Systematic Trading Part 2

Strategy Testing:

It's been a week since the last post! Thanks to all the peoples who responded to this and has shared their strategies with me and after compilation most of the respondents can actually be categorized into two groups, trend following and breakout trader.

For trend following, where trader follow the rally of the trend once they believe strength accumulated is strong enough. The most common used technique will be crossover on moving average, and everyone could have their own "secret" like using exponential moving averages of 10 cross above 40, 20 cross above 30 and much more, each of the unique parameter will have yield different results in different underlying products (shares, fx, derivatives), in different time frame (1, 5, 15, 30, 60 minutes), different time of moving averages (adaptive, hull, weighted, exponential, volume weighted).

And we are talking about entry signal only, in each successful trading, entry do play an important part to enable traders have edge during entry, however exit will determine 80% on trading success, so when I ask most of the traders what exit order you see, numerous strategies came out such as percentage of capital, points, cross over exit, trailing loss, indicator exit (stochastic, MACD, RSI etc).

Stay with me! Now let's take a look on trend following on Nasdaq underlying securities with details below:

Test period                          :1st January 2000 - 1st January 2010

Securities                            :Components stock of Nasdaq 100

Interval                                :Daily

Methods                              :Trend Following (Exponential moving average [EMA] crossover)

Long/Buy to cover short       :10 EMA Cross above 30EMA

Short/Buy to cover Long      :10 EMA Cross below 30EMA

Contracts trade                    :100 contracts per trade 

Commissions                       :USD10 per trade

As you can see, the trading system is not doing well for reasons below:

1. Losing money! Back to the root of the trading perspective, you want to make money, is fine if during short term period and you suffer some drawdown (No one can make 100% winning trade), but 10 years and still losing money? No way

2. Inappropriate risk to return ratio, it is normal that trend following trades will have more losing trade to winning trade (with ratio 3:1), however the return of winning to losing must above 3:1 to make profit and ensure you ride the correct trend

So in my next email, I will share breakout strategy testing result, for those who want to discuss further, or want to test their strategy feel free to drop me an email à ryantongyc@gmail.com

Systematic Trading Part 1

Systematic trading Lesson 1

How to save yourself from paying tuition fees to market:

Over the years, we have been hearing friends around, strangers sitting at next table of Starbucks had claimed they are trading (shares, forex, derivatives), so the question from me to them is always “how do you trade?” I can assure you there are 99% of the respondent said they do follow a strategy; no matter is a strategy that they learned during some seminars with ($5000), strategy that they developed after reading few books (or webpage), strategy that they combine and sounded very complicated and “canggih”.

But hold on!Are you sure that they are following the strategy or they thought they had one and they think it might work? After a few questions and clarification on their “strategy”, most of the traders has confessed that they don’t know how they trade eventually, they are actually using their “feel”, a subjective view where gamblers using in casino (I myself has to plead guilty to that)

Subsequently, this is where the tuition fees came along, while people test the trading strategy in real market and paying the market “tuition fees” until they learn to make it profitable, or there are a portion of traders who have been losing money since years ago until today.

Why is that so hard to make money in the market while others seems mastering it easily, I would say the general response first: “Market always go against me”. Sounds familiar? While markets do not go against you, instead of that, you are going against the market my friend! I have seen experienced trader who can flip a coin to decide long or short and then develop strategy accordingly and he made a fortune out of it, amazing right?

So in my next sharing, I will give few examples on backtesting and hopefully those who would like to test their strategy, drop me an email to discuss further with details on what are you trading (shares, futures, options, forex), what strategy are your using (trend, counter trend, breakout, oscillator) at ryantongyc@gmail.com

10 DEC FCPO/FKLI Daily Trading Commentary (Malaysia)

Short FKLI @ 1841 : Target profit (1820) Stop Loss (1850) Long FCPO @ 2650 : Target proft (2670-80) Stop Loss (2,610)

Technical Outlook (FCPO):

Daily closing at 2,639, hovering around the 20 days SMA again with ADX going down to 34, move in tandem with +DI slipping towards 25 and –DI surging up to 15. We notice a clear strong support for the prices was found from both 20days SMA and the uptrend channel, which is around parabolic SAR at 2,604, any movement below 2,600 will mean the breaching of supporting level and correction will expand further.

