Where do I start?

SESSION 33

On volatility.

Volatility comes in several guises. To take the two most readily identifiable, you have the natural randomicity of price movement, and the other being a result of suppression, whether it be intentional or otherwise.

Natural volatility or randomicity is the exuberant and spontaneous action of market movement. It works within flexible natural channels and helps keep the action fresh and unpredictable. Each moment is a new beginning so to speak, never seen before, and never to be repeated in exactly the same way. In nature, this is similar to a growing plant or animal. You know it is of a particular kind, but you simply cannot predict the direction(s) in which it will grow. There are seemingly infinite factors at play which are simply beyond exact measure.

Volatility resulting from suppression can be a far less enjoyable event. In nature, such situations can be likened to an influential body which has for too long suppressed the will of its members. Eventually, a point is reached where the pressure is too great for the influential body to bear and a sudden release of energy is experienced, causing the influential body to disintegrate, and chaos to ensue.

A robust trading method should be able to cope with both situations, ‘picking up’ clues early enough to see that you are positioned to benefit from the changes or at least move you into a neutral position.

Both of the above kinds of volatility exist at all wavelengths, but vary in character and relative magnitude as you go up and down the scale. Natural volatility decreases as you increase the wavelength. At tick level, where each new price is being ‘born’, it looks very random, but gradually certain patterns begin to form and the volatility factor becomes smoother and smoother, particularly in high volume markets such as foreign exchanges and index-related products.

With volatility resulting from suppression, this is can be an all-of-a-sudden re-alignment occurring with little notice, as in the case of the 1987 crash. The severity of re-alignment is proportional to the degree of distortion created by the suppression, which is not always possible to know until some time later when everything resolves itself. In some cases, if a market’s natural pathways are exceptionally suppressed (or overstretched depending on how you look at it), then the release of pressure can lead to price whiplashing past its natural level by a similar degree, and repeating this sequence over a prolonged period of time until eventually all the energy is re-distributed and it settles at its natural level.

When starting out in trading, it is a good idea to see how you first get on trading the daily timeframe. Once you establish a profitable method in the daily timeframe you can then move onto the quicker timeframes of day trading. As outlined above, the smaller and smaller the timeframes get, the greater the factor of natural volatility becomes. This will have the knock-on effect of reducing your level of profitability with any given trading system, including the harmony trading method. If you choose to move into day trading you will therefore need to develop ways in which you can keep tipping the balance back in your favour, for each change in timeframe.

Tomorrow I will move onto section three, trading the live game.

Until then …


[Running total of set-up cost = £0.00. See SESSION 13 re spending a penny.]
 
SESSION 34

Section Three: Playing your Part in the Live Game

Okay, we are at the point where you have to put theory into practice, and we all know that this is a whole new ball game. In a sense it is no different to reading books on how to drive a car, and then sitting at the wheel for the first time. You simply know that the theory stage is different to the practical.

This is where you need to think back to something that you have done in your life where you have succeeded in producing quality results, and apply the same process to trading. You know there were ups and downs, were faced with a plethora of choices, tools, materials, people who were there to help you on, and people who were there to knock you back, all equally as important as each other to help to get you where you wanted to go. Your determination saw you through and you eventually reached a point where you took a quantum leap from knowledge to knowing, where your actions became second nature, where you essentially added an extra dimension to your character. This extra dimension not only helped with the task in hand, but the process of learning that you went through stood you in good stead for all future challenges such as trading.

One thing you may have found from going through such a process is that although you began with many choices of which combination of tools to use, which are the best materials, and the like, you eventually by the end of the learning process will have managed to whittle all these choices down to a select few which suited your personality, and no doubt will they be of quality manufacture.

Take learning to play the guitar as an example. You know that there are many books and guitars out there but where to start? You have to start somewhere, so a visit to the library may be in order, at least to get a feel for the different books available. Once you have weighed up how well written and presented the books are, you then venture into buying a guitar. Well, again, where do you start? You can visit a music shop to try different ones out, have a look on the internet at reviews, or perhaps even you have a friend or relative who can give you some guidance.

Once you have your guitar and book you begin to put things into practice. You start learning a few chords, three should do for the moment so you can play some well known rock’n’roll songs. And gradually you build up your knowledge, learning different chords and a few riffs. You then think that you could sing along to some of the tunes. You do this, then also buy a few songbooks from your favourite artists, and listen to a few of their tracks to see how well you can sound like them. All of this gives you encouragement and a natural discipline to keep learning. Nothing is forced upon you, it is your enjoyment of the process which keeps fuelling you on. There is no ‘artificial’ discipline in this process.

