrupulous system vendors and naive developers produce strategies that frequently include this.

Davey also makes a point to avoids exotic technical analysis templates like Renko, Kase, and Point-and-Figure charts.  “The way these are built from history,” he writes, backtesting fills often cannot be believed.”

Either of these pitfalls could make a trading system perform better in development then they are likely to trade in real time.  They are therefore good vehicles for misrepresentation and that is why I have categorized this under optionScam.com.

I will conclude with the next post.

The Personal Side to Trading System Development (Part 4)

I have found trading system development to be so individual that I can hardly find anyone interested enough to work with me to do it.

This also makes me realize how limited your takeaway can be as my reader of some of my posts.

Even if I develop and write about systems that I deem worthy, many potential factors may prevent you from trading them–not the least of which is the fact that you would be foolish to trade what I claim to be profitable without replicating the work as part of your own due diligence. My process can be studied and used as a starting point after which to pattern your own work: this is what books have done for me. Only you can take yourself the rest of the way.

It was not my intent to make any grandiose claims with this blog series other than to summarize my experience to date. I originally learned about systematic trading and backtesting as compared to discretionary trading. I then learned about trading systems vs. strategies and trading system development. I purchased what I believed to be the most comprehensive and inexpensive software package and then started to read books. It was at this point that I found different books to have limited overlap. Once I set out on my own system development journey, I edged closer to the holes in understanding that I grapple with today.

I think science can help me understand how the patterns I see in backtesting results correlate with live trading performance. This science will be inherently personal, however: only applicable to my trading concepts and to my trading preferences.

The Personal Side to Trading System Development (Part 3)

Understanding trading system development as a wholly individual pursuit makes me better understand why my past attempts to organize a system development group failed.

My universe of potential prospects started with the limited number of people worldwide who trade. Out of that, I was looking for people with a significant amount of time to devote to system development, which perhaps necessitates people without other full-time jobs. Out of that I was looking for people in/near the city I live in.

Those meeting these criteria were about to be further stratified by what means I was going to use to find them. I tried Meetup.com, which produced three people. Where else? Craigslist? Twitter? Facebook? Maybe some were locatable through each with the others reachable through other avenues unknown to me.

The remaining handful were ill-suited to work with me because I demanded a degree of open-mindedness, willingness to suspend judgment, and substantial freedom from commercial influence (e.g. trader education companies, affiliate programs, etc.). I also insisted they use my preferred software package since I had already spent 18 months arduously trying to learn it.

But wait: THERE’S MORE!

Other excluding factors were also lying in wait: requisite amount of money to trade, brokerage platform, desired markets to trade, desired time frames to trade, attitudes toward fundamentals or other potential means to generate trading candidates, etc.

The generality/specificity monster was rearing its ugly face again because ultimately, I found nobody to work with!

I will conclude this discussion in the next post.

The Personal Side to Trading System Development (Part 2)

I ended the last post discussing books as a starting point to learn about trading system development. Different authors use different software packages so immediately what I read has been passed through a specificity filter.

As available information shrunk in the law example I gave, after making a book choice the usable information narrows further due to personal trading factors. If my brokerage differs from the author’s then the same technology may not be available to me. I may also prefer to watch the market differently than the author (i.e. different time frame) or enter orders differently. Perhaps I use contingent orders with a larger offset or no offset at all just waiting for the fill. What if I don’t get filled? These are unables that can affect system results. How do I factor in slippage to the backtesting? Does the author?

Perhaps worst of all for establishment of a system development discipline is the observation that everything discussed in the last paragraph is not even addressed in many writings. Now, I can only gain partial education from books with the rest destined to be completely individual based on my eventual experience. This means system development will be different for everybody. Furthermore, how can I even attain that “eventual experience” before having a complete understanding of system development? Certainly not through backtesting or paper trading, which some experienced traders believe are nothing like live trading.

The upshot of all this is that I will have to do some gambling to truly learn about system development. If it’s not based on a complete understanding then I am trading to learn from my performance. I may or may not have an edge and if I don’t then I am gambling. Who wants to gamble when they can participate in other forms of discretionary trading that can allegedly be taught?

“Forget system development,” the intelligentsia might say, “because I want to hold onto my money.”

The Personal Side to Trading System Development (Part 1)

Are you familiar with the “Dummies” series of books? I would love to see such a book on trading system development but the truth is that I don’t know if such a book could even be written. That is, System Development for Dummies can’t truly be written because what it is and how to do it vary too much from one person to the next.

I have already addressed subjectivity in system development in some earlier blog posts. Howard Bandy’s books define and discuss the objective function. It struck me that “subjective function” might be a better name after realizing the irony that where system development and backtesting sound like scientific endeavors, since the measure of success varies from one person to the next perhaps there’s nothing objective about them at all.

Some of this subjectivity boils down to a distinction between generality and specificity of knowledge. I can find many general articles on-line about law and the legal profession. If I am trying to find out about something related strictly to Family Law, for example, then the articles will be fewer in number. If I am trying to assess how good one particular lawyer is then I may never find anything outside of that lawyer’s website where the testimonials will certainly be from friends, not foes. Bottom line: the more specific the knowledge, the harder it may be to find it.

Education about system development starts with what I can read in books. Authors of different books use different software packages, though. Use of one software package limits what I can glean from an author who uses another because anything about the programming language, backtesting capabilities, and even system development definitions may be different.

I will continue this discussion in the next post.

Some Ramblings on Elliott Wave (Part 3)

Today I conclude a trader monologue heard a few years ago.

“I meet a lot of professional traders: futures, commodities, forex, large private investors, RIAs, market makers, pit traders, black-box programmers, etc. I always ask if they use Elliott Wave. I have always gotten the same basic response: ‘we look at them because other people look at them. Sometimes we look for levels of support and resistance at those levels, but we don’t trade off of them.’

I know there are people who claim success using Elliott Wave but sometimes things work for different reasons.

Jeff Augen did a dirty little trick once. He took random data (using lognormal scale) and presented the data to technicians. They worked their magic and drew their conclusions. He later told them it was all random. Reading that was a seminal moment for me. It really changed my perspective on technical analysis. Augen essentially believes it’s all hocus-pocus. I don’t go that far but I do believe it gets a lot more credit than it deserves.

So… what do I think? I put Elliott Wave much closer to astrology in terms of being able to predict future market movement.

By the way, I am Sagittarius with moon in Taurus and Venus was not in retrograde, which totally explains everything you need to know about me.”