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Turning Automation On

You’ve prepared for this moment, now it’s here. It’s time to release your strategies to the real world of live markets, real money. It can seem scary and daunting, but you are confident because you have done your homework, you have tested your strategies, you know your edge, and you’re completely comfortable with the process. Time to make money.

In theory, your systems should run completely autonomously, but this is the real world, and if it were that simple, then everyone would be doing it. But not to worry, because you know the drill, you know what to expect and what to do. We call these things SOPs, or Standard Operating Procedures. Every commercial manufacturing system has them, military operations revolve around them.

For example, once you turn your systems on, the clock starts ticking, and that’s because you’ve entered into a cycle we call a campaign. Kind of like a project at work, it has certain goals and a timeframe. But your campaign is way smarter than the typical corporate project plan, it’s an agile process designed for continuous improvement.

Standard Operating Procedures (SOPs)

The whole goal of your SOPs is to take the pressure off of you, so that you can concentrate on the really fun part of automated algorithmic trading, and that is coming up with creative ideas, modeling those ideas, then developing them into automated strategies that make you money. That process of development is in fact a SOP, just like back testing is a SOP, and the procedure you use to promote your strategies to live trading is governed by a SOP.

SOPs are like recipes. You start with the basic ingredients, follow the directions, and wha la! You’ve accomplished a very important step. The only difference between a SOP and a recipe is that you sometimes have to make choices that follow a prescribed path, where you have to make a decision, like is it worth continuing with this strategy, or should I scrap it and move on to the next one.

Then there are operational SOPs like dealing with futures contract rollover. Every futures contract has an expiration date, and if you are in a trade and the expiration date is nearing, and you want your system to stay in that trade, then you need to roll the current contract that is about to expire, to the newly formed contract that the rest of the world is rolling to as well.

So, in this SOP there’s a few elements, first we need to know about that particular futures contract’s expiration policy, that will tell us the drop dead date, before we are obliged to take delivery of the underlying commodity. And believe me, you don’t want to take delivery…I mean what would you do with a tanker truck full of oil pulling up to your house?

But it’s not a big deal, you simply give yourself plenty of time prior to expiration. Perhaps you have a notification mechanism that tells you when a contract is coming near rollover time, or a mechanism that temporarily halts the trade until the rollover is completed. All of these are very simple to setup. And then there’s the act of rolling the contract, which is a super simple process. And then reuniting the contract with the strategy. Ok, that SOP is done, and your strategy is off to making money again.

Real World versus Hypothetical

When you are running a strategy in the live market and the strategy (a computer program) is entering and exiting hypothetical positions, the TradeStation system needs to maintain synchronicity between its hypothetical position in code and the real life position in the market in order to work. If that synchronicity is broken, in other words if the code has a position but there isn’t a corresponding position in the real market, then there’s a problem.



Fortunately TradeStation has a Position Match monitor in the TradeManager, that allows you to see if the hypothetical system’s position has a corresponding matching position in the real market. And so long as that is true, your strategy will look exactly like the real world position. But watching the TradeManager’s Strategy Positions monitor all day can be mind numbing. There are better ways, like an indicator on the specific chart where the problem has occurred.



This chart shows a big yellow bar where the position match has occurred. It’s easy to spot and effective. To get the position back in synch is an easy procedure. Go to Format>Strategies…, in the format window click the “Properties for All…” button, then the “Automation” Tab.  Then select the the options below to adopt a real world position. If the position is open, the strategy will use it, otherwise you may have to manually add the position, then the strategy will adopt it and all will be synchronized again.



Fully Automated versus Semi-Automated

When you release your first strategy and give it access to your real money, this can be difficult and a little scary because you have not yet developed the confidence in your ability to administer the system. So TradeStation provides you with two options, semi-automated and fully automated. Fully automated simply means that when your strategy decides to enter a position, it will do so without any further action by you.

The second option, semi-automated, requires your confirmation. You will be presented with a dialog asking for your confirmation to execute the trade that the strategy has initiated. I don’t recommend the semi-automated approach, unless this is part of your strategy, and you have a very good reason for requiring manual confirmation. Otherwise you are no different than a discretionary trader. If you love your strategy, you must let it go.

Here’s how you turn on Automation. Select Format>Strategies… from the menu, then check the Automation execution button, select the appropriate account, then turn off confirmation. Now you’re fully automated!


Running in fully automated mode at first can seem a bit intimidating, but once your strategy starts performing the way it did in your testing and curation, that intimidation factor will soon reside. And the more strategies you get running fully automated, assuming of course that they exhibit a low level of correlation, the easier it will become.