It’s been a few months now, if not years, and at times you feel you’re going backwards. Your playing and singing still sounds a bit clunky and out of key, and your enthusiasm starts to wane. Other interests have come more prominent in your life, and you spend less time on the guitar and singing. As the months pass, you pick up the guitar now and again, but with less intensity as before.

You then wake up one morning. When you pick up the guitar again something ‘feels’ different. All of a sudden you seem to have gained a fluency in playing, and your singing is also more tuneful. Whereas before things were becoming a struggle, you now find there is little if any effort needed to play your favourite tunes …

What you have experienced there is a quantum leap. You have gone from knowledge to knowing, second nature. In a way it has become automatic, and this significant step-up then propels you into further work that inspires you.

You also notice that it’s not only the playing of the guitar and your singing which have improved, but the process also took you into other fields of learning. Your hearing has become very discerning when listening to songs, in that you can pick out the different instruments better, hear how individual musicians in bands play their parts. Also, you’ve found that there are different quality of guitars out there even though many look the same when your starting out. The roundedness of the sound, the action of the fretboard, you’ve also found that a wound g-string sounds great! Just as importantly, you’ve learnt that it can be useful to ring and blow the many bells and whistles out there, as you can now see that whilst it was confusing early on, it has helped you to eventually find a quality set of equipment which suits your personality.

Bells and whistles are useful in the early stages, as seen above, but if they are given too much prominence then the tail can begin to wag the dog. A golf putter may be the last club to get the ball in the hole, but there is a whole set of clubs which helped it crown that glory. Bells and whistles certainly have their place, but need to be put into perspective otherwise they will not guide you well.

To give another analogy, let’s take the Beatles music (and the same will apply to all artists over all genres over all ages). You have four quality musicians with a quality producer recording on quality equipment. The music as it is mixed in the studio is what you are looking to play back through your music system. Now, whether it be low or high cost moneywise, a lower quality system will have graphic equalisers and all sorts of bells and whistles to it, usually to make up for a poor quality reproduction. But if you want a near perfect reproduction of the studio sound then you will look to a high quality system, with a quality amp, player, speakers, interconnects and cables. The amp will usually feature just one ‘adjustment’ to the reproduction, which is a big volume dial. If you have a quality system, that one big bell is all you need.

That is where you are looking to end up with your trading system. Find the quality first, then increase your quantity to suit your personal preferences. Quality does not have to cost the earth. High quality can be achieved at relatively little cost, especially once you find a system which could last you a lifetime.

I’ll post again later today …


[Running total of set-up cost = £0.00. See SESSION 13 re spending a penny.]


PS, I’ve posted the below video on YouTube, showing this morning’s rolling calculation for the imaginary S&P500.


HTiChart _ Fri 27 Jan 2012 - YouTube
 
SESSION 35

To begin with, we are looking to trade one market with one indicator in one timeframe. For the purposes of these sessions, as in the previous examples, we will choose a product related to the movements of the S&P500.

We are looking for certain characteristics to help keep the natural and ‘artificial’ volatilities low, and the placing of orders/stops as accessible as possible, including:

- Consistently high trading volumes.
- Available to trade 24hrs a day, or as close as.
- Tight bid/ask spread.
- Low minimum stakes.
- Low and/or percentage based fees (if not already reflected in the spread).
- Online access.
- Looking to start with the daily timeframe.

A S&P500-related product can tick all these boxes if you find a decent platform.

So, we now need to find such an online trading platform which can facilitate the trades. The platform should also give reliable live price charts, featuring a basic interface of adjustable timeframes and indicators, including the Directional Movement indicators.

In addition to the conventional brokerages, you also have the spreadbetting platforms which you can look into. It’s a personal choice and this is part of the search of finding what is right for you. Do some googling around for a while to help narrow down the possibilities.

You will find with some spreadbetting firms that a S&P500-related product is available on a rolling spread at around 40p/point minimum stake, and because the S&P500 is currently around 1300 points this means that your starting capital doesn’t have to break the bank, keeping in mind that you are trading the margin. Bid/ask spreads can also be as low as 0.4 points for some S&P500-related products. Use this as a benchmark and if you can find anything better then that's a bonus.

In summary for today, we are choosing one market (S&P500-related product), one indicator (+/-DI with 21/126 dual-time settings), and one timeframe (daily). One of the next questions is how do we source price data for the harmony trading interface? Another is, if we include the starting capital in the set-up cost below, what is the minimum amount required?

I’ll continue this introduction on Monday.

Have a good weekend …


[Running total of set-up cost = £0.00. See SESSION 13 re spending a penny.]
 
