Option FanaticOptions, stock, futures, and system trading, backtesting, money management, and much more!

Paper Trade 1 (Week 3) (Part 2)

Yesterday, the trade described here would be closed at the profit target.

At 12:30 on Monday, Sept 29, the trade was up $2,040.

Waiting until EOD (15:30), I would have closed the trade with profit of $2,260 (11.4%).

Only two paper trades but both have been winners. This is far too small a sample size to conclude anything just yet.

Paper Trade 1 (Week 3) (Part 1)

Yesterday Avg IV spiked about 1.8%. Being a Thursday, this meets the criteria defined here for a weekly IBF trade.

On 9/25/14, I sold 10*1140/1110/1110/1070 IBFs. MR is $19,730. Credit received was $20.71.

Profit target is $1,973 with max loss $2,959.

For T+1, max loss points are roughly 1090 and 1132.

I will monitor this way every day to see if max loss points are hit.

One concern I have is that this is the first trade in nearly two months. Perhaps I should backtest this every week to see if waiting for a higher volatility condition really makes a significant difference.

Paper Trade 1 (Week 2) (Part 2)

Last Friday (9/19/14), this trade hit the profit target.

On Day 2 of this trade (Day 1 was EOD when it was placed), looking every 30 minutes the trade was down as much as $990 and down as little as $140.

On Day 3, the trade was down as much as $200 and up as much as $600.

On Day 4, the trade was up as little as $1,280 and as much as $2,230. I could have closed the trade at the profit target intraday but at EOD (15:30), it was up $1,780. That’s not at target so I kept it on for another day.

On Day 5, the trade was up as little as $1,250 and at 15:30, I closed it for a gain of $5,130 (27%). My preference is to close trades intraday if max loss is hit but not to close trades until EOD if profit targets are hit. I feel that biases backtesting against the trade by providing more opportunity to hit loss points. At the same time though, by realizing a 27% profit rather than 10% profit (target), this is biased for the trade–maybe the two effects cancel each other out.

Only with enough occurrences will I have a better idea about this.

Some Ramblings on Elliott Wave (Part 2)

In a previous post I began summarizing a trader monologue from a few years back. He continued:

“One of the best-known Elliott Wave practitioners is Robert Prechter. Go here to see who has the worst track record of the entire bunch. 23% accuracy! He was right: just early…

The [lack of] evidence doesn’t stop the faithful, however. When the market pulls back, they jump out of the woodwork: ‘AHA! SEE, I TOLD YOU THE MARKET WAS GOING TO PULL BACK! JUST LIKE THE ELLIOTT WAVES PREDICTED.’

I have a prediction. The market is going to go down for a while and then it is going to go up… and then it’s going to go down. AHA!

I consider Elliott Wave theory as a religion. Despite rational thinking and evidence to the contrary, ‘you gotta have faith’ to believe. When an Elliottician arrives at a conclusion using irrational thought, it’s impossible to use rational thought to talk them out of it.

In order for Elliott Wave to work there has to be a behavior that is governed by some set of rules. Elliott believed that traders would exhibit certain behaviors due to psychology. This may have been true in the 1940s but the markets and rules have changed. The advent of electronic trading has brought about thousands of trading methodologies that could never have been conceived by Elliott.

If someone could explain to me WHY IT WORKS, then I might believe it. Scientists understand “why it works” in nature. “Human psychology” is not a plausible reason when things like the uptick rule, circuit breakers, high-frequency trading, black box trading, short squeezes, and delta-neutral portfolios exist in the market.

I do think there is something going on. Certain stocks will rise to certain levels and tend to fall to certain levels. You can look at a chart and understand what I am saying.

People want to believe there is something out there that holds the key to the universe: the Holy Grail, if you will. This may exist but it’s not the Elliott Wave…”

Paper Trade 1 (Week 2) (Part 1)

Yesterday, Avg IV increased from 16.3% to 17.1% on a second consecutive 10-point down day. This is not the magnitude for a 1-day volatility spike I originally described as a criterion for taking the trade.

The main issue I’m having is a low number of occurrences. If I take this trade then it’s only the second trade in 1.5 months. At that rate, it will take 75 months–over six years–for me to get 50 trades (a small but probably acceptable sample size). Another problem with the infrequent trades is that it can’t be counted on as a consistent income generator.

I could do a couple things to increase the number of occurrences. First, I can allow for Monday trades rather than Tuesday through Thursday only; that is something I am doing here. I originally excluded Monday trades because Avg IV usually expands on Monday since the tradeless weekend has passed; this can distort Avg IV change data. Second, I could look for more than a 1-day IV spike. If IV increases 0.8% one day and 1.2% the next then that’s a 2.0% spike in two days, which is a lot. Neither would meet the “roughly 2.0% or more on one day” criterion, though.

Another thing I might have to consider is taking all trades just to see how the trade generally performs. If the trade is only profitable when IV spikes then it’s an opportunistic, occasional trade. My preference would be one I could place regularly, though. There may or may not be such a thing as that “consistent” trade that is a reliable profit generator. I’m skeptical.

Yesterday, I would sell 10 * 1180/1150/1150/1110 IBF for a credit of $21.44/contract. MR is $19,000 so the profit target is $1,900 and max loss is $2,750. At T+1, these would be hit at 1129 and 1170. I will continue monitoring accordingly.

Some Ramblings on Elliott Wave (Part 1)

A couple years back, I listened to a trader talk about Elliott Wave analysis. I found the diatribe interesting enough to save as a potential blog idea.

“Once upon a time,” he began, “I was introduced to the Elliott Wave. I thought this could be the answer although neither my research nor money found anything reliable: only subjectivity.

