Intraday mechanical trading

[nizar]

Does anybody here trade intraday using a mechanical system?

Just curious to know what % returns you been pulling and what markets you trade?

I can't see any reason why a trend following method that works on daily or weekly bars won't work on 1-minute or 5-minute or 15-minute bars.

But trading smaller timeframes seems (to me) to hold alot of potential as it could increase trade frequency and significantly decrease market exposure.

Using 5-minute bars, a MASSIVE trend would be, say 100 bars thats less than 2 hours so you could even set it up so you exit all positions before the daily close. This way you're not exposed to nasty overnight gaps.

Of course potential costs of this sort of daytrading means significantly higher brokerage fees and real time data which is also quite significant.

But maybe its worth it if you have a good system?
Maybe not.
But definately worth consideration IMO.

Any thoughts?

 

[>Apocalypto<]

Does anybody here trade intraday using a mechanical system?

Just curious to know what % returns you been pulling and what markets you trade?

I can't see any reason why a trend following method that works on daily or weekly bars won't work on 1-minute or 5-minute or 15-minute bars.

But trading smaller timeframes seems (to me) to hold alot of potential as it could increase trade frequency and significantly decrease market exposure.

Using 5-minute bars, a MASSIVE trend would be, say 100 bars thats less than 2 hours so you could even set it up so you exit all positions before the daily close. This way you're not exposed to nasty overnight gaps.

Of course potential costs of this sort of daytrading means significantly higher brokerage fees and real time data which is also quite significant.

But maybe its worth it if you have a good system?
Maybe not.
But definately worth consideration IMO.

Any thoughts?

I would keep it off FX Nizar, as there are nasty spikes that turn back to nothing.

cheers

 

[nizar]

I would keep it off FX Nizar, as there are nasty spikes that turn back to nothing.

cheers

Yes I never planned on venturing out of stocks, at least not in the forseeable future.

 

[rub92me]

Not many stocks on the ASX that have enough volume & volatility to make this work I think, unless you use substantial leverage. Maybe contemplate using futures on a 2-5 day timeframe? I'm building and testing one; will take me a couple more months to complete though - not enough spare time.

 

[nizar]

Not many stocks on the ASX that have enough volume & volatility to make this work I think, unless you use substantial leverage. Maybe contemplate using futures on a 2-5 day timeframe? I'm building and testing one; will take me a couple more months to complete though - not enough spare time.

Thanks for your thoughts.
Yeh sounds about right the point you raised?

How about the Yanks?
Brokerage would work out cheaper as well.
But then Iv got to deal with the whole currency issue....
Hmmm...

 

[professor_frink]

Yes I never planned on venturing out of stocks, at least not in the forseeable future.

you could try the SPI Nizar- near on 24 hour market so not much in the way of gaps, no trading halts for days on end, not much in the way of savage news related spikes(compared with FX), lots of available leverage and dirt cheap brokerage(compared with stocks).

 

[julius]

Finding markets that exhibit the right depth, participant & volatility characteristics to suit this kind of system is very difficult.

FX is the obvious choice but to my knowledge consistently profitable systems with realistic slippage are hens teeth.

Another problem is that retail sized account traders using mechanical entries are open to manipulation by market makers.

Maybe Dr. Bandy can shed some light ?

 

[tech/a]

Nizar.
Yes you can do it (Create a short term system) with stock as well as Forex/Futures/Indexes/Currencies/Metals anything you like with enough data to give you statistical significance.

BUT
You really have to alter the way you think from the longer term systems approach.
This took me years.
Smaller timeframes will have you severely effected by market noise.

The biggest hint I can give you is the Reward to Risk becomes the all important key.
Frequency of trading will increase.
Winning % will increase.
% gain will decrease each trade.

While you can code a system I have found that using the principals of a winning system and trading in a discretionary manner gives greater return as you have the flexability and speed of the mind.

 

[wayneL]

Gold and Oil can be great to daytrade at times too.

I have 8 - 10 charts up; indices, gold, oil, grains, bonds etc and pick the one(s) that are setting up right for the way I trade.

 

[nizar]

Finding markets that exhibit the right depth, participant & volatility characteristics to suit this kind of system is very difficult.

