Traders World Expo VII

Transcription

1 Traders World Expo VII Finding and Exploiting Statistical Tendencies By Kevin J. Davey

2 Today s Agenda Who Am I? How to Find Statistical Tendencies Tips Pitfalls FREE spreadsheet tool for evaluating systems Questions and Answers

3 Disclaimer U.S. Government Required Disclaimer - Commodity Futures Trading Commission states: Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures, stocks or options on the same. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in this document. The past performance of any trading system or methodology is not necessarily indicative of future results. CFTC RULE HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

4 Who Am I? Futures Trader for 20 years 1 st or 2 nd Place Finisher in the worldwide futures trading contest Over 100% annual return each year Profiled as Market Master in 2010 Wiley book The Universal Principles of Successful Trading Writer for SFO Magazine, Active Trader Magazine and others Although I write about futures, consult and offer signals to public, ABOVE ALL I AM A FULL TIME TRADER

5 My Trading History During the first 10 years of trading, I spent a lot time PICKING THE WRONG SYSTEMS! Cowboy Trader method >> LOST $ Simple Moving Avg Cross >> LOST $$ You Can t Lose Method >> LOST $$ Visit my website for article on why scale trading is dangerous Averaging Down Method >> LOST $$$

6 My Trading History But, those early losses forced me to research the best traders and ideas Market Wizards books Other Classic Investing Books Van Tharp s Trading Psychology Courses Combining what winning traders did with my own personality/psychology led me to where I am today

7 My Trading History Now, I develop systems using an objective approach Data Mining, Brainstorming Limited Feasibility Testing In Depth Testing, Optimization Walkforward Testing Monte Carlo Simulation Initial Real Money Testing Full Size, Real Money Operation It takes approx trading ideas to yield 1 tradable system

8 Data Mining & Brainstorming Objective is to discover statistically valid tendencies in the market, and develop systems that exploit them Can be as simple as buy Friday afternoon, sell Monday morning or complex as when Gold/T-Bond ratio exceeds X, buy stocks with low beta values

9 Data Mining & Brainstorming Can use variety of tools Trading software Excel High level math/statistics software No one right way to do this Follow my tips, avoid pitfalls Let s look at 3 examples

10 Data Mining & Brainstorming Example 1 Seasonal Analysis Example 2 Time of Day Analysis Example 3 Opening Gap Analysis

11 Data Mining & Brainstorming Tip #1 The best statistical tendencies have a solid, easily explainable explanation behind them

12 Seasonal Analysis Is there a seasonality play in Orange Juice? What if I: buy in early Summer - anticipating hurricanes sell in Winter after freeze is priced in Is there a seasonality play in Heating Oil? What if I: Sell in Fall opposite of most retail traders Buy in Spring

13 Why Do You Need Explanation? Would you fly in a plane if the pilot said I have no idea how this thing works, but I haven t crashed yet! To trade well, you need confidence in what you are doing logical explanations help instill confidence

14 Example 1 Seasonal Analysis Look at a number of different commodities Buy beginning of one month Sell Short 6 months later All commodities must have explanation behind them Run thru past data (20-30 years or more) Statistical significance? YES Go to Testing Phase NO Get a New Idea!

15 Example 1 Results Seasonal Strategy - Hypothetical, fixed contracts per trade, 1/1/2004 to 9/19/10 Past Performance is no Guarantee of Future Results $300,000 $250,000 Walkforward Results Realtime Results from 11/09 $200,000 Net Profit $150,000 $100,000 $50,000 $ ($50,000) Trade Number

16 Example 1 Results Starting with an idea, we were able to: look at past data determine some significant patterns (without over optimizing) put the concept into a comprehensive system All started with simple explanations to market movements

17 Data Mining & Brainstorming PITFALL: Testing thousands of combinations of entry and exit dates, keeping the best one as proof concept works. Maybe you are only seeing a statistical fluke!

18 Data Mining & Brainstorming Example 1 Seasonal Analysis Example 2 Time of Day Analysis Example 3 Opening Gap Analysis

19 Data Mining & Brainstorming Tip #2 Observations you make about market, or that you hear about, can lead to great ideas SO Don t underestimate your ability to suddenly discover market tendencies

20 Example 2 Time of Day Analysis Trader/author Al Brooks mentioned in book that usually day high/low hit in 1st hour for ES futures Does statistical analysis back this claim up? If so, can this be used to create an edge?