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I started trading shares about 4 years ago. Once I decided I was going to start investing, I dived straight in. Knowing what I do now, I would have spent more time trading on simulators and watching price movements. you need to do that for about six months to see what makes a company share price move up and down.
The other thing I would advise is to research the company to death. From the board of directors to contracts won and lost etc.
There are books you can read, but there is nothing like getting hands on experience.
There are not many independent websites that offer genuin help but this has good information for newbies. sharetradinglinks.co.uk
I wish you good luck and success.


nwqwhf13 said:
Hi all,

I am really new to trading and have zero knowledge about it. I just want to hear from someone who had started from nothing but gradually built up a portfolio. What's the first step, what books should I read, what techniques should I learn?

Thanks in advance

Frank
Click to expand...
 
SESSION 36

I’ve posted today’s calculation for the imaginary S&P500 on YouTube (below), and this will help us answer the questions of price data and starting capital.

Also, before coming onto this you will notice a slight difference in the order(s)/stop calculations for today. The reason I have done this is because as soon as you place an order it is also very good practice (if not imperative) that you also place an accompanying stop for any potential trade. Whilst very rare in very large markets such as the S&P500, there is always the possibility that there could be a major-major swing in one day, which means that whilst early in the day the direction would be seen as going very strongly one way (and so trigger one of your orders), your stop is there to get you out if, for whatever reason, the price swings in the other direction with as great a force.

The beauty with the directional movement system is that price would practically have to swing the whole distance of the bar to trigger the stop, very rare but always possible. It is always best to know that you have this stop in place, as it helps to remove stress from your decision making and so takes a load off your mind so that you can get on with the other things that you enjoy. There is a little bit more involved in applying this stop system which I will come onto in a later session.


HTiChart _ Mon 30 Jan 2012 - YouTube


Coming back to the price data. The price data that I’m using in the example is that which I have collected over a period of two years, therefore I know it is synchronised to the imaginary spreadbetting trading platform where the imaginary S&P500 is being traded. If I need price data before that date then I’m happy using the Yahoo! price data, as I know the mathematical analysis for the leading edge of the chart will be the same (because the decision making filter has time settings of 21 and 126 days).

However, if I was wanting to increase these time settings then I know that the Yahoo! data would begin to influence the calculations increasingly so, and this is the point where the data will become an unreliable source for decision making. In the whole scheme of things, the main market values for the S&P500 (eg the Yahoo! data) are not that far removed from the example platform we’re looking at here, so kept in the right perspective they have their value.

When setting up an interface such as the one being used here, it is therefore important that the data is synchronised to your actual trading platform. At the start, this may mean manually inputting the data from your platform’s live chart (with your keyboard input remaining in the spreadsheet, you can hover your mouse cursor over the live chart – no need to click – and this will reveal the price data for the price bar). With time-settings of 21 and 126 days for the decision making filter, I feel that you should input at least a year’s worth of platform-specific data (the high, low, and close values, HLC).

This may sound a huge task to begin with, but once you get into the flow of it you will find that you can input a day’s set of price data (HLC) in around 15 seconds. If you are looking to input around 250 days worth of data (approx one year), then 4 days can be inputted in 1 minute, so this should take around one hour in total to complete. You can break this hour up in any way you wish, eg if done across a working week or two, this would mean you do it in batches of 12-14 or 6-7 minutes/day respectively. You can really do it as you wish to suit your lifestyle. I would recommend completing it on a separate spreadsheet and then copy/pasting the data across to the interface.

Then, once it is set up for the market you choose to trade, the only price data inputting required in future will be included in your daily routine of re-calculating order(s)/stops (as shown in the video).

To comment further on the use of interfaces. By interface I mean a form of charting software, which can also include your trading record as in the case of the harmony interface. Early in my trading life I felt that a programmable charting package would be of benefit, as it would have many functions that are not available on the typical charting software available with platforms, and so I decided to buy the MetaStock End-of-Day (EOD) package. This then became part of my interface which would contain my decision making filters. Also, being programmable, this allowed me to research the many variations of indicators and parameters. Because it downloaded the data for many types of markets it also helped me study wave patterns from various angles, including Elliott and Hurst. Gradually, I began to whittle things down, and decided that focusing on one large market at a time, and doing it well, suited my personality. And so I began to fine-tune things. I could see that I needed to start inputting my own data from the trading platform I was using, and this then progressed into developing the harmony method.

Over the last few months, however, I was beginning to see that this method could be transferred to a spreadsheet and in fact give me more functionality in calculating the ‘probable’ moments for order(s)/stops using the spin buttons that feature in Excel. In MetaStock I was having to keep going in and out of the Downloader software and manually adjusting the highs and lows at the leading edge to eventually arrive at the order(s)/stops values. This could include around 20-30 operations going backwards and forwards, in and out of Downloader, whereas the spin button in Excel can achieve this in a matter of moments.

