follow the leader extreme scalping

[ChocolateDigestive]

good day to you all.

I want to stimulate discussion of 'follow the leader' type strategies, you know the kind where gold break outs and then some gold stock follows it. Or I dunno when apple el busto out of a range and then RIMM pops out. you know what I am sayin.

I just wondered if there are any lurkers who trade these 'follow the leader' type methods, anything commodities, baskets of this and that.

So to kick off I will share a little experiment I have been running whilst lurking in shadows posting up lulz the odd bit of porn lol. (sorry about that) and of course spanking the market where it is due.

I have been watching the FTSE, DAX & EUROSTOXX futures, and as you might guess these bad boys are correlated. If one of them el busto, good chance one of the others will el busto.

Here is a screenshot of the 3 contracts Z, FDAX & FESX, 1min charts in an AMP Ninjatrade Demo account. It's a great demo account as they give you access to 100's of future contracts, sure ninja trader is a bit retail but it's free compared to TT @$800 pm.

So I have been observing what happens when 2 of the 3 contracts breaks to new fractal swing highs/lows. Normally the 3rd follows init

Very interested if anyone wants to play around with this strategy, add in their own 2c after all this is no holy grail, you could play this over so many different instrument combos. like a metal/energy/stock.

anyways I was watching at 11am to 11.30am London today, there was a nice set up at 11.23 am I have scrolled back the charts to 11.23am to show you in 1st screenshot. Now check the charts, FTSE had made a new low, so had FESX. old FDAX was sitting @ 6913.5 hadn't made a new fractal low yet. FDAX was ripe for an el busto breakout.

now check out the 2nd screenshot, taken 2 minutes later @ 11.25am London, FDAX el busto to 6902, thats a 22 tick move @ 12.5 Euros per tick per contract.

Now of course you cannot spread bet this strategy, you need to trade the futures, but AMP offer some really low intraday margins. FESX is $500 per contract, Z is $1440 per contract, FDAX a bit more spicy at $3500 per contract. It would be fairly easy I reckon to choose 3 or 4 contracts with $500 intra day margins making it possible to get started for chump change.

all input welcome (from non vendors).

now get spanking.

good trading to you.

 

[The Leopard]

I think this is a superficially attractive idea that many people might well have considered, but I think it is unlikely to work in practice.

I don't trade the three you mention (you know how early you have to get up to trade FESX? F uck that) but I do trade what you might regard as US equivalents - ES, NQ and YM.

Say I see (as I often do) NQ make a break for it and start running. I've missed it, but no problem, I'll stroll on over to YM which is usually much slower. Better still, because I've got such massive stones and need ultimate liquidity, I'll do it on ES.

ES is still there, so great, I open my position and wait for the riches to come tumbling in.

Except now NQ is coming back. It wasn't a major move after all. It's just a jumpy bugger quite a lot of the time. Just a little fake out that I wouldn't have taken on NQ or ES without my new idea. So now I have go away and stitch up my ripped-open a$$ and grumble about a loss on something I wasn't even trading.

They're heavily correlated, yes. But they are still different contracts, with all that entails, and I don't think that you can really make generalisations about them (I've seen it said for example that NQ and TF can be used as a heads up for ES and YM, which works great, except when it doesn't, which is often).

Some days you'll see YM put in a pretty serious move, NQ kind of shuffles along a bit in the same general direction. And vice versa.

Or even if they go the same way to pretty much the same extent. On ES I'd be sitting on a big profit come the close, but I took the trade (let's say they display the same set up or other entry reason) on YM and got stopped out on the first pullback, which on ES never came close. The action on them is different.

Like I say, they are similar but different. You have to trade what you trade in my opinion.

Like men and women. Same in a lot of ways. Both human, got heads, four limbs, thumbs, that kind of thing. But if you're out at night and you treat one as though it's going to do the same as the other - well, you'll probably end up with a black eye that night or a ripped-open a$$ the next morning (see similar example above). Either way, not good.

So whatever you do, I'd put in a lot of work on this before wapping your stones out, shoving them in the mangler, and yelling "Come at me , bro!".

 

[The Leopard]

Just to add - doing this on a 1 minute cart like you suggest, or rough volume / tick equivalent, you are asking for trouble. Down there the action really is what it is, not what it is on something else.

Just my opinion, but I'd be really careful if I were you. Leave this one on the demo unless you're really sure, and my bet is that once you're really sure, you'll leave this one on the demo.

 

[BeginnerJoe]

Trading on correlation is dangerous because the correlation can stop correlating any minute. I find it is best to be blinkered and look at each thing you want to trade in complete isolation. But once you are aware of the danger, you can use the correlation loosely as a guide while keeping a hand on the gear stick and be ready to reverse course any minute.