FX is the obvious choice but to my knowledge consistently profitable systems with realistic slippage are hens teeth.

Another problem is that retail sized account traders using mechanical entries are open to manipulation by market makers.

Maybe Dr. Bandy can shed some light ?

Julius.
Thanks for your thoughts.

This is a long term plan for me. I will be setting up my primary business first (outside of trading) for maybe the next 8-10years. Then after that I maybe will have some time for intraday trading.

FX and futures and SPI you need plenty of leverage.
Unleveraged maybe you need $1mil+??

But I could be wrong here. I still need to study other markets (besides stocks) in greater detail if I have to ie. if this mechanical intraday system is not viable for stocks.

So in 8-10 years time, I will be giving intraday mechanical trading a serious crack (For now my weekly system will do me, and Im not going to have much time to trade after November 19). But anyhow, be assured by the time I do start, my account will not be "retail sized"

Tech/a.
Thanks for your thoughts, I never expected this to be easy or quickly grasped.
But luckily when it comes to time, Iv got plenty.

 

[nizar]

Just having another think about the potential of this.

Compared to longer term systems, short term (intraday) systems tend to have win rate >50% and (average win/average loss) < 2.

So say we had a system using 5-min bars that traded 10 times a day.
Initial capital say $200k.
Each position $20k.

You have 60% winners, with on average each winner being about 4%.
The rest (40%) are losers, say they are each 3%.

So 60% winners and (average win/average loss) is 1.33
Each win = $800
Each loss = $600

If you trade 10 times a day on average thats:
($800*6)-($600*4) = $2,400

Say brokerage $30 each way.
So $600.

Nett = $1,800 per day.

The problem here would be finding stocks that even have 10% daily swings. On ASX this may be a problem for the bigger stocks that Im targeting.

US stocks i heard have greater volatility so its maybe a goer there.

Then i thought -- what about CFDs??

You could control alot of capital without much cash. So maybe you wouldn't need $200k.

Is there even interest payable for CFDs intraday??

(I know nothing about CFDs)

Im not sure if you could test using 1% leverage with Amibroker but If you cant -- well then after backtesting unleveraged I'd have to paper test for a while.

A couple of weeks of trading is 150 trades so enough for statistical significance.

One thing which would really destroy you with CFDs is a string of losses though.
How many can you handle?
Probably not many with 1% lol
So something to be careful about.

But this is where the backtesting and validation techniques come into it.

Anyway -- What does everybody think of this?

Unrealistic??
Doable?

Any thoughts would be most welcome.

Im excited. LOL

 

[Temjin]

Just for your information Nizar, I am still (and STILL ) in the process of developing a mechanical intraday futures/commondities trading system. There is no way I would develop a similar sort of system for stocks at any time soon due to the lack of extreme high liquidity and leverage ability candidates. (as Tech/A mentioned)

While you can code a system I have found that using the principals of a winning system and trading in a discretionary manner gives greater return as you have the flexability and speed of the mind.

Can you further elaborate on that for us, Tech/A?

Do you mean discretionary trading or in the design of the trading systems?



Ohh Nizar, think in terms of 1R. Short term trading definitely have higher percentage wins but lower reward/risk ratio per trade. You will have to make it up with more trades.

As for the leverage using CFDs, think of it that the use of leverage allows you to start trading and fully utilise your money management strategies with LESS CAPITAL.

Example: You may need $1 million dollar to trade a particular system on stocks alone. That includes all the associated money management strategies that you have backtested and give you the confidence to trade this system. But with leverage, after cost, you found out you could do the same thing for just $100,000 dollars instead.

That's how I treat leverage.

 

[nizar]

Just for your information Nizar, I am still (and STILL ) in the process of developing a mechanical intraday futures/commondities trading system.

Then its a good thing I gave myself plenty of time

 

[>Apocalypto<]

Then its a good thing I gave myself plenty of time

Don't worry Nizar each man picks up things up at a different pace to the other!

you might hit it real quick!

The main reason I could never get into systems trading is cuz I love the thrill of the hunt!

Good programing to u!

 

[julius]

Hi Nizar,

I have seen a few couple of very impressive high frequency trading systems but none were able to generate consistent profit once brokerage was factored in. This was FX and a couple of different markets.