I am now thinking of way to bring this functionality into MetaStock, but for now I am very happy using the spreadsheet until I work through a new source code for MetaStock. The current spreadsheet interface is in Excel, but I plan to switch over to OpenOffice and prepare some video tutorials on constructing the interface once I complete these sessions this week. This way, you will then have a basic starter kit for trading, your first vehicle, ready for you to fill up the tank with your starting capital. All you then need to do is to learn how to and drive it and maintain it, L-plates at the ready?

As I always say, this is one way of trading, it is not the only way. You will have your own way and it will take time to find it, remembering that it is only time that ‘separates’ you from your answer, nothing else. In the mean time, the harmony method will give you a benchmark to work from, whether or not you decide to apply it in practice.

I will go through the question of starting capital in today's next session.

Back soon …


[Running total of set-up cost = £0.00. See SESSION 13 re spending a penny.]
 
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SESSION 37

Moving onto starting capital, and this will also guide us as to position sizing when first starting out. Eventually you will get a feel for the numbers, helping you move away from the thought that you are been driven by a mechanical or mathematical system. Remember, you are the driver, your interface is your car, and your chosen market is the road. The mechanics and numbers help you get from where you are now to where you want to go.

Let’s say that today’s imaginary order, long or short, is triggered, and then there was a major-major intraday swing which stopped you out. What would be your loss? For our purposes today we will round the numbers to keep the maths straightforward, and say that we are looking at around a 100-point loss, calculated by examining the difference between the order (long or short) and the respective stop, ie the difference between the 1260s and the 1360s.

We therefore have a 100-point loss, but our actual money loss would depend upon our stake, always remembering that we are trading the margin on this imaginary platform. Well, if we start with a minimal stake, let’s say Britannia, 50 new pence, then our loss would be £50 sterling (50GBP). Then think how many times such a scenario would happen, not often … hopefully, for the sake of the global economy! Allow say a safety factor of 3, and so you arrive at a starting capital of £150. That’s it. It’s as simple as that. Indeed, if your first trade was profit taking you would only need the minimum amount required by the imaginary platform, which is far less than the safety-factored £150 that you have arrived at.

This is similar to thinking how much fuel you may need in your tank to get you from A to B. It is foggy so you make sure you put enough in the tank to get you to the next petrol station. Once you are an experienced driver, you can usually gauge this without much calculation, but for the moment you put in more than you need based on your theoretical knowledge. Now in such a case, a profit making trade is similar to you coming out of the petrol station, still in the fog, and feeling yourself going downhill. You find most of the journey is downhill with the odd few little ups and downs. And then you come to the next petrol station, with the fog also having lifted. You think it best to re-fill the tank, to find that only a little petrol was used because you were mostly going downhill with the help of gravity and the wheels were turning the engine without much need for any fuel at all, except for the few little ups and downs.

The above is a useful analogy, but don’t think of downhill as always meaning short. The same scenario can also apply when your long, it’s all relative. Just think upside-down to make it work both ways.

And so we have our first ‘cost’ to setting up, albeit a ‘consumable’ and not part of your fixed cost base. I’ll enter this below as a ‘fuel’ cost, to help distinguish it so.

Many will laugh at the 50p stake, yet it is no different to growing an oak tree from an acorn if you are looking to trade for long term purposes, eg retirement fund. The mathematics of compounding covered in an earlier session illustrates how this can work. Alternatively, you can choose to go to the garden centre with a larger amount of money. It all depends on how you wish to distribute your money. Obviously, if you have a larger amount of money then it would make more sense to make a larger allocation, however, the purposes of these sessions inter alia is to show that there are few, if any, barriers to entry to the markets if you hold the desire to go it alone as a trader.

Ultimately, what will matter is how well you take care of your garden. Many ‘instant’ large sums of money have been lost in a flash through poor gardening, yet many acorns have grown and still endure as great oaks.

I will return this afternoon with a few more analogies, so to help see a bigger picture than just the mathematics and numbers.

Until then …


[Running total of set-up cost = £0.00 fixed cost + £150.00 starting capital for fuel = £150.00. See SESSION 13 re spending a penny.]
 
SESSION 38

The ‘vehicle’ analogy has much mileage in it, again pardon the pun.

If you take driving lessons, you will usually be learning in a basic car with sufficient power to get you around, something which is ideally suited to the roads you choose to travel on while learning. You can think of the markets’ pathways as the roads, and the daily timeframe as being a well balanced match of average cars to average speeds on average road networks.

Once you get into (intra-) day trading this balance changes and the smaller and smaller the timeframes you enter, the more you are entering the worlds of rally driving. In essence, you are having to drive faster on a bumpier road network, and to do this your vehicle needs to be a very different machine indeed. As you grow into trading, using the daily timeframe as a benchmark, you will acquire the skills and wherewithal to develop such vehicles if you do make a choice to day trade. It is not, however, necessary to day trade to make a living as a trader. As mentioned in our last session, you can trade the daily timeframe over a longer period of time if you prefer, and this can give you the added benefit of releasing the rest of the day for you to enjoy the many other aspects of life.

