Mechanical Trading possible ?

[dcraig1]

It is not necessary that automated systems have no weekly or longer period drawdowns if the system in question is part of a portfolio of automated systems that have low correlation with each other.

This has not been mentioned so far on this thread, but it has to be an area where automation beats discretionary execution hands down. Certainly not easy to achieve, but a highly desirable goal.

Mathemagician has posted on this before.

As for this thread going round in circles, it suits the purposes of some as they get more air time.

 

[mechanicaldaytrader]

It is not necessary that automated systems have no weekly or longer period drawdowns if the system in question is part of a portfolio of automated systems that have low correlation with each other.

This has not been mentioned so far on this thread, but it has to be an area where automation beats discretionary execution hands down. Certainly not easy to achieve, but a highly desirable goal.

Mathemagician has posted on this before.

As for this thread going round in circles, it suits the purposes of some as they get more air time.

nice to hear from the poster that "name calls" ....

Each system needs to stand on it's own two feet..it is either robust or it is not. Now, I will concede you can have a long system and a short system, but the net still has to be the same...the two systems together must be positive each and every week, otherwise, why trade intraday? I can find all kinds of streaky overnight systems that rack up huge gains overall - that's about 50% of the volume of the S&P500.

The Mechanical Day Trader

 

[Dacamic]

I can find all kinds of streaky overnight systems that rack up huge gains overall - that's about 50% of the volume of the S&P500.

Would you mind sharing the basis for your conclusion about volume?

 

[mechanicaldaytrader]

sure...just go to the CME website (they change it frequently so I can't give you the link) and look for open interest volume - study how that # changes each day -- historically the "open" and the "close" of the Session 1 have very high volume, as high as 50% of all contracts traded during Session 1 (typically when arbs and hedges are reversing/entering/exiting). If they still have the service, you can subscribe to the "live pit call" of the S&P and get blow by blow info daily as well. T

The CME probably has a "product" you can pay for that has the 'open interest' or volume by tick/minute somewhere, don't know for sure. There's probably some forum posts somewhere as well that discuss "open interest" + "open" or "close".

From my past research the S&P500 is the premier hedge of all American futures markets - Warren Buffet typically enters the S&P with a quarter billion at a time to hedge his long positions in the stocks that he knows may face depreciation (which he is prohibited from shorting) for example.

I wrote 3 Tradestation Systems years back trading the S&P - a couple using 7 minute bars, another using tick bars, had entries via limit within 'x' bars and exits on close. Somebody might want to give it another try! lol The systems all returned over 150% per year after slippage for about 4 or 5 years of testing, but were very inconsistent when the market was short - we'd have big wins for quite a while then drawdowns one system could not catch. Both of them traded about 75 times per year and held overnight.

I'd encourage someone to give it another try, I think the S&P and today's technology might get them further than I got.

Regards,

The Mechanical Day Trader

 

[Dacamic]

I interpreted your earlier comment to say 50% of the S&P 500's volume was due to highly-profitable "streaky overnight systems". Did I misunderstand?

 

[Dacamic]

With apology, my confusion lingers. I am having trouble connecting the dots between open interest; arbs and hedges reversing/entering/exiting; and, overnight mechanical systems. Maybe one interpretation is that 50% of S&P 500 volume is due to arbs and hedge funds using overnight mechanical systems for opening and closing contracts, as revealed by changes in open interest. Correct?

I assume Buffett, your clients and cajones are unrelated to volume at open and close, and so have moved those topics to the sidelines.

 

[mechanicaldaytrader]

...up to 50% of the volume of the S&P500 is transacted at the open and close ....mostly this volume is due to mechanical systems that trade the "open" or "close" of the daily bar. I repeat, Daily Bar.

Have you ever heard of options and option expiration? Those derivatives have a huge effect on "open interest" and daily volume. Any index that is substantially hedged will be affected by the expiration of options.

The Mechanical Day Trader

 

[mechanicaldaytrader]

I assume Buffett, your clients and cajones are unrelated to volume at open and close, and so have moved those topics to the sidelines.

Buffet & Berkshire Hathaway affect "open interest" because of their huge trading positions BTW. People that hold trades overnight have cajones. Trades held overnight comprise "open interest".