The ‘Elliotticians’ suggest one might look at a stock and think ‘if it is going to pull back then it would probably drop to X and if it really dropped it would probably come down to Y and it if bounces back, then it would probably come up to Z. You look at a chart and you can sort of tell what looks reasonable. Those ranges tend to be close to Fibonacci retracements.

I really thought there might be something to this analysis. The Elliotticians are very convincing and they can, of course, pull up historical charts and show you exactly how this works. They just aren’t so great at predicting future moves [something common to a lot of technical analysis ‘gurus’]. A common term, when technical analysis errs, is ‘I was early.’ This means the stock went the other direction for a while. Eventually any prediction will come true, right? Almost any, at least.

What really got me interested was a guy from Down Under with an incredible track record. The evidence was astounding: almost too good to be true. It looked like a money-printing machine. It was really expensive, though. They wanted $10,000 just to access the software. It was quite tempting.

I decided to do a bit more research brought to you by Google! I found some dirty little secrets about the founder. First, he results were actually backtesting. Shockingly, he was right every time! It was uncanny. Second, a criminal penalty was assessed to this guy for being ‘disingenuous’ about the results. He is still out touting the magic of Elliott Waves in another country under a different company name. It’s the same basic stuff, though…”

The Tone of BS (Part 4)

From just four of 12 paragraphs I have been able to falsify this thesis on trading. For the sake of completeness, I will continue on.

I believe [5] happens quite frequently.

I agree with [6].

[7] seems somewhat meaningless. I don’t care what strategies this author prefers. I have no idea whether this author is a profitable trader, anyway.

[8] opens another can of worms. How do I know if seasonality reduces exposure and improves performance? The author claims this but for evaluation purposes, I would have to see the data or citation behind this conclusion.

[9] is also quite meaningless. This sounds good but how does the author know?! The author could start with “in my experience,” which would leave me to evaluate the author’s trading experience. Without that qualification though, the statement is downright absurd. How am I going to evaluate the easiest way to make money? The author does not even list different approaches for comparison. This is totally baseless.

I agree with [10]. I cannot say whether it is a good or bad thing to do all that research without any live trading, though. Perhaps staying out of the markets would save me from severe losses! Perhaps staying out would prevent me from precious gains. It would be good and bad, respectively, in these two cases.

I think [11] is a restatement of [9]: not very meaningful.

I think [12] is meaningless. Yes, looking for better odds to gain than lose would seem like a solid strategy. Taking what the market gives you, though, is always extremely clear in retrospect rather than in the moment.

Overall, I think these paragraphs are yet another collection of trader gobbledygook. Parts sound good. Most of the rest are platitudes, propaganda, and other nonactionable ideas that would do little more than stop critical thinkers in their tracks with looks of puzzlement on their faces.

The Tone of BS (Part 3)

Last time, I interrupted the analysis with a challenge impossible. I want to elaborate on that today with regard to why we could never prove that institutional traders are more profitable than retail traders (or vice versa).

As a quick review, [2], [3], and [4] all suggest that institutions are profitable whereas retail traders are not. How would we design a study to evaluate that claim?

First, we would need large sample sizes of systems traded by institutions and by retail traders. Given the systems, perhaps we can evaluate them for profitability.

I need not think too hard to realize attaining these samples would be, in and of itself, an impossible feat! I would be hard-pressed to find even one [never mind a “large sample size” of] institution[s] that is willing to share its “secrets.” Many retail traders also feel the same way about their own “proprietary strategies,” which would make it extremely difficult to get the second large sample size, too.

Another problem with this proposition would be the time and money required to do this study. I could be making phone calls to institutions for a long time before ever getting cooperation! With regard to retail traders, how would I even find them? I would also have to operationally define “trading system.” If someone attempted a trade once or a handful of times, would that constitute a “trading system?” Retail traders range drastically from “full-time trading for a living” to “Vegas-style trades for a hobby.” People are not all that open to detailed questions about their financial dealings especially when strangers are doing the asking.

A third problem regards the questionable justification for the immense cost of doing this study. So what if I find institutional or retail traders to be superior as a whole? The answer won’t help anybody. This study would not be actionable to me or any other trader as we continue doing what we do.

Therefore, I’m quite sure no valid study of the sort has ever been done and any claims about the institutional or retail world being more profitable than the other are baseless.

The Tone of BS (Part 2)

In the last post I presented an anonymous opinion from the internet.  I numbered paragraphs at the end of each in brackets.  I will analyze the opinion one paragraph at a time.

[1] I do not disagree that the institutional world is a secret one.  Legends abound and stories recycle.  I can hardly imagine what life is like with the professional firms since my background is not in finance.  I could try and read financial forums but I don’t know what information there is true reporting from professionals and what is fictional or hyperbole.

[2] The only problem I have with this paragraph is the suggestion that institutional firms trade profitable systems.  I believe retail traders have been conditioned to think the institutions consistently make money.  How do we know?  Certainly funds go out of business all the time due to poor performance.  How about just last year, for example? Some funds completely blow up (e.g. LTCM anyone?).

[3] The claim here is that systems in the public domain are not profitable. The only way to know if this were the case would be to live trade book systems or to develop those systems ourselves to see if they still have potential. I certainly don’t think anyone can wave a hand over and say “those systems that didn’t work for the institutions are written up in books, never to work for anyone else either.” How would the author know?

I agree with [4]. The two worlds are very different. Is this relevant to differences in profitability between the two? I do not know. In thinking about what it would take to answer this question, I would argue such a study to be impossible! Can you think of some reasons why?

In four paragraphs, I think I’ve seen all I need to know to determine how I feel about the thesis presented!

For good measure, I will continue this evaluation in the next post.