However, from the hourly RSI, we see that ADX and ±DI are consolidating with –DI looking to slid below level 30. This could mean a new hourly trend could be forming in next few bars. We further look for 30 minutes chart where the 30 minutes downtrend might finish soon since RSI rebounding from 35 earlier, and +DI looking to cross above –DI.

Trade Recommendation (FCPO):

Intraday traders are recommended to catch the rebound if the price reach above 2,650 which is the 20 period hourly SMA and target profit at 2.670-80 (second pivot resistance point), and stop loss at 2,610 (second pivot supporting point).

For long term overnight traders, as this could enter into few days consolidation period which trading around the range of 2,600-2,800, we advice to short if it breach below 2595 (around the psychological supporting level at 2,600) or else accumulating long position at weakness around 2,610 – 2,630 (target profit at 2,700 and stop loss at 2,595).

Trade Recommendation (FKLI):

We still maintain strong sell on FKLI as per yesterday with further supporting from chart pattern of reverse divergence from the reading of daily RSI:

Intraday traders can short around 1,840 with target profit at 1,820 and stop loss at 1,851. Overnight or long term traders are recommended to long at weakness which could be around 1,805 to 1,820, with stop loss below 1,800 and target profit around 1,850, it might not be happening today hence we shall closely monitor.

10 DEC FCPO/FKLI Daily Trading Commentary (Malaysia)

10-12-13

Technical Outlook (FCPO):

CPO surged to high at 2,689 yesterday, near to its previous high at 2,692 but the selling pressure has caused the price tumbled down and close at 2,645. This closing price is still well supported by 20 SMA which is at 2,625 and the daily uptrend channel, point to note where parabolic SAR has now at the bottom of the price and indicate another uptrend will come soon.

From the hourly chart, we can see the hourly closing price is at the supporting line of the uptrend channel, third time in this month since the beginning of December. Price normally rebound after hovering around the supporting line for few more bars. However we noticed –DI has just crossed above +DI, means the correction could go further with the reading that hourly MACD converge at 0, while at the positive territory.

 Trade Recommendation (FCPO):

For intraday traders we advised to long at weakness which is around 2,635 with cut loss at 2,610 (second pivot supporting point) and target profit at 2,676 (first pivot resistance point). Overnight and long term traders can look for opportunity to accumulate long position around 2,630-2,640 with stop loss at 2,595 (below the 2,600 supporting price) and target profit at 2,700.

Technical Outlook (FKLI):

Gap open at 1,839 with close at 1,836.5 indicate very strong uptrend for KLCI in near future, however, daily ADX reading at 46.3 where previously it has a tendency of short term correction after the ADX breach above 45. It combines with the reading of daily RSI at 68, base on the previous pattern it might breach or approach level 70 then correction will come shortly afterwards.

This is line with hourly chart where RSI is at high of 71 since yesterday, looking to trend downwards and the ADX is at 69.1, historical high since 24 October, it indicates trend strength could come to an end with reversal is very likely to happen with –DI coming up from bottom and +DI slipping down.

Trade Recommendation (FKLI):

For intraday traders, we advise to catch the short term correction and can short around 1,840 with target profit at 1,820 and stop loss at 1,850. Overnight or long term traders are recommended to long at weakness which could be around 1,805 to 1,820, with stop loss below 1,800 and target profit around 1,850, it might won’t be happening today hence we shall closely monitor.

09 Dec CPO/KLI Trading Commentary

09-12-13

Technical Outlook:

Forth continuous higher weekly closing at 2,670 indicate strong bullish trend on CPO and is expected to continue as the ADX reading remain strong at level 46. Uptrend signal from weekly is consistent with the daily charts where close rest above 20 days SMA, +DI curving up again and MACD looking to converge again from negative territory. Daily parabolic SAR at 2,687 and pivot resistant point of 2,685 will be served as significant resistance level for CPO.