2 out of 3.

The Mechanical Day Trader

 

[ZEPPO]

" People that hold trades overnight have cajones" - er, you mean "cojones"; "cajones" is the spanish word for "drawers"...!

Eduardo.

 

[mechanicaldaytrader]

" People that hold trades overnight have cajones" - er, you mean "cojones"; "cajones" is the spanish word for "drawers"...!

Eduardo.

... thx for the correction! ...I consider it a typo that got past me...however, Wiki has a listing for the misspelling...seems to have slid into the vernacular (is that spelled right?? haha) as far english usage is concerned...according to wiki I am ok, I just used the sloppy spelling derivative....lol

cajones - Wiktionary

 

[Hammer61]

Now, pay attention to I say next, and DON'T ANYONE MIS-CHARACTERIZE what I am about to say --

There is NO 100% MECHANICAL SYSTEM that trades INTRADAY in the futures market that has ROBUST trading results that can be backtested/proven.

I define the term "ROBUST" as netting (after slippage & commissions) 100% of daytrading margin per week, every week. No weekly drawdowns are permitted. The thing works every week or it's not really catching the overbought and oversold conditions properly. I've written several Tradestation Systems, all intraday, none of them worked in all Bull and Bear markets - they all had their blind spots.

Geez MDT, you don’t won’t much do you????

I agree by your definition it doest and IMO will never exist, but I never claimed to have a system that did anything approaching that.

I said I trade a mechanical system that has returned over 100%.a year, I then added that this wasn’t on a 1 market basis, its on several markets across several time zones, I basically trade around the clock and a very nice short in the Mini S&P ive just woken up too, mind you ive been shorting it for the past 3 sessions and been stopped out each time but finely I got my good trade, this to me highlights what mechanical trading is about, following your rules, risking small and you will get a result, 4 trades the past 4 sessions and 3 losses each for 3 points and 1 win for 17 points, im net 8 points or $400 less commission per contract for a win rate of 25%.

As to posting my results or even a strategy report, its not going to happen as it’s a pointless exorcise, the only way I could prove to anyone im the real deal and make money trading mechanically would be to either show them first hand what I do or get audited reports of my broker statements from an independent accountant and if you think im doing that for a complete stranger on a trading forum you gotta be kidding, im also not trying to sell anyone anything, think if I was then yes I should put up or shut up.

As far as I can see all I have done in this thread is answer the question is mechanical trading possible and I think it is and trade and make money doing so, weather anyone believes me or not doesn’t worry me in the slightest, forums like this are about opinions and experiences with trading, not about who is best who has made the most who has the best system etc, some people offer good advise others don’t, you see things or ideas you may not of thought of, yourself.

Good luck and good trading to all

H61

 

[mechanicaldaytrader]

As to posting my results or even a strategy report, its not going to happen as it’s a pointless exorcise, the only way I could prove to anyone im the real deal ...
H61

..posting an aggregate strategy report is NEVER pointless. The purpose of which is to display a "mechanical view" of a market. All one has to do is display the Easy Language code for the trade entry (such as mine was a limit order along with all the error checking for accurate fills) and the code for the trade exit.

I will not belabor your earlier posts regarding "trading systems" (plural) that had "simple trading rules", et al...that horse has been beaten to death previously.

The Mechanical Day Trader

 

[sirviente]

Hello Traders,

Thank you for sharing your experience on this. It seems like a very very dark road on the way to trading mechanically 100%, even trading manually seems like a very dark road too, considering how much stress and emotional pain one has to tolerate.

Regards,
Sirviente (The servant)

 

[mechanicaldaytrader]

Hello Traders,

Thank you for sharing your experience on this. It seems like a very very dark road on the way to trading mechanically 100%, even trading manually seems like a very dark road too, considering how much stress and emotional pain one has to tolerate.

Regards,
Sirviente (The servant)

IMO, 100% mechanical trading is a myth...70%, 80%, 90%, that is a possibility for those that are diligent & focused.

