Trading ideas are everywhere, you just have to look and recognize them. The best ideas are intuitive and easy to explain. A trading idea doesn’t have to be mind blowing to work, it only needs a sound premise. Cobbling together a strategy with a bunch of indicators and tweaking the money management isn’t an idea, even if it does produce a great equity curve after several optimizations, what you’ve done is created a strategy that works perfectly in the past, via curve fitting, but has little hope of working on markets it’s never seen.
Types of Trading Ideas
When you’ve been doing this long enough you start to catalog ideas, here’s some:
- Trends based on some identifiable factor like the monetary policy of the Federal reserve. Trends are by far the most followed pattern.
- You could exploit the relationship between two similar stocks or futures in a statistical arbitrage (pairs trade). Perhaps even an inter market relationship like the auto industry and platinum group metals (primary use is catalytic converters for gas powered engines), or soybean vs soy meal.
- There are seasonal patterns, speaking of soy beans, in agriculture, heating oil; did you know 40% of heating oil price movement is influenced by supply-demand issues in the northeastern United States, and weather is a big factor. Airlines and resorts have seasonal patterns that are easy to sort out.
- Selling premium up to a big announcement or earnings report, or buying volatility cheap after the earnings are announced and volatility has crashed.
- How about turnaround Tuesday, or over the weekend patterns, or same time next month when funds redeem and add to their position.
I could go on, as there are an unlimited number of ideas out there that are exploitable and profitable, if it’s a sound premise and you see it, then figure out how to trade it. Until you put up the money, your ideas are just that, ethereal moments in time, but ain’t worth a dime.
The best way to get in tune with the market and the economy is to get yourself involved, trade geopolitical events, wait for zinger economic reports and fade the move, be early on the spot by monitoring juicy breaking news from web news sites like The Fly on the Wall. When you have your money on the line, working for you, your attention is attenuated and focused. This is when ideas are born.
Trading Ideas Matter
If you think you’ll do well in the trading business with your idea de jour, think again. Someday that idea isn’t going to work. A constant stream of ideas is what you need, in fact it is the very life blood of a successful trader to stay ahead of, and take advantage of opportunities in these constantly changing markets. So, how does a trader come up with new ideas, and not just rehash the tired old ones?
“I begin with an idea, then it becomes something else.” -Pablo Picasso
The big mistake traders make looking for ideas is looking in the same old tired places. The market is reflective of what’s happening in the world, so doesn’t it make sense to expand your notion of a trade to the real world? Maybe, maybe not, perhaps you have to jump to the non-real world. The point is, trade idea generation is exactly like any creative endeavor, there are lots of ways to do it, just google “how to generate ideas.” That’ll get you going.
Most creatives use a process for generating ideas, let’s apply that to trading.
Research is first, you should focus on a particular market, like Oil for example. Start by looking at key reports, such as the petroleum status report, which comes out every Wednesday, and the weekly Natural gas report on Thursdays…ask yourself what happens to the market after these reports, how about before the reports…do you see patterns. Study why investors care, perhaps that will lead to research around OPEC and what they are currently up to, both business wise and political.
Most events experience a half-life, that’s where the maximum intensity of the report will last a certain number of days, then fade away until the next report. Ask yourself, what’s the half life of oil inventory reports? Is there a reversion to the mean that’s noticeable, or are these the beginning of momentum plays. Look for secondary markets that confirm a change in price of crude, like gasoline, maybe there’s a trade there, or maybe just a confirming indicator. Are there seasonal influencers, or weather anomalies at play. How many oil rigs might be affected by a nasty tropical storm, what about just the fear of a big storm coming.
Do you see how each question leads to another?
Once you’ve identified a pattern, think about how you can turn it into a trade. What are the setups, the ranges in time and price, what’s the average duration of the trade, what can go wrong, what can intensify the effect…on and on, one idea begets the next.
Let’s Get Real
It’s all and good to throw hypotheticals at you, but how would you actually turn an idea into a real trade? Well, let’s do that with crude oil. Perhaps we can trade some behavior we noticed crude takes after an impactful report. Let’s first develop the strategy.
After a big move does crude oil tend to fall back in line or does it continue down a path. In other words, is this a reversion to the mean or momentum play? Will the path be a circle (reversion) or momentum (line). From my research, crude is definitely a momentum play, so we’ll want to look at the strategy as a trend follower, but relatively short in duration due to the weekly reports. So we’ll make the following assumptions:
- 10-day loopback covers 2 weekly status reports and smoothes out noise.
- A move of 4 to 5 standard deviations over 10 days is big enough to matter, and small enough to generate enough trades.
- Giving price at least two days of pullback will allow us to stay in the trade, while providing the room to discover a trend.
- Holding the trade for 20 days allows the strategy to catch bigger market moves
Here are the Rules
- Enter Long when the close > close 10 days ago + 4 standard deviations
- Enter Short when the close < close 10 days ago + 4 standard deviations
- Reverse the trade after two days if there’s a new signal
- Exit the trade after 20 days
Results and Next Steps
I have executed this trade 4 times so far this year with excellent results, all four trades were big winners. I did 2 trades last year that has similar setups, but this year’s trade represents a refinement. How did I refine the trade you might ask? I varied some of the assumptions by trying different loopback periods, and varying the standard deviation threshold. I also incorporated a confirming market, using Heating Oil and looked for divergences.
I noticed a profound inverse relationship between the difference in price between crude oil and heating oil, and the price of crude oil alone. I also noticed this same inverse relationship of the Crude-Heating pair versus the S&P 500. With major changes in the market usually having a 2-3 day lagging effect on my trade.