Do not mistake day trading as Formula 1 driving. It is not. Formula 1 works in a closed circuit and the drivers use a different mindset. You can experience this by going go-karting at your nearest club, you find a certain groove which you generally can repeat over and over. It’s wholly different to rally driving, where you can have an open circuit, every twist and turn being different to the one before and the one to come.

A football team can be shown how to convert many such ‘closed-circuits’ or set-plays such as free-kicks, corners, throw-ins, including penalties, but if the team cannot perform in open play then this is of little use in the whole scheme of things. If you see a trading system which is purely justified on how well it can catch trends, then you must ask how it performs in the more predominant open play, the times when it is range-bound, waiting to spark into a new trend. I have referred to Wilder’s book for the Directional Movement system (the DI specifically), yet I know from backtesting that some of the other systems in his book do not perform to the same level, and neither do several other systems from other authors I have backtested. The losses incurred between the trending sections are simply too great for the few-and-far-between trend profits to make up for. Remember, however, that this does not make them wrong, they just perform less well in a relative sense. Great value can indeed be found in them because they help to set a context in which you can gauge the many other approaches that are possible.

As a rule of thumb when starting out, you should be able to backtest a system for all time, not just for when it has an exceptional ‘now-and-then’ performance. You also need to be careful to check, amongst other things, that any backtest uses more price references than just the closing price on the day of the trigger, as gross distortions will otherwise result in the output calculations. I will cover this aspect of trading as an appendix once this section three is complete.

To leave you with a thought before I end for today. Here is an experiment to help you tune into a flow of trading. If you drive a car, start looking at the way you drive. Seek to cruise at around 55mph wherever the legal limit allows, and think of 60-70mph as a cushion to move into if you need to. On roads where the legal speed limit is below 55mph, look to see how you can increase the ‘softness’ of your acceleration and gear changing to top gear, and then back down when approaching turns, and also braking to stop. Imagine you have a wedding cake in your boot and that each operation needs to be as smooth as possible so as not to throw it about. If you have a cruise control on your car try using it on motorways when it is safe to do so, and if you have a trip computer see how your fuel consumption changes.

This experiment may be difficult to apply all of the time so just try it now and again to start off with. As well as the benefit of reducing your fuel consumption and general wear and tear, you will also notice other effects to do with your perception of events around you. Early on, it may sometime seem as though time itself is moving about, that you’re going ‘out of time’ as other vehicles shoot past you. On motorways, one way to not feel ‘embarrassed’ at doing this is to move a safe distance behind a goods vehicle which will be doing a similar speed. No one will then be ‘pushing’ you along, and any faster vehicles approaching you in the inside lane will see a goods vehicle in front of you and simply overtake as normal. This way you will not feel as though you are holding anyone up.

You do not need to do this experiment all of the time, it’s a choice and some opportunities will be more suited than others. But over time, if applied consistently, you will notice certain benefits to your mindset which you can apply to trading, as well as in other areas of your life. And if you already drive this way, then keep hold of that mindset as you enter the world of trading. It will guide you well.

Will be back tomorrow …


[Running total of set-up cost = £0.00 fixed cost + £150.00 starting capital for fuel = £150.00. See SESSION 13 re spending a penny.]
 
SESSION 39

Below is today’s calculation for the imaginary S&P500, which I’ve posted on YouTube.


HTiChart _ Tue 31 Jan 2012 - YouTube


Revisiting Session 37 on starting capital and position sizing. The ‘extreme’ example of the 50p stake and £150 starting capital was set out to show that you do not require a huge amount of money to enter the markets. The safety factor of 3 was also given as a guide based on this relatively small amount.

Now, the safety factor of 3 was calculated on the back of a ‘low-probability’ 100 point swing, whereas if you look at the loss making trades on the chart (of which there will always be some), and assuming on the trigger days that you entered/exited at the less favourable ends of the price bars, then the losses would rarely exceed 50 points, if that. Accordingly, in terms of looking at the ‘high-probability’ losses, the safety factor is more like 5-6. In other words, you would have to experience a string of 5-6 losses before your capital was fully exhausted.

For many (and not all I know), the £150 starting capital is a modest amount, and whether the safety factor is around 3 or 5-6 makes little difference as there is probably a lot more in reserve. However, what I would say is that if you are looking to allocate much larger sums to trading then you should progressively increase this safety factor the larger you get. The same would also apply as your starting capital of say £150 grows into the larger bands of capital. Essentially, what we are looking to create is a ratchet effect which progressively reduces your exposure of capital to risk.