While exposure decreases with greater frequency, slippage generally doesn't scale and can really bite you in the ****!

What about lower frequency, high probability intra day sets up?

 

[tech/a]

Can you further elaborate on that for us, Tech/A?

Do you mean discretionary trading or in the design of the trading systems?

What I mean is you become systematic.
Your trading becomes based around R/Ratio's.

Ive been fortunate enough to have ben educated in this method of trading using a combination of Elliott and VSA.
While Nicks seminar covered a lot of ground,other members have spent time with me opening my eyes to a form of trading I hadent contemplated.

I and others have invested a great deal of time and Money in honing our skills.Still doing so.
The potential for a professional exponent is enormous.
I describe it as a finness.
I'm not going to go into great detail due to the above (Time money and confidences shared).
But I will say that it is very possible to have very high win rates (70-80%).
Great R/Ratio's and in this sort of trading anything above 2 is fantastic.4 and more is achievable---consistently.

This is where your analysis skills (Application of Money Management and understanding of how to run the business of trading) turns you from a trading hobbiest to a trading master (Not that I'm there yet).

You can trade any timeframe any market and any instrument with confidence of profit.Its no longer a mystery.

The combination of the 2 technical analysis disciplines is the best I have seen.
Coding and systemising it will kill the potential.
Sure it will and can be profitable but not toward the highest achievable results.
WHY.
Systems work on inputs.
Apply the inputs over and over and an expected return of X can be achieved.
However you are hog tied by the rules and the blueprint.
Profitable---yes and can be spectacularly so.Possibly all most want or need.
The best you can achieve---no.

 

[wayneL]

This thread reminds me of Acts 9 ::

 

[tech/a]

Just googled Acts 9 cant see relevence.
Care to enlighten me?

 

[weird]

I remember reading a trading blurb from a successful trader, and one of his comments he made that really stuck is, "I often think how would a really lazy person would best go about being successful in trading". I believe the intended response to that is by capitalising as much as possible from other people's work and through as much automation as possible.

Just to put another slant on things to some of the posts, because discretionary trading to me is not how a really lazy person would go about being successful. Heck there is more to life than trading in front of a screen.

My thoughts, as I can not be glued in front of a computer all day (and thanks to work firewalls this is not practical either), I would look at 'outsourcing' as much as possible, whether it be a broker or even a system if one does not have the knowledge or time to produce one.

I should comment I do not trade intraday, as it does not fit in with my lifestyle. But if I personally felt compelled to do so, and I don't, I would personally 'outsource' as much of it as possible. But hey, if I could afford to spend all day in front of screen doing nothing else, then that may be a different story.

Another thing I should mention, is that, trading intraday, it may require leverage, and 'compounding' that leverage can be a fearful thing, to take those results to greater heights further than other forms of trading ... I personally find compounding easier to do without leaveraged funds, but hey I am not trying to win competitions.

One site, that struck to mind, in writing this, that may be worth atleast having a look at is,

http://www.attaincapital.com/

 

[Temjin]

What I mean is you become systematic.
Your trading becomes based around R/Ratio's.

Ive been fortunate enough to have ben educated in this method of trading using a combination of Elliott and VSA.
While Nicks seminar covered a lot of ground,other members have spent time with me opening my eyes to a form of trading I hadent contemplated.

I and others have invested a great deal of time and Money in honing our skills.Still doing so.
The potential for a professional exponent is enormous.
I describe it as a finness.
I'm not going to go into great detail due to the above (Time money and confidences shared).
But I will say that it is very possible to have very high win rates (70-80%).
Great R/Ratio's and in this sort of trading anything above 2 is fantastic.4 and more is achievable---consistently.

This is where your analysis skills (Application of Money Management and understanding of how to run the business of trading) turns you from a trading hobbiest to a trading master (Not that I'm there yet).

You can trade any timeframe any market and any instrument with confidence of profit.Its no longer a mystery.

The combination of the 2 technical analysis disciplines is the best I have seen.
Coding and systemising it will kill the potential.
Sure it will and can be profitable but not toward the highest achievable results.
WHY.
Systems work on inputs.
Apply the inputs over and over and an expected return of X can be achieved.
However you are hog tied by the rules and the blueprint.
Profitable---yes and can be spectacularly so.Possibly all most want or need.
The best you can achieve---no.