 

[gktk]

stock sectors def. have correlation i.e. mining / oil stocks impact ind. goods manufacturers eg. DE, CAT

 

[ChocolateDigestive]

stock sectors def. have correlation i.e. mining / oil stocks impact ind. goods manufacturers eg. DE, CAT

Hi gktk, yeah definitely interested in all that. Commodity breaks out and stock follows. have you been trading this strat?

 

[DionysusToast]

I think following of one sort or another is a worthy thing to consider.

People tend to gravitate towards reversal strategies. They will watch a market go up 4 ticks, 8 ticks, 12 ticks, 16 ticks. All the time watching their market go up and up and up and up.

Hovered over the sell button, waiting for the opportunity to short, knowing the time is not yet right because the move up is strong................

If this is you, I have a message

FFS - BUY THE DAMN THING...

Obviously, you can bring in correlations etc and try to figure out which is the tail & which is the dog but that's a fools errand as far as I am concerned. What is more important as a follower is to buy the damn thing when it's going up and not sit there waiting 4 a short.

 

[The Leopard]

I think following of one sort or another is a worthy thing to consider.

People tend to gravitate towards reversal strategies. They will watch a market go up 4 ticks, 8 ticks, 12 ticks, 16 ticks. All the time watching their market go up and up and up and up.

Hovered over the sell button, waiting for the opportunity to short, knowing the time is not yet right because the move up is strong................

If this is you, I have a message

FFS - BUY THE DAMN THING...

Oh God yes.

You may be a dirty, vendoring b@stard (albeit our dirty, vendoring b@stard) but that is a great f ucking post.

EDIT:

Run out of rep. So for the record, I rep that post 100 times.

Good Lord, the money and time I could have saved if I'd never looked for a reversal.

 

[DionysusToast]

Good Lord, the money and time I could have saved if I'd never looked for a reversal.

Well - you & me both.

Funny how the brain works, isn't it?

 

[ChocolateDigestive]

I had a bit of spare time to muse over some stock/commodity correlations.

Watched Exxon mobile against front Oil also Dow futures there on the right hand side. Exxon is obv very correlated to front Oil but it was displaying some nice lagging behaviour. Check this. screenshot 1 Oil had broken out and XON was stuck @ 88 and was meeting a some solid resistance. Oil marched on along with the Dow, the resistance was getting broken down, then pop. Screen shot 2. def could have bought 88 even's there and sold at 88.10's on the pop. The spread on XON is 1c, plenty of liquidity - it's a biggy. Plenty of time actually to hit into a nice inverse ECN rebate, could have grabbed $1.70 per 1000 rebate on CBSX (boston) on the way in and out would have covered the commissions and a little extra, plus the 10c, $100 on a 1000 lot.

damn, Mr Charts would be proud of me.

behead Mr Charts.

 

[DionysusToast]

I never got into this stuff and I shall explain why.

Let's say A leads B. A goes up, B follows. I used to trade B based on what B does. Now I trade B based on what A does.

So - I see A go up, I buy B... what happens if I buy B and A then goes down the sh1tter?

This is my conundrum. I want to use a "B follows A" strategy because directional trading B on it's own is damn hard. On the other hand, to trade a "B follows A" strategy, I need to know where A is headed. So all I did wa stopped analyzing B and started analyzing A.

So I didn't reallly gain anything.

The other issue is that in the next minuts/hour/day/week - B might appear to be the tail and A the dog but at any time that can change.

I'm not saying you can't make money @ this stuff - just that I don't personally 'get it'.

 

[Mr O]

Leaders and laggers are basic inter market relationships. For example I trade the emini s&p 500 so what the USD is doing is of importance to me. Before Europe closes, the Euro and the pound normally lead U.S equities because they strengthen as the USD weakens. A weak USD is good for U.S equities as it makes U.S products cheaper for foreign buyers which increases demand.

Crude oil is also another leader of U.S equities. If crude starts going through the roof then equities will normally follow as a weak USD drives up demand for crude oil which is priced in USD.

Then within the equities indexes, the emini nasdaq tends to lead the mini dow and emini s&p, then ontop of that you have the flight of quality effect with equities and fixed income products.

 

[BeginnerJoe]

People tend to gravitate towards reversal strategies.

They don't. They flip flop between reversal and continuation strategies as the market flip flops between reversal and continuation moves. Sometimes the strategies and moves are in sync. Other times, not. The net result is loose.

 

[ChocolateDigestive]

Another opportunity with XOM & WTI in the last couple of minutes. See screenshot Exxon makes an equal high @ 88.12, now check out WTI it made it to 93.75 but not up to 88.10, so perhaps exxon is ripe for a drop here. WTI starts to drop off 93.67 at time of screenshot.

so short XON 88.10

screenshot 1 minute later XON has indeed fallen to 88.03. WTI now showing signs of strength again so exit 88.03.