The Mechanical Day Trader

 

[mrsoul]

I would like to share reliable indicators to develop a super trading system:

Hi,

I've been programming for about two months in VB6 trying to get a mechanical strategy up and running, but its hard just to break even. So, two questions, have you seen succesful mechanical trading ? Have you noticed that just buying and selling immediately 90% of the time results in a loss ?

Thanks,
Ulises

I would like to develop a system combining a few reliable indicators.
I would like to share reliable indicators with people interested in developing a super trading system.
If you would like to share indicators let me know and I will message you the ones that work for me.

 

[mechanicaldaytrader]

ONLY Institutional Stops cause trading reversals...ignore all other causes

...find "institutional stops" first - once identified, they are either
retraced
violated
ignored

by future price action; based on future price action regarding a institutional stop, you take a view of the market and trade accordingly.

If you are a intraday trader, you need to differentiate between multi-day stops and intraday stops. Multi-day stops will cause further reversals in the same direction into future trading day(s). Intraday stops will only modify price action within that day or a certain # of trading hours (late afternoon stop may affect early morning trading, fyi).

Once an institutional stop is retraced (perfectly) it is dead as a stop (that will cause reversals). The only exception to this is a 'triple top' or a 'triple bottom' -- which -- if the chart is correctly timed - will convert a multiday stop to a NEW intraday stop affecting price action the next # of minutes/hours of the current session.

Example:

S2 created 14:25 yesterday; market closes at 16:00

S2 retraced today at 10:05 and again at 10:42; market then creates HH (higher high) for the next 'x' points & 'x' minutes. Overnight traders closed out positions at 10:05, institutions AND daytraders initiated long positions after 10:42, thus causing the market go up substantially (fyi).

Only trade institutional stops, even when scalping.
Look for a trend begin and a trend end technically
identify beginning and end of trading ranges technically

Trend following trades are the easiest to create wins and maintain tight stop losses. If your institutional stop is violated in a trade you are stopped out.

Going back to the S2 example above, your entry is 'x' points > S2; your stop is 1 tick below S2. If S2 does not cause the market to hit your minimum profit objective, then S2 was not a tradeable stop. Go back, re-read the chart, make adjustments to your method and retest.

Good luck ! (yeah, I've been doing this stuff about 12 yrs..I wish somebody taught me this, it would have saved about 3+ years of pulling my hair out)

The Mechanical Day Trader

 

[mechanicaldaytrader]

After determining an Institutional Stop Has been retraced...

After determining an Institutional Stop Has been retraced....then use one or more indicators that measure the # of buyers at the climax of that cycle. A lack of buyers at a resistance retracement would guide the trader to exit longs and/or go short; a surplus of buyers at a support retracement would guide the trader to exit shorts/ or go long.

Using the S2 example above, you will need an indicator the measures the climax of THAT particular cycle. When the market retraces that cycle, this same indicator should reverse upward after the climax of the retracement. There should be a 'deviation' between indicator climaxes if you compare the 'creation' of the S2 back in time and the 'retracement' of the S2 presently.

Next, a second indicator needs to be timed to measure the support climaxes leading up to the S2 retracement (when selling the same indicator needs to measure the resistance climaxes). By comparing the support level preceding/above the S2 retracement to the indicator level OF the S2 retracement - this indicator should measure "more" buyers (a higher level of the indicator) at the S2 (lowest) retracement than the previous, higher support climax.

This is shown here - an example of DayRaider 1.1


Notice as the market retraces down to a previous level (to the far left) just above the dotted red line near the center of the chart...DayRaider 1.1 has two indicators plotting greater than the bottom of the indicator range. This shows that there are MORE buyers at the bottom of these cycles, the prognosis is that the OVERSOLD condition has ended, and the market should make higher highs.

To trade 'mechanically', the software MUST accurately measure EVERY cycle climax and the results MUST be consistent. Then, when the trader sees a major institutional stop being retraced, the trader merely looks at the cycle indicators to confirm whether a buy or sell should be entered. The indicators should ALWAYS agree on winning trades; if they display different answers then the indicators are worthless for low risk trading.

Stop losses should be tight, set just outside the institutional stop that is retraced.

