PART 1 CROSSING EMA. I will pause between the two parts for questions, but if I am not clear enough at any stage please feel free to interrupt.

Transcription

1 PART 1 CROSSING EMA Good evening everybody, I d like to start by introducing myself. My name is Andrew Gebhardt and I am part of Finex LLP, a small Investment Manager which amongst other endeavours also runs a listed UCITS fund whose models are based solely on technical analysis. Today I am going to try and offer some of our experiences in intraday trading. Intraday trading is very alluring for the individual trader. It is economical, one can go on holiday with no position, and it s still an area where the human has a competitive edge over the machine. Humans are vastly more capable in spotting patterns than a machine, which is why so many automated intraday models end up being either based on statistical arbitrage or outright scalping. This evening we look at Intraday Swing and Opening Range Breakout, to try and cover most of the market conditions within the day. I will pause between the two parts for questions, but if I am not clear enough at any stage please feel free to interrupt. Here we look at the 2 minute Bund, and I am going to concentrate on one single day. This may seem totally unconventional but this day has all the complications found across all time frames across all markets. This day represents 420 bars, and one year of daily bars is only 252 so it compares favourably. This day has an opening gap (point to first box), a strong reversal which hits a brick wall (point to second box), a period of mean reversion (third box) and finally a good old fashioned trend (fourth box). Can we find a method that works in all these conditions? Or are we better off with a group of imperfect models? Opening gap Strong reversal which hits a brick wall 1 P a g e

2 Mean Reversion Trend We start by adding a simple Exponential Moving Average based on the breakout principal. So, bar opens below and EMA, closes above it, one goes long, we see that something as simple as this can in itself deal with the entry for two of the phases without losing too much money on the mean reversion phase. However once you run the full analytics you find out that you have wasted a lot of the day s true swing in entry and exit costs. You gave away 50% of this move (point to second box) as the market hit a brick wall, then in the mean reversion phase, despite some decent swings, we only lost money. So out of an 83 tick potential over the day we spent 17 ticks to make 38, net 21 ticks. However let s not discard the methodology quite as yet, as we will see going forward. Especially if you trade on bar close of a gap. What would happen if we used a two EMA crossover, again a very popular choice because it looks so damn good on a longer term chart. 2 P a g e

3 So with the Double Es we think we might have solved the Opening Gap phase (point to first box), but we haven t. We entered here, exited here, then in this second phase we are so late to the party that we end up chatting up the cleaner and lose money by the time the signal is reversed (point to 3 rd box mean reversion). Finally we look at the last phase with great satisfaction, but under inspection we need to see that to have held that position we would have had to run a 16 tick stop and we only ended up making 20 ticks. All told what looks great on a chart makes a sum total of 7 ticks, using a 16 tick stop. Not a great risk reward. So from the last two slides we learn that an EMA breakout is much more useful than an EMA cross for intraday. We now add a third EMA, again this does nothing for us if we use the EMA crosses as actual signals, however we do see an exit strategy emerging. Can we use an EMA breakout as entry, and an EMA as a trailing stop? We know already from the first EMA slide that the breakout will lose 11 unitary ticks in the Mean Reversion Phase. Here is briefly the Trend phase which looks exactly like what you expect it to. Although we make less than the original EMA crossover for this phase (26 ticks versus 23) the EMA cross method required at a minimum a 16 tick stop whilst here we manage quite happily with a very generous 10 tick stop. However when we do have a breakout we also do have a very high probability of getting stopped immediately as the EMA is both the signal and the stop, we need to have something that moves us from a static stop loss to a dynamic one. In all these examples we should assume a 10 tick unrealised profit stop trigger but functionally we could have run a 6 tick stop and remained in 3 P a g e

4 position throughout. So to summarise the analysis, we looked at the most basic EMA breakout, an EMA crossover and a complex Treble EMA model. Clearly the EMA crossover is a waste of time, however it s pretty close between the simple EMA and treble EMA with trailing stops. Simple EMA makes 21 ticks whilst the Treble EMA makes 23 ticks. Some may argue that the additional complexities are not worth the 2 extra ticks. QUESTION PAUSE PART 2 MEAN REVERSION ACD PRINCIPALS Toby Crabel doesn t need much of an introduction, he was a little less well known in 1990 when Day Trading with Short Term Price Patterns and Opening Range Breakout was published by Traders Press in the States. In his book he talked about ORB, moves from the open, price patterns, range expansion, two and three day patterns...and all of that before the Internet even existed. It s a highly attractive method because basically anyone with a watch can trade the market off technical analysis methods. More exciting in 1990 than in A decade later Mark Fisher brought out the ACD Method based on Opening Range Breakouts. His book was called The Logical Trader. It too was quite a success. Firstly why Opening Range? OR is a distinctly different methodology and despite the fact that it is more fragile than many other systems it is also our experience that it has the capacity to produce quite good results when most other methods are failing to gain significant traction. At Finex we strongly believe in the implementation of logically different imperfect methods rather than one over optimised super system. Here we come to the central process of development. We cannot afford to have one over optimized (overspecialized) methodology, even if it were the result of a gargantuan statistical analysis and historically very stable. We know from nature that a small change in the local environment can wipe out a very specialized specie overnight, and we have seen this happen over and over again in the markets. The change could be regulation, tick size, issuance or lack of, we do not know and nobody can reliably say what will affect the markets in the future. 4 P a g e