I will continue to study this trade, and see if there are further refinements that can be made, or other triggers that can help it, confirm it, or turn it into something completely different. That’s the nature of trade idea generation.
What is a Systems Trader?
The answer to that question depends on whether you’re talking about the industry of algorithmic trading, or you’re talking about the growing community of retail traders that are running their own portfolio of automated trading systems.
This website is dedicated to retail traders who want to run their strategies on their own computers. The industry of algorithmic traders is big business, which typically includes investment banks, hedge funds and institutional traders. They have huge budgets and are running hundreds of millions or even billions of dollars.
The typical retail trader is trading with a much smaller account, typically a few thousand to a few million dollars.
So, while the industrial trader and the retail trader don’t compete, they are both doing essentially the same thing. They develop and run a portfolio of automated strategies that trade their accounts.
How is the Retail Trader Different?
The retail trader has a big advantage over the industrial trader in that he or she is small and nimble, and at the same time has access to incredibly powerful tools that are on par with many of the tools that the industrial algorithmic trader uses. They also both have access to essentially the same market data.
There’s nothing stopping the retail trader from running the same sophisticated algorithms as the industrial trader, except that they are looking at two fundamentally different problems and with much different criteria that is a direct result of the size of their respective accounts.
But this is the advantage of the retail trader. They can employ some of the same methodology and strategies in most of the same markets, at a much smaller scale, and also put tu work very effective strategies that are impractical for the industrial behemoth.
Our Approach to Algorithmic Trading
There are only a handful of people offering either algorithmic trading systems or training on developing also systems that are truly worth the investment, and they all follow the same basic methodology. We follow the methodology, but we are also the only people offering both the systems and the training in the same package.
Our goal is to not only provide you with a superior automated trading system, but also teach you how to be an effective administrator and developer of that system.
So, when you take our course, you get a portfolio of working strategies out of the box, you also get the training on how to develop your own strategies and instruction on how to run your system like a boss.
To schedule your first session go to the booking application below. For more information, click here.
Or call Ernie directly on his personal mobile phone: (508) 446-0517
Schedule Your Training Here
What Is Discretionary Trading?
Discretionary trading basically means you do your trading by hand. You take your signals from a variety of sources, or you have a specific strategy or set of tools that help you make trading decisions. There is little or no automation, for the most part you are pushing the buy and sell buttons.
We teach people who like to trade the discretionary way, but we do it with a systematic approach. Which means that there are trading rules to abide by, however within those rules there is some discretion on when to actually take the trade.
Advantages and Disadvantages
There are many very successful discretionary traders, and you can do quite well, so long as you are disciplined and consistent. Discretionary traders that know their edge and work within the rules and practice sound money management can and do succeed. But there is also a great deal of risk as well…
That risk is typically born from the inherent fallibilities of being human. We are subject to emotions, like fear and greed, we are also subject to distractions, which can result in costly mistakes being made.
Knowing Your Edge
Most discretionary traders don’t have a firm grasp on what makes them profitable and why, they just go on instinct. It is very rare to find such a person that is consistently profitable.
That is why we teach a sound approach where there is an underlying philosophy and methodology that guides the strategy and tactics. We employ a variation of theme based on a well known strategy that looks at the treasury yield curve.
The strategy is statistically based, so we know the odds of the trade, and we employ methods that stack the odds in our favor. The key to being successful with the strategy is employing sound money management.
This is a variation of the same strategy used by institutional traders in investment banks, hedge funds and proprietary trading firms. The strategy is very simple and can be learned in a few short lessons, and comes with live support. If you would like to learn this strategy, you can schedule your first lesson below. For more information click here.
Or call Ernie directly on his personal mobile phone: (508) 446-0517
Schedule Your Training Here
Don’t let anyone tell you that systems trading stocks or futures is easy. I’ve been speculating in systems trading for nearly 15 years. And it wasn’t until I serendipitously found my mentors, did I start seeing success. The following is what I learned, and I suspect it will work for you too.
Step 1. Have a Plan
When you embark on any project of sufficient complexity, build a house, start a business, run a campaign…you need a plan. The same is true for speculating in the stock and futures market. Your opponent has a plan…this is a competition, there are winners and there are losers. The winners plan well.
Step 2. Find a Strategy
This is the most difficult part of developing a trading system. Because most people think its about finding A super strategy that works. The reality is that it’s not about finding a killer strategy, it’s about developing a process for creating a continuous stream of adequate strategies.
Step 3. Curate, Check and Test
This is perhaps the most important step, because it’s the gate you open to running your money. You need to check and double check your work, strategies should be back tested, forward walked, and run in simulation mode against realtime data before you commit it to real money. If you can peer review it, that would be a very good thing to do as well.
Step 4. Execute Your Strategy
This is the big moment, when you pull the trigger and trade your strategy with real money. This is when all your planning comes together, you are now a fund manager. Don’t deviate from the plan, stick with it, at least for three to six month campaigns. Anything less then random chance could make a good strategy look bad.
Step 5. Monitor, Measure and Adjust
As soon as you start trading, it’s essential that you monitor your results. Your plan is not static, it’s about continuous improvement. Keep a trade log, develop relevant statistics, note all anomalies, then review the performance of your system on a periodic basis. Use what you have discovered as input to the next round, the next campaign.
Whether you know it or not, when you trade, it’s a business, and it requires the same kind of attention that any business that you intend to succeed at should have. These are the steps I have used and found success. It takes time to settle in and get everything running smoothly, but it will be worth it.