Lastly, a third indicator should plot the END of the TREND. When the market is trending upwards, there should be a CLEAR plot that there are less buyers at the very top of the market (R1) than at the previous high (R2). When this occurs, DayRaider clients exit longs at the R1 (as it occurs). The opposite logic for downtrends will be plotted on the same indicator.

Using each indicator ONLY at the approriate times, guides the daytrader to only consider entry/exit when there is a major deviation at a previous institutional stop. While this may not capture EVERY reversal, it will consistently capture almost every reversal at or near an institutional stop.

A nice, stress free living can be made if one programs this into your chart analysis.

Good Trading!

The Mechanical Day Trader

 

[mechanicaldaytrader]

Exit Uptrends At The Highest High

This attachment shows how DayRaider 2.2 captures the extreme Highest High of the Uptrend and mechanically tells the trader to exit at the R1 (highest high). Notice ALL 3 indicators plot the end of the Overbought condition at the same time, at the very highest price. Depending on what the overall market condition is a trader would reverse at the high and short if the market was completing a 110% or 105% retracement of resistance.

Enjoy.

The Mechanical Day Trader

 

[Citizen2007]

I add the caveat that IF the system uses 'market orders' for entry, any test results would be invalid. The entry must be via limit order and cannot be filled on the same bar as the signal. The exit can be at the "close" of some future bar.

There it is...I've thrown down the gauntlet --- SHOW ME!

The Point Is -- using a 90% mechanical methodology is the only alternative for ROBUST trading results intraday.

I rest my case.

The Mechanical Day Trader

Can you please explain your reasons for the above.

Interesting to read your criteria for a 100% mechanical trading system. So its not 100% winning trades that you are looking for. Is it the timing of the signals you refer to ?

I have been in the process of developing mechanical systems for about a year now, the hardest part of the equation has been the programming language. As for the system, it has only entered it testing stages this week. Yesterday for example, on Cable during the trading range its biggest loss was 9 pips on 1 trade and biggest winner was 32 pips, overall profitable. I was quite pleased with that result for the time being as the market was very narrow and not in any defined trend. The results were similar on Thursday. During trending days it works very well.

I saw yesterdays testing as a positive in that it coped quite well during its non trending period. Programming the additional criteria for this phase was extremely difficult. However nothing to get too excited about yet, as I am sure further bugs will be discovered.

More on this later.

 

[mechanicaldaytrader]

...you must have rigid rules for backtesting past charts. It's just basic common sense to me that a signal cannot be filled on the same bar that it is generated. If the price is a good price for a reversal then the time of the chart should display at least one more bar containing that price in the near future (afterwards). The only exception I can think of is the use of 'daily bars'.

Something that is done trading the S&P is the use of 60 minute bars for signals and then Tradestation will plot the system fills on a faster chart, such as a 5 minute. The 60 minute bar will generate the limit order number, and the fill or kill will be plotted on the related 5 minute (or 3 minute or 7 minute, etc.) bar.

I would definitely backtest whatever methodology 24 months at least. If you're using intraday futures data, you would have to buy the data and string the contracts together. Tickdata.com handles this with custom software. A simplier way is to take your signals off the cash index and backtest the cash index of what you are trading (futures index for instance), then apply the signals to the futures contract (the current one will do) and determine your money management of your futures entry. The cash chart would determine the approximate time and technicals, the futures chart would be adjusted for the vagaries of the futures contract.

NOTE: on many American futures contracts the institutions purposely 'fuzz up' the futures data to frustrate mechanical traders - but the cash index (that underlies the futures contract) is technically perfect (that can't be fuzzed up).

About ten years ago, I used to trade a couple NASDAQ stocks, and would use NYSE stocks and indexes to key my reversals sometimes because the NYSE issues were technically perfect, whereas the NASDAQ stocks would try to stop you out. The technicians at the NYSE played their usual games in holding back fills, but the actual bid prices were right on.

When backtesting, use a 3:1 ratio to start, although you can have Tradestation adjust this during backtesting (all my systems have adjustable parameters to find the best setups (this is called curve fitting) so I have idea an of what to expect during live trading. If I traded based on 'curve fitted' data, then my backtesting data had to be 4+ years. Anything less than that was looking thru 'rose colored glasses' imo.

Good luck.

The Mechanical Day Trader