This is why it is a good idea to start off small so that you can ‘feel’ your way to the higher numbers, which you will then be able to handle with a much greater ease than if you immediately throw yourself in at the deep end. It is like learning to football skills with a tennis ball, and then moving onto a full size football. Your ability will naturally be much more honed.

I will return to this subject in more detail once these sessions are complete, so that I can put the above into a more mathematically structured form. Next to developing a decision making filter which turns a net profit over time, the topic of position sizing is a very important aspect of trading. Yes, the ‘weight’ of it is lightened when you have a positive expectation for your trading method, however, a very comfortable cushion still needs to be maintained so that at no time should your capital even catch sight of its lower portions. Maintaining this balance is vitally important but not difficult if approached wisely.

I should be able to do another post this afternoon.

See you then …


[Running total of set-up cost = £0.00 fixed cost + £150.00 starting capital for fuel = £150.00. See SESSION 13 re spending a penny.]
 
SESSION 40

Spreads and fees. These are some of the last pieces of the jigsaw to factor in when considering backtesting and profitability, and increase in prominence the smaller and smaller the time setting you choose to trade, resulting eventually in a profit-making method turning into a potential loss-maker. They are therefore of vital consideration.

The harmony trading method and dual-time settings in these sessions are based in the daily timeframe, trading one high volume market on a continuous basis. At this level, backtesting suggests a firm level of profitability over time. If we were however to start trading in smaller and smaller timeframes, the returns would be seen to gradually diminish, until eventually you reach a zone where overall profitability must be brought back into question.

As you reduce the timeframe, the amplitudes of the predominant wavelengths become smaller, and so each trade you take ‘travels’ less distance price-wise. The ‘cost’ that the bid/ask spread then applies to each trade is therefore proportionally larger, and so takes a bigger chunk out of your profit-making trades, while doubly serving to amplify the loss-making trades.

You therefore need to always review your trading method to accommodate the smaller timeframes, or simply just not go there and remain happy with trading the daily timeframe for a longer term. As always, it depends on your personality and lifestyle as to how you wish to approach trading.

If using a spreadbetting platform on a rolling spread, there is also an overnight charge that is made for financing, although for our purposes here this amounts to pennies and is relatively negligible in respect of the calculations.

In summary, depending on the trading platform you use you must always take careful note of the spread and fees that will apply to each trade, and factor these into your backtesting calculations as best as possible. Because ultimately will are dealing in approximates, it is always prudent to ensure that whatever trading method you use that there is an ‘obvious’ margin of profitability being demonstrated in the backtest. To settle with a method which shows only borderline results is dicing too much with approximates and probabilities, and unlikely to make for a comfortable ride.

Personally with backtesting, I like to see that even if you ‘missed’ a trade by a day and entered/exited at the close value of the “triggerday+1”, that your cumulative return would still be above the breakeven point, wavering at a reasonable level of profitability, albeit relatively small compared to your scenario of the optimally timed trades.

I will continue tomorrow with some notes on the daily ‘workout’ of reviewing and adjusting positions. (I’m trying my best to avoid the word ‘routine’ but, doh, you just sometimes can’t get away from it!)

See you tomorrow …


[Running total of set-up cost = £0.00 fixed cost + £150.00 starting capital for fuel = £150.00. See SESSION 13 re spending a penny.]
 
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PollyM said:
SESSION 35

To begin with, we are looking to trade one market with one indicator in one timeframe. For the purposes of these sessions, as in the previous examples, we will choose a product related to the movements of the S&P500.

We are looking for certain characteristics to help keep the natural and ‘artificial’ volatilities low, and the placing of orders/stops as accessible as possible, including:

- Consistently high trading volumes.
- Available to trade 24hrs a day, or as close as.
- Tight bid/ask spread.
- Low minimum stakes.
- Low and/or percentage based fees (if not already reflected in the spread).
- Online access.
- Looking to start with the daily timeframe.

A S&P500-related product can tick all these boxes if you find a decent platform.

So, we now need to find such an online trading platform which can facilitate the trades. The platform should also give reliable live price charts, featuring a basic interface of adjustable timeframes and indicators, including the Directional Movement indicators.

In addition to the conventional brokerages, you also have the spreadbetting platforms which you can look into. It’s a personal choice and this is part of the search of finding what is right for you. Do some googling around for a while to help narrow down the possibilities.

You will find with some spreadbetting firms that a S&P500-related product is available on a rolling spread at around 40p/point minimum stake, and because the S&P500 is currently around 1300 points this means that your starting capital doesn’t have to break the bank, keeping in mind that you are trading the margin. Bid/ask spreads can also be as low as 0.4 points for some S&P500-related products. Use this as a benchmark and if you can find anything better then that's a bonus.

