Price of Oil - a big problem.....

[Foti66]

Nice!!! I have done extensive work with trading system development. I was one of the first owners of Tradestation and Metastock. I can see by your chart that the system you are designing keeps you in the market at all times. A few things, if you don't mind me offering my opinion.

1. If you are testing your system on futures you should test it on the front month of the product (this equates to alot of work). Their are some software packages that produce ok consecutive data but it is never going to be factual.
2. Work on your stops. They are just as important as your entries. Futures is a very leveraged product. A good system has small drawdowns. You accomplish this with good money management.
3. Test your system on various data to make sure it is robust. A good system exploits an edge. An edge is a market tendency that occurs with some regularity in all markets. I am looking at the entries for your above system and they are highly suspect. For example: You enter a short at around 745 during a bullish trend. This is absolutely the wrong thing to be doing at this time. As I said above, no one on the planet can predict with any degree of consistency when a trend might end.

[Mygdonia]

Hey Foti, thanks for the advice my friend, really appreciate it!!!

The problem I see with my system is that it's a system to pick major turning points.. the TP on the chart don't mean much; it's merely a count of the highest or lowest price spike over the last 34 days. I am working on a trend trading system, haven't found anything I like as yet.

Quick question if I may. How do you handle whipsaws? Is it merely a case of placing stop orders and that's it?

The average days I hold a trade is very erratic. For example I have held an instrument and rode the trend all the way up for some two months, but these rides as you would know are very rare.

For example that oil trade I was like 6% in front and no sign of taking profit but within 1 and a quater days.... bam! everything is wiped out?

Do you have a preferred time frame when to hold an instrument?

I have read somewhere that when trading hard-trending instruments you shouldn't hold longer than three days, does this make sense?

[Foti66]

Originally Posted by Mygdonia

Hey Foti, thanks for the advice my friend, really appreciate it!!!

The problem I see with my system is that it's a system to pick major turning points.. the TP on the chart don't mean much; it's merely a count of the highest or lowest price spike over the last 34 days. I am working on a trend trading system, haven't found anything I like as yet.

Picking major turning points is the wrong idea to start with when designing a trading system (the idea is flawed). If you like to fade markets you should do it when the market is not trending (this is on average about 85% of the year for each market. Although this last year we have seen some great trending markets that have lasted longer than 15% of the year.)

1.This should always be your first filter in any trading system (you can use the ADX. When it is above 30 it means the market is trending, don't fight it.)

After you have established that the market is not trending (ADX below 30), you can then look for some type of regular occurrence that alerts you that a turning point may be coming. How about a divergence between price and an indicator?

2.You can use a Stochastic or the MACD and look for divergences that occur within 8 to 12 days. You can then fade the move expecting a reversal.

Great, we are half way there. Now you need some sort of trigger to get you into the market.

3.a. Within that 4 day window of opportunity (8 to 12 days) you can look for a large bar (a wide range day) that opens at one end of the bar and closes at the other end of the bar (of course the close needs to be at the end of the bar you will fade, wide range days usually signal exhaustion). The following day you can try fading the market at the open expecting a reversal.
3.b. Within that 4 day window of opportunity (8 to 12 days) you can look for a narrow range bar and take a breakout out of that narrow range bar in the direction you are looking (narrow range days usually signal strong moves in one direction the following day. Breakout)

4.Ok, now you need to use some type of money management. Since this is a short term trading system (short term trades are not going to last more than 2 to 3 days before a natural turnaround occurs) exit at the close of the second bar (2 days).

There, we have built a simple trading system. It is robust (should work in all markets), it exploits a market tendency.

Originally Posted by Mygdonia

Quick question if I may. How do you handle whipsaws? Is it merely a case of placing stop orders and that's it?

Well, if I am swing trading (2 to 3 day hold) I use stops in case of an adverse reaction. When I am trading a trend I like to use options to lock in profits. This way the market can do whatever it wants in the short term (my profit is locked in).

Originally Posted by Mygdonia

1. The average days I hold a trade is very erratic. For example I have held an instrument and rode the trend all the way up for some two months, but these rides as you would know are very rare.

2. For example that oil trade I was like 6% in front and no sign of taking profit but within 1 and a quater days.... bam! everything is wiped out?

3. Do you have a preferred time frame when to hold an instrument?

4. I have read somewhere that when trading hard-trending instruments you shouldn't hold longer than three days, does this make sense?

1.Very rare. The average ride on a short term idea is 2 to 3 days. The average ride on a trend can be a week to month’s depending on what the market does.
2.That oil trade you took against the trend should not have been held longer than a couple of days. The idea that you were going to catch the turning point is flawed. You can try to predict turning points in a trend and you will be wrong 95% of the time. There is no edge in that trade. You have now crossed into the gambling realm. You would have better odds at the blackjack tables.
3.2 to 3 days when swing trading. A week to whatever the market is willing to give me when trend trading.
4.No. If you do not want to stick around while the trend is taking a breather and going sideways you will be trying to catch the meat of the move. When I do this I use a tight stop (lowest low of the last 2 days for bull trends, highest high of the last 2 days for bear trends.) and take what the market gives me. I never know what the market will do in the future. I just exploit simple tendencies where I know I have some type of edge that will put the odds in my favor.

[Mygdonia]

You're the man, thanks Foti

[pankration]

You guys could be speaking Chinese for all I understand about the stocks, futures etc. I've invested in real estate; I understand a house. The part of my brain that would understand your posts is the size of a peanut. Goes to show that too much education causes brain damage.