7c profit. The spread is 1c on XON, compare that to a bucketshop like IG and they are charging 9c spread gulp!

good init. maybe worth some demoing.

 

[ChocolateDigestive]

I never got into this stuff and I shall explain why.

Let's say A leads B. A goes up, B follows. I used to trade B based on what B does. Now I trade B based on what A does.

So - I see A go up, I buy B... what happens if I buy B and A then goes down the sh1tter?

This is my conundrum. I want to use a "B follows A" strategy because directional trading B on it's own is damn hard. On the other hand, to trade a "B follows A" strategy, I need to know where A is headed. So all I did wa stopped analyzing B and started analyzing A.

So I didn't reallly gain anything.

The other issue is that in the next minuts/hour/day/week - B might appear to be the tail and A the dog but at any time that can change.

I'm not saying you can't make money @ this stuff - just that I don't personally 'get it'.

I have never traded follow the leader type strats either, just very interested in all this. I take your point above about A going down the ****ter. I guess if you were going to choose this route you would look for spots not only where A leads B but also where B is looking weak or is in a spot already where it is ripe.

Check the example I just added, XON clearly looked over extended and any weakness in WTI would likely pull it down imo.

 

[ChocolateDigestive]

Leaders and laggers are basic inter market relationships. For example I trade the emini s&p 500 so what the USD is doing is of importance to me. Before Europe closes, the Euro and the pound normally lead U.S equities because they strengthen as the USD weakens. A weak USD is good for U.S equities as it makes U.S products cheaper for foreign buyers which increases demand.

Crude oil is also another leader of U.S equities. If crude starts going through the roof then equities will normally follow as a weak USD drives up demand for crude oil which is priced in USD.

Then within the equities indexes, the emini nasdaq tends to lead the mini dow and emini s&p, then ontop of that you have the flight of quality effect with equities and fixed income products.

kinell bud you sound like you are spanking the market

 

[ChocolateDigestive]

They don't. They flip flop between reversal and continuation strategies as the market flip flops between reversal and continuation moves. Sometimes the strategies and moves are in sync. Other times, not. The net result is loose.

I have to agree with the Toast here, the reversals are very attractive towards retail traders, just my opinion. With the flow is always more forgiving.

I have a theory about reversals and people expecting price to bounce of the side of their monitor, it's a human bias, we see price approach the top or bottom of our monitor screen and it's natural to think it will bounce off. I am actually being serious....

 

[DionysusToast]

I have never traded follow the leader type strats either, just very interested in all this. I take your point above about A going down the ****ter. I guess if you were going to choose this route you would look for spots not only where A leads B but also where B is looking weak or is in a spot already where it is ripe.

Well - the thing is, you have put "extreme scalping" in the title of this thread.

To me, that implies taking advantage of much shorter term "tail wagging dog scenarios" which might have a lot more merit that the sort of correlation strategies that usually spring to mind.

It's a sort of short term inefficiency. It's not something you can define one day & trade for the next 6 months but maybe it works for a day and the next day it doesn't. There is some appeal there.

One of the reasons I canned day trading stocks was the constant searching for opportunities. I'd be watching this scanner, have 24 stocks charts up - then I'd be so busy looking for good opportunities, I'd end up never trading anything.

So - the downside of such short term correlations is the amount of time you spend looking for them. The upside is that you aren't engaging in an strategy with every man & his dog doing the same thing.

The key would be finding the opportunities in a timely manner.

 

[piggybridges]

if A and B are correlated, and A is breaking up strongly making new highs, you could look at it like ''hey, A is the strongest one of the two'' and then just buy A, rather than buy B hoping that it plays catch up. Maybe 'B' is lagging for a reason?

All kinds of pairs trading / correlation stuff is all very interesting to me too (especially after seeing Grey1 kill the market day after day, live), but i've found for me personally, i'm better of trading the instrument based on that instrument alone.

 

[ChocolateDigestive]

Well - the thing is, you have put "extreme scalping" in the title of this thread.

To me, that implies taking advantage of much shorter term "tail wagging dog scenarios" which might have a lot more merit that the sort of correlation strategies that usually spring to mind.

It's a sort of short term inefficiency. It's not something you can define one day & trade for the next 6 months but maybe it works for a day and the next day it doesn't. There is some appeal there.

One of the reasons I canned day trading stocks was the constant searching for opportunities. I'd be watching this scanner, have 24 stocks charts up - then I'd be so busy looking for good opportunities, I'd end up never trading anything.

So - the downside of such short term correlations is the amount of time you spend looking for them. The upside is that you aren't engaging in an strategy with every man & his dog doing the same thing.

The key would be finding the opportunities in a timely manner.

by scalping I mean looking to take 1c to 10c out of a stock or 1to 10 ticks out of a future. as you know there is no set definition of scalping, at US prop firms that scalp stocks they typically mean 1c to 10c.

absolutely these are short term inefficiencies.