In summary for today, we are choosing one market (S&P500-related product), one indicator (+/-DI with 21/126 dual-time settings), and one timeframe (daily). One of the next questions is how do we source price data for the harmony trading interface? Another is, if we include the starting capital in the set-up cost below, what is the minimum amount required?

I’ll continue this introduction on Monday.

Have a good weekend …


[Running total of set-up cost = £0.00. See SESSION 13 re spending a penny.]
Click to expand...

Good luck with SB on the S&P but I think you are going to struggle. Trust me all I trade is the Emini, you are already at a disadvantage if you are paying $3 per RT in commissions when the bigger players are in and out for a couple of cents. SB will also quote their own price you wont have any orderflow, T&S, DOM and no true volume. This is like driving your car down the freeway blindfolded with the lights off. You can make money from indicators but not in the way that you think, the larger players know all about the retail traders indicators, this is one way make money.

god bless
 
SESSION 41

Trading one large market with one robust indicator in one daily timeframe should on average take you 5-10 minutes a day to maintain. Certain critical moments, such as the days surrounding an entry or exit point may require a more frequent monitoring, but the actual reviewing and adjusting of order(s)/stop(s) should take less than 1% of your day to effect.

I have posted today’s calculation on YouTube (below), and this reflects part of the procedure which you can go through each morning. A fuller explanation will come once these sessions are complete and I develop the tutorials for the trading interface. You can think of it as a mental workout, similar to the way you may do some physical exercise to maintain your body. However you think of it, it is imperative that it is made an immovable routine. In the beginning this may feel very restrictive, however, over time it will become second nature, and gradually you will deal with it just like any other routine action that you may do on a daily basis.


HTiChart _ Wed 1 Feb 2012 - YouTube


This is where the aspect of discipline should be re-visited. You are looking to realise a natural discipline and you do this through enjoying what you are doing. ‘Artificial’ or enforced discipline is unhealthy as it works against your natural instincts and brings about a dis-ease. Seek to enjoy trading by keeping it simple at first. If you wish to try other avenues which seem to have a magical complexity about them then feel free to do those also, I know I have. You can do both, simply keep them separate from one another. Put time aside to do the simple trading route such as the one market/indicator/timeframe and keep this ticking over in the background, and then attend to the more complex matters which may arouse your curiosity. Both will have value.

To touch upon the ‘critical moments’ mentioned above, as price approaches one of your paths of a pre-set order and then triggers an open position, you will look to monitor and adjust your stop as necessary. In our present example of the imaginary S&P500 we have set stops which are situated at the approximate points where the indicator would turn the complementary colour. For example, for the long order the stop is set at the point where the indicator would switch to a short position (red), and for the short order the stop is set at the point where the indicator would switch to a long position (blue). Essentially this is done for the purposes of being an ‘absolute’ backstop in the first moments, but once an order is triggered and the price settles over the following day(s) you will look to adjust your stop to a neutral position. In other words, if you are long then your stop will be placed at the price where the indicator switches back to ‘out’ (green), and if you are short then your stop will be placed at the price where the indicator switches back to ‘out’ (green).

You will look to adjust your stop from the complementary position to the neutral position as soon as you possibly can in the hours/day(s) following the point of triggered order.

Another critical moment will be when your pre-set stop closes out a position, and you will then look to keep the process rolling by setting up new round of order(s)/stop(s), and so the process repeats itself ad infinitum.

The ad infinitum part of the above paragraph has good reason to be there. In my next post today I shall come onto the topic of mind games.

Bye for now …


[Running total of set-up cost = £0.00 fixed cost + £150.00 starting capital for fuel = £150.00. See SESSION 13 re spending a penny.]
 
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SESSION 42

The mind and body interact in a revolving fashion. Relative to the body, the mind is vast. As an analogy, you can think of the body as the equivalent of the ‘visible’ wavelengths of light to the more diffuse wavelengths of the ‘invisible’ electromagnetic spectrum which is mind.

Physical actions are a reflection of mind, in that thought comes before action. You therefore create your reality in your mind first, which you then manifest through your bodily actions.

Mind games seek to influence your individual mind. Because you create your own reality, the only way in which another can affect it is through influence. Some influences can help you, and others can hinder you. This is one way to tell them apart.

If you are approached with a comment which contains words that are of a relatively low quality, then the influence will generally serve to hinder you if you choose to take it onboard as a belief.

If you are approached with a comment which contains words that are of a relatively high quality, then the influence will generally serve to help you if you choose to take it onboard as a belief.

Neither are really right or wrong as, again, this is a relative position depending on each individual, but you will know inside which brings you more enjoyment and which brings you less.