5 The broad outline of the method is that we make an arbitrary decision of what we expect or observe the Opening Range to be. For example we could look at the first hour of trading or take something more complicated as the 20 day Average True Range and apply that to the opening price. Once we have made this decision we want to apply two factors to this range, one which is used to confirm breakout, and the wider second level to confirm or reject breakout in favour of mean reversion. For anyone familiar with ACD they will know that we are simplifying, but we don t need to add complexities at this stage. As attractive as it may be to set an opening range using a long initial bar, say 60min, we lose the ability to trade the impact of overnight news and the market on open flows or more often than not the remainder of the market on close orders that were not executed the previous session or in the closing auction. For example with the Bund it is still open well into the US session before the 21:00 close so will have been open and actively trading, either outright or as a spread against 10yr Treasuries. Even using an Average True Range calculation we still have to wait for the market to open before we can make a decision of where we want to get involved, even if we were happy taking the last price in pre open before the market closes for the open we get little value from any potential gap or more from the previous day s close. Why not use the last hours of the previous session to set your breakout and mean reversion levels? In this way you get the full advantage of the surprise element from the deviation from the previous day s close and all your orders can go in preopen. Let s look at using the 18:00 to 21:00 session. Basically we want to go short on a close below the Breakout Level, limit the Confirmation Level and stop at the Lower Opening Range. Secondly if the market touches the Confirmation then trades back to the Breakout on a close above one goes long target the Mid of the Opening Range. The breakout made 6 ticks on the first signal, the second signal is for illustration only. The idea behind the model is that it can trade when the ORB is being formed in the first hour, and at the end of the first hour exits at market and goes to sleep. Statistically, let s look at what happens to the market after it goes through a previous Closing session high or low. For a whole year we return this data, where frequency is on the X Axis and Maximum Excursion is on the Y. This in only for the first hour of trading. For each day we determine how many ticks from the Last 3 Hour Range 5 P a g e

6 High the market moves in the first and second hours, and conversely how many ticks from the Last Hour Range Low the market moves. So we have decided to look at the last 3 hours of Bund trading between 18:00 and 21:00 and applied that range to the open of the next session. Remember that at this stage we have no idea where the market will gap to. We place two orders, buy on Stop at Range high, sell on Stop at Range low. Profit at entry +10 ticks and stop at the other end of the Range or at 08:00. Here are the optimised results for the same year of results. So we have effectively looked 3 out of the 4 market conditions found on the 8 th December The last one missing is the mean reversion phase. This is probably one of the more complicated phases to solve effectively, but continuing on the ACD path this can help as well. Especially now that we have found a way of trading on the open we can go back and look at Crable and Fisher s original concepts. One thing I would like to reiterate, and this is very personal I know, but we very much prefer to run several imperfect systems rather than trying to improve a primary model with added complications. Basically we want to go long on a close above the Breakout Level, limit the Confirmation Level, stop at the Upper Opening Range. Secondly if the market touches the Confirmation then trades back to the Breakout on a close below, one goes short target the Mid of the Opening Range. Looking at the upside we see a nice 24 ticks To the downside we get a paltry 2 ticks 6 P a g e

7 The Treble EMA method gave us 23 ticks, the First Hour idea made 6 and the OR method made 26. Still 55 ticks out of a theoretically potential 83 ticks is fine. Taking the full results out for a few years you get a clearer picture of the strengths and weaknesses, for example taking the Blue line on its own you would struggle to justify trading it on its own. However the three of them together and you get something rather special. I have omitted actual profit and loss because if not it is hard to get people to focus on the drawdowns rather than just looking at the top right hand corner and getting all excited. The greatest success of a portfolio diversified in basic methodologies is the reduction in drawdowns because by design their loss periods tend to be asynchronous. Many portfolios try to find diversification via multiple instruments and quickly you end up trading Spanish 10yr and Milk Futures, however as we know from public data this effectively doesn t work as not only are markets very correlated, but also Diversified Funds are very correlated. Master the idea of using different techniques rather than one super system and you will end up with a portfolio which the industry as a whole struggles to obtain. 7 P a g e