21 Example 2 Time of Day Analysis Put High and Low Data (and Times) in Spreadsheet, see what results date high time low time Did H or L occur before 10:35? >>> 67% of days, either High, Low or Both occur in First hour of Trading!

22 Example 2 So, what do I do now?

23 Example 2 Results Knowing this tendency, look for action consistent with bottom/top Or, use OB/OS indicators to find extremes

24 Example 2 Results Today reversal bar and lower high (from yesterday) was good High of Day marker

25 Data Mining & Brainstorming PITFALL: Statistical tendencies are only part of a strategy remember confirming patterns/indicators, stops, profit targets, and money management!

26 Data Mining & Brainstorming Example 1 Seasonal Analysis Example 2 Time of Day Analysis Example 3 Opening Gap Analysis

27 Data Mining & Brainstorming Tip #3 Take a well known/perceived edge, modify or add to it

28 Example 3 Open Gap Analysis Two popular gap observations Buy Fri close, Sell Mon open Open Gap >> trade same direction

29 Example 3 Open Gap Analysis These observations are generally true, but can they be twisted to be even better? Perform Simple Excel Analysis 0.50 Average C hange (Points) Fri-Mon Mon-Tues Tues-Wed Wed-Thur Thur-Fri >>> Buy Mon, Sell Tues is even better than weekend trade!

30 Example 3 Open Gap Analysis These observations are generally true, but can they be twisted to be even better? Perform Simple Excel Analysis Avg Daily Change (pts) < to to to -5-5 to to to to +20 >+20 >>> Possibly Buy (don t sell) big down gaps! Also, avoid small gap days -3 Opening Gap (pts)

31 Example 3 Open Gap Analysis Other possible analyses Could the Gap day of week be combined with gap size? Does Long term trend have an influence? Could this be combined with first hour high/low observation? Basically, anything can be done. Just make sure You have enough observations You can explain what you are seeing You add in other components of a good system (stops, etc)

32 Final Pitfall PITFALL: Don t take cliches, books or magazine articles as truth. Be prepared to verify it yourself, and test variations.

33 Summary What Did We Learn? Tips Explain what you find Always Observe Re-invent known edge Pitfalls Avoid overtesting Edge only part of strategy Check truths Tendencies (be sure to verify!) Buy OJ Aug Sell OJ Feb Buy HO Apr Sell HO Oct 67% of time, Hi/Lo hit in ES 1st hour Buy Mon, Sell Tues better Fade big down gap

34 For More Information Information on my systems Articles, videos, webinar materials Learn about following my trades

35 FREE For Attending! Monte Carlo Spreadsheet Tool I use it everyday INPUTS IN LT. BLUE Monte Carlo Simulator Base Starting Equity $ 15,000 RESULTS IN YELLOW Stop Trading if Equity Drops Below $ 5,625 Start Equity Ruin Median Drawdown Median $ prof Median Return Return/DD # Trades, 1 Year 167 $15,000 1% 21.2% $15, % 4.88 System Name Gen 3 - Mini S&P Only $18,750 0% 17.8% $16,084 86% 4.83 $22,500 0% 15.3% $15,988 71% 4.59 $26,250 0% 13.8% $15,861 60% 4.31 Inidivdual Trade Results $30,000 0% 12.4% $15,718 52% 4.23 Profit/Loss $33,750 0% 11.3% $15,615 46% 4.16 ($317.50) $37,500 0% 10.4% $15,695 42% 4.04 ($892.50) $41,250 0% 9.7% $15,830 38% 3.90 ($155.00) $45,000 0% 8.9% $15,704 35% 3.87 $ $48,750 0% 8.4% $15,761 32% 3.84 $ $52,500 0% 7.8% $15,910 30% 3.84 ($292.50) $32.50 $ $ $ $ $ $ $ ($1,390.00) $1, $ ($55.00) ($55.00) Rate of Return 120% 100% 80% 60% 40% 20% 0% Rate of Return $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 Start Equity Return/Drawdown Rate of Return / Drawdown $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 Start Equity Visit, join mailing list

36 FREE For Mailing List Members Super Tips 2 Tips for Mechanical/Automated Traders 2 Tips for Discretionary Traders Of all the things I ve learned in 20 years of trading, these are the key ones To be sent to List Members in October

37 Thank You For Attending! Thanks For Joining Me Today! I Hope Your Data Mining (and Trading) is Successful!