I do agree on the part that applying discretionary over systematic trading has an advantage due to the practical experiences you've gained over the years. I can definitely tell it will lead to much better understanding of the market over than just designing a systematic mechanical trading system and follow it blindlessly with less regular inputs. (which results in less experiences)

But by now, I'm sure you know what I've been trying to develop over the past few months, a fully automatic, pure mechnical intraday trading system. There are obviously inherent disadvantages in trading such a system. However, the major advantage of being able to trade MANY multiple "uncorrelated" markets that cannot be possibly achieved by a human being, in my opinion, outweights the advantages fro the discretionary application.

The only way I can gain more experience is by continuing refining my experience through developing even more systems and monitoring their performances.

This is an article posted by Dr Barton not long ago, in one of Van's newsletter. It's an interesting read.

For Part I
http://www.iitm.com/Weekly_update/Weekly_340_Sept_26_2007.htm
For Part II
http://www.iitm.com/Weekly_update/Weekly_341_Oct_03_2007.htm


Part I article is below

Systematic Trading –
What Does That Mean for You?

by D.R. Barton, Jr.



This past weekend, I had the chance to meet some incredible new folks and also spend some time with old friends at the workshops in Raleigh,NC

And, we certainly had some very interesting discussions. One theme that kept re-appearing on the radar screen was the topic of systematic trading. It was clear from the heated debate that BELIEFS play a huge role in our understanding and implementation of systematic trading.

So I thought it would be helpful to share some useful beliefs about systematic trading that might guide expectations and actions as folks design and implement their trading strategies.

First of all – we need a working definition of systematic trading. My belief is that systematic trading is any trading strategy that follows a defined a set of rules. I can hear the cringes out there now, so bear with me while we explore some of the subsets of systematic trading.

Purely computerized trading. By way of definition, this is any strategy that can be programmed and executed via computer. For some diehard adherents, this is the only “true” systematic approach. But this is a very constrictive and less useful belief about systematic trading.

Mechanical trading. In this subset of systematic trading, the rules are completely mechanical (all decisions are either “yes or no”). But some of the rules may be difficult or impossible to program. In this style one may ask a question like, “Is there news on this stock?” or "Has Market Profile shown time/price contraction or a similar rule that is tough to program?" However, those questions can have a binary “yes or no” answer, making the system purely mechanical in both design and application.

Now we need to stop and add a definition -- one that makes mechanical traders wince. A rule can be a decision that requires trader input. And to be honest I know many more traders who have rule-based systems that aren’t purely mechanical than those that are (more on this next week).

What’s an example of a rule that isn’t mechanical? There are plenty. What is the current market sentiment? How is this sector doing compared to three others? How does this pattern compare to the last time I saw it?

Hybrid mechanical / rule-based trading. I added this category, which is a combination of mechanical rules and rules that require a trader’s input, because lots of traders use this style of systematic trading – more than any of the others.

Rule-based, non-mechanical trading. Here is the style where a trader follows rules, and follows them every time, but those rules aren’t a mechanical set. My belief is that most successful intuitive traders fit into this category. They have rules that they follow, but they just haven’t formalized them in a way that a linear/logical thinker would understand.

Next week, we’ll look at the pros and cons for each of these styles of systematic trading. Until then…

Great Trading!

D. R.

Then its a good thing I gave myself plenty of time

Same here, I only just started my career, plenty of time. But need to constantly remain myself to commit to it. Progressing there.

Hi Nizar,

I have seen a few couple of very impressive high frequency trading systems but none were able to generate consistent profit once brokerage was factored in. This was FX and a couple of different markets.

While exposure decreases with greater frequency, slippage generally doesn't scale and can really bite you in the ****!

What about lower frequency, high probability intra day sets up?

Repeating this again, I have seen at least one very impressive high frequency trading system that was able to generate consistent profit over the last 24 months. If that CTA (Commodity Trader Advisor) continues at this rate, this compounded return will shoot through the roof in a few years time. I'm talking about on average 8.5-9% return per month. (of course, with lots of variations and respectable maximum drawdowns thus far)