Hourly reading of RSI trending upwards to 63.4, MACD diverge to +2 and ADX curving up to 27, all technical indicators above are signalling strong momentum on bullish trend. We foresee the last previous high at 2,678 will be resistance level for short term movement.  

Trade Recommendation (FCPO):

Intraday traders are recommended to long around 2,660 with target profit around 2,700 (second pivot resistance point) and stop loss at 2,620 (20days SMA). For overnight (long term) traders we recommend to long around 2,660 with target profit at 2,720 and stop loss at 2,620.  

Trade Recommendation (FKLI):
Global market correction has failed to affect solid performance of FKLI and US equity index encounter a strong rebound last Friday where majority foresee that bull run will continue. FKLI has shown its bullish momentum with closing higher at 1,821 despite drop in volume, indicated that could be accumulating from institution. It had tried to breach above 1825 however it fail while leaving daily high at 1825.5. Weekly ADX looking to cross above 20 level which means a significant bull run will be foreseen in next few weeks and this reading is in line with daily ADX. Intraday traders are advised to long around 1,820 with target profit at 1,835 and stop loss at 1805 (20 days EMA). Overnight (long term) traders are advised to long around 1,820 with target profit at 1850 and stop loss at 1800 (40 days EMA).

06 Dec CPO Trading Commentary

06-12-13

Technical Outlook:

We see a low volatility (High 2,653 Low 2,627) yesterday with daily closing above 20 days SMA at 2,641. ADX and ±DM are trending down simultaneously could imply another consolidation period with trading range between 2,600 to 2,680, this shall valid range until further major outbreak above or below the range.

Hourly closing is just slightly above 20 SMA and below the uptrend hourly channel supporting line as well, frequent crossing within ±DI has left price move in choppy pattern. Trading signal can be found from 30 minutes chart where +DI cross above –DI and MACD converging at level 0. This could be a rebound signal however the strength is unclear at the moment as ADX reading at 17, if it hike above 30 then it shall be strong rally.

Trade Recommendation (FCPO):

For intraday (short term) traders we recommend to long around 2,630 (hourly 20 period SMA) with target profit around 2,678 (previous high) and stop loss at 2,611 (daily 20 SMA). For overnight (mid-long term) traders, we recommend to long around 2,630 with larger target profit at 2,680 – 2,690 and stop loss at 2,600, this is in consistent with the forecasted trading range and also the third supporting and resistance pivot point.    

Trade Recommendation (FKLI):

With global equity index correction for third consecutive days, including US index such as DowJones, S&P500, NASDAQ, HK index like Hang Seng, Japan index like Nikkei, we expect the impact will go to FKLI soon or at least cap its movement below 1,820. FKLI intra traders are advised to short after a low volatility trading range yesterday (1812-1819.5), 20days EMA still below 40days EMA combining with irrationality as lower volume but ended with higher closing price. Traders can short between 1,816-1,820, the target profit shall be 1,800 and stop loss shall be at 1,830. Long term traders could wait for chances to long if it spikes above 1,825, with target profit at 1,835 and stop loss at 1,815. 

05 Dec CPO Trading Commentary

05-12-13

Technical Outlook:

Daily closing above the trend line and above 20 days SMA at 2,656 confirm the continuing bullish trend in CPO. Although ADX trending down to 36, which is an overall indication of weaker trend, however with no other sign of reversal or correction, the bullish formation shall remain strong with RSI going to 62.

Hourly closing is resting above 20 SMA and back within the channel right after the false breakout yesterday at 2,619. We believe that another bullish trend will be coming as MACD at reading of 2 and diverging above level of 0, +DI has just crossed –DI and RSI looking to try level 70. We look for confirmation at 30 minutes chart, the +DI trending downwards could be a sign of quick correction before the rally starts again.

Trade Recommendation:

Intraday and overnight traders are advised to long around 2,640 (Hourly SMA with Period 20) with stop loss at 2,600, the well supported level which has been tested couple of times before, and target profit at 2,680.