The above process is much easier said than done, but with practice you will begin to see the order amongst the chaos.

The repetitious practice of doing any action will help to strengthen your resolve. To paraphrase a note from the Tao of Jeet Kune Do, look to emphasise a repetitious drilling of economical form to acquire an instinctive action, remember that acceleration can be increased by sheer practice and will power, and that mechanical repetition is the basis of this.

What is important is that you follow your own mind, and look upon influences as a secondary factor when seeking to establish your primary pathways. Use your feelings and emotions as your guide, just as you use indicators in trading.

There are many children’s stories which highlight this process, Pinocchio and Charlotte’s Web to name but two. Indeed, if ever you wish to find a relatively healthy way in to any subject, first pick up a children’s book as they are written with children in mind, and kept as pure and simple as possible.


[Running total of set-up cost = £0.00 fixed cost + £150.00 starting capital for fuel = £150.00. See SESSION 13 re spending a penny.]
 
SESSION 43

Money. What is it exactly?

To understand this better we need to go back to a beginning, a time before money as we know it. I will have to condense the story somewhat so please bear with me.

Okay, I’m a forager, I begin to make tools, then farm land, then produce more than I can personally consume, so begin to barter my produce for other’s, it’s going well but I’ve got my eye on a table and chairs and nobody wants that many cabbages in one go, the local community realises these challenges popping up as each person begins to specialise in their production so they bring in a universal token of exchange (money), it’s found to work well, it helps to distribute the goods about more smoothly, and then because everyone is enjoying themselves even more they keep finding ways of producing more, and then realise that they have a lot of cash on their person, it’s very portable and accepted by everyone so a fear begins to grow that it may be stolen, and so the local community decides to build a bank in which all ‘loose’ cash can put in safekeeping, after a while the bank realises that not everybody wants their cash at the same time and there is always a relatively large ‘float’ of cash in the vaults doing nothing, so they decide to lend it out for the creation of major items such as buildings and transportation, this helps accelerate the development of more new technologies allowing faster and faster production of everything, the money supply exponentially grows bigger and bigger …

The above paragraph illustrates how many forks there are in the road and it is up to each individual to choose their course. The production is there to be enjoyed, it is natural like the spring and summer bringing new life and nutritious fruits. Knowing when to ease off is another thing, knowing the point when the tail could start wagging the dog.

When starting out in trading, the mechanical mathematical system helps to bring about a ‘feel’ for the motions of the markets, and helps identify a moderate course, taking also into account the autumns and the winters. Your ability to trade long or short gives you a great flexibility in benefitting from all the seasons of the market revolutions.

Below is today’s calculation for the imaginary S&P500.


HTiChart _ Thu 2 Feb 2012 - YouTube



[Running total of set-up cost = £0.00 fixed cost + £150.00 starting capital for fuel = £150.00. See SESSION 13 re spending a penny.]
 
SESSION 44

Learn to do one thing well, even if it is making a boiled egg and soldiers, and take what you have learned from this process and apply it to the next task that you set your mind to. These processes are self-similar, but you will see many different things on each journey, just as each jigsaw puzzle has a similar ‘construction’ but there are a great many variations on the theme.

That is where the enjoyment is, in asking a question then allowing an answer to flow, each time bringing new journeys and adventures.

In the early stages then, it is often a good idea not to set yourself strict targets, but operate simply in the knowledge that you are applying a profitable trading method with a good cushion of positive expectation. In not setting a ‘specific’ expectation such as growing ‘so much money in such a period of time’ you give yourself a freedom to experience things as openly as possible. Over time you will gain a natural feel for the returns, with no need to refer to the mathematical tables.

The analogy of the gardener is a useful one. Set out your basic plot, starting small with a few tools, seeds and instructions, and increasingly your experience will guide you as to how to tend to your garden and produce the most balanced results.

Focus on quality first, and quantity will follow.


[Running total of set-up cost = £0.00 fixed cost + £150.00 starting capital for fuel = £150.00. See SESSION 13 re spending a penny.]
 
SESSION 45

I will now close out this section three of these sessions.

I’ll take some time out to pull together the video tutorials for constructing the harmony trading interface in OpenOffice.

I’ll keep looking in on the forum to see if there are any aspects of the sessions which may require further clarification or explanation.

Thank you for reading these posts. They have helped me set down an outline of what I have learned about trading over many years, and have given me a benchmark from which I can develop my continuing research.

I will leave you with this morning's calculation for the imaginary S&P500.


HTiChart _ Fri 3 Feb 2012 - YouTube



[Final total of set-up cost = £0.00 fixed cost + £150.00 starting capital for fuel = £150.00. See SESSION 13 re spending a penny.]
 
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