[Foti66]

Hi Pankration. It is simply something you have not looked into. Designing a mechanical system to buy and sell commodities. Price movement of a commodity is a language all its own. The way the price of a commodity (or stock) is reacting is sometimes giving you a clue as to what it might do next. Through rigorous statistical testing you can seek and find such situations. The above thread is discussing the making of a mechanical system. My thanks to Mygdonia for the questions. It got my juices flowing again. If anyone has any other questions please PM me. I will be happy to answer to the best of my ability.

[Mygdonia]

Foti

I am on the edge to short oil again, I think it looks exhausted up here please convince me I shouldn't?

Do you know how to post charts???

My trading system says sell - I am on the verge of pulling the trigger if todays low @ 131.20 is taken.

You're thoughts.

I'll post my oil chart.

[Foti66]

Hi Mygdonia,

Well, you have the divergence between price and indicator (Macd), that is one criteria that has been met. You have a congestion of price that has formed over the last 9 days (explosive moves in one direction usually come out of congestions), another criteria has been met. It would seem logical to take a breakout as you are suggesting. BUT!

Remember what I said above. When constructing a system you should always use a trend indicator as a filter. I have designed my own trend indicators but you can use the ADX. If you run a chart of the ADX you will see that it is above 30 and rising. This tells us that the market is still trending strongly. To attempt to short here (against the trend), even though some of the criteria has been met is a low probability play. I can't say this enough Mygdonia "THE TREND IS YOUR FRIEND".

I will continue with what I would do in this situation in a post below. I want to catch you before the markets open and you place your trade for now.

[Foti66]

I see a trade here and it is on the long side. The market is trending, I am only looking at trades in the direction of the trend (this is the high probability play for now). I am a trader and not a prognosticator. There is no way I or anyone else can predict the end of a trend.

I would like to discuss and define the congestion a bit further. We already established that statistically speaking explosive moves often occur out of congestions. The other part to this is that the closer to the congestion you try and enter the market, the higher the probability of a whipsaw (market reverses direction). The further away you try and enter the higher the probability the market will continue in that direction.

This is how I would handle this market at this particular time. The market may make an attempt to break out of this congestion to the downside. To me this would be an opportunity to look for a long play in the direction of the trend (you Mygdonia are trying to do the opposite).

1. If I were an aggressive player I would be looking for the market to peter out during the day as it is moving lower (I would look for an intraday clearly definable double bottom (30, 45, 60 min. chart). A double bottom looks like a W. The reasoning behind this is that the market has tested the same place twice and has found some support. This is a good place for a move to be launched in the other direction. After I enter my long I would place my stop at the double bottom low (there is no reason for the market to come back down there except if I am wrong so I want to exit if I am wrong). If the trade works out the market moves to the upside and I continue to trail my stop. Note: If the double bottom is occurring at the end of the day, let it go. Chances are that the following trading day you will have some follow through to the downside and you can get a better price.

2. If I were a less aggressive trader and the above scenario occurred during this bullish trending market (breakout to the downside out of a congestion) I would wait until I saw the market come back into the congestion (this should take no more than 2 days). This movement by the market is telling me that it has tried to move out of the congestion explosively in one direction (down side) and has failed. The market is now setting its site on a breakout to the upside. I would try and enter a long somewhere in the middle of the congestion (I would place my stop at the low of the recent failed move to the downside). I would then be looking for the market to break out above the congestion. If it doesn't do so over the next day or two exit the trade.

3. The most conservative play would be to simply wait until the market breaks out above the current trading range (congestion). This is telling us that the market wants to move higher and we should only be thinking about jumping on board in the direction of the trend. The stop would be placed back in the area of the congestion (the market has no reason to come back down there unless we are wrong).

You can now see how many different factors you have to think about. This is why whatever software package you are using is inferior for trading system development. I use tradestation to test out basic ideas. It is very hard to refine a system to the level where it is buying and selling by itself with low drawdowns and high probabilities of success. You will have to do it in a separate computer language (example C++) and link it with your data.

Anyway, the main thing here Mygdonia is that you shouldn’t fight the trend. A simple way to see this is too look at your candlestick chart. Count how many bars are green (denoting that the opening is lower than the close, bullish) and how many bars are red (denoting that the opening is higher than the close, bearish). If you were using a simple system like buying at the open and selling at the close you will be successful (provided that you use some money management. Some of those bear moves can be brutal). This shows you that there is a statistically significant occurrence happening here. You have an edge. You are a trader. Not a prognosticator. Trade with the odds in your favor.

DON’T FIGHT THE TREND! THE TREND IS YOUR FRIEND!

[Cadmus]

Hi Mygdonia and Foti!

Wow i kind of missed this great thread until now!

Just a quick reaction: i cant say to much now at all, stocks globally are jittery allover..
Foti your right about the trends, but a W model has been breached so far here in the netherlands! we had a W model in just 3 months! in january/february and in april when stocks were on the upside! now its going down again which i see to a new depthpoint or testing atleast last february's lows!

Now the DOW under 12.000 points again and oil acting very strange..that is a trend is set already but how much more to the upside?
I dont work usually with such advanced computer models like Foti and you do , but i always look at double bottoms in charts since history has shown that rebounces always occure in the W model..but now i see something strange happening, everything so far has been a dead cat bounce and as the last years lows will be breached i will say there's going to be inflation or stagflation...who knows where the new bottom will set because right now the W model is out!

Banks are becoming cheaper and cheaper though!