Multiple Non-Correlated Strategies

If you have watched any of my YouTube videos, or attended any of my webinars, then you know that this is my mantra. Successful automated trading is built around running “multiple non-correlated strategies.” This is the holy grail of automated trading if there ever was one.

You don’t need a rock star strategy to be successful. Besides, they are very difficult to come by, if they exist at all. One thing is for sure, even rock star strategies eventually stop performing. Developing them can take months or even years, and buying them, assuming someone would be willing to sell something that good, could cost a small fortune.

So why do it, when you could, with much less effort, build several simple okay strategies, that have a low degree of correlation between them? In fact, the best thing to do is create a process where you can continually churn out simple strategies that work. They don’t have to be perfect, just good enough. And that’s because when run together, the uncorrelated returns will have the effect of diminishing drawdowns and profits will add up. The result will be a combined system that is superior to the rock star system.

Diversification of strategies is the key to running a successful automated portfolio. Of course all of this can be easily accomplished through well established SOPs and a good plan.

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Life Cycle of a Trading Strategy in an Automated Portfolio

Creating automated trading strategies is being presented as super hard work, that takes incredible discipline, lots of brain power and testing, testing and more testing. And only if you follow the prescribe thousands of steps will you achieve success.

Well I say that’s a bunch of bunk!

Now let’s be clear, I’m not saying it’s easy as pie, what I am saying is that the emphasis and effort is all in the wrong place to make a trading system a profitable system. The emphasis should not be on creating the perfect rock star strategy, this is HUGELY wasted effort.

The emphasis should be on how well one strategy plays with the other strategies. Because a successful trading system isn’t about one strategy, it’s about a community of strategies that work well together. And the mind blowing thing here is that a bunch of average strategies working together the right way, that don’t take gargantuan amounts of effort to develop, will perform way better than one or two rock star strategies.

And the total effort to build these average strategies is orders of magnitude less to create than the rock star strategy or strategies. The rock stars can consume years or even a life time of effort. Simpler strategies can be churned out weekly. The difference is the playground in which you place them and how well they play together.

The key phrase here is, you should be running multiple non-correlated strategies.

So here’s the end-to-end process, the cradle-to-grave life cycle of a strategy. Don’t be intimidated, it’s not that complex. It’s all a matter of moving the strategies from left to right as they grow up and become better citizens.

Strategy Life Cycle

The concept is pretty simple. We want to produce a bunch of average strategies that have a low degree of correlation with each other. That simply means that they generate trading signals in ways that are not related. For example, one strategy might take signals based on seasonality events, another might wait for breakouts after an economic report, another might work on lunar cycles (not kidding), while another takes signals on significant pullbacks. And we can measure the degree of non-correlation with a simple Excel function called CORREL.

There are also fantastic tools that let you organize your portfolio of strategies into one consolidated performance report, that will show the correlation as well as the combined statistical measures. TradeStation has such a tool called Portfolio Maestro, and there are third party tools like PortfolioMerge.

Ok, so let’s look at the picture above. Our goal is to move strategies from the idea phase on the left, to the live campaign on the right. About one in twenty strategies will make it to the campaign. Not a big deal when you get my course as I provide you with a bunch of campaign ready strategies right out of the box.

Ideas to Development

Ideas can come from anywhere. I talked about this in previous emails, it’s not that hard once you get in the swing of generating ideas, as a matter of fact, this is the fun part of this process, the part where you’ll spend most of your time, perhaps 75% in total. This is where the magic happens. There’s a definite process and you build upon things that are known to work, and hopefully discover more things that work from time to time.

If an idea is a flop, then you scrap it. If it makes it through you initial evaluation, and shows some promise, it can go into the curation process. Your main job is to think of this process like a factory, where you need to develop lots of small ideas of reasonably high quality.

Strategy Curation

This is where your strategy goes through both in sample and out of sample testing. That simply means historic and live market data. The testing process is the key here, and the goal is to weed out the good from the not so good, so that after time a strategy shows its true colors and proves that it’s ready.

This is the boring part of the process, but perhaps the most important. You spend about 15% of your time here. Once a strategy has proven it works under lots of conditions and is robust and shows a low degree of correlation to other strategies in the live campaign, it sits and waits for the opportunity to join the game.

Live Campaign

Campaigns are like serial projects. This is where all the live trading takes place. A new campaign starts periodically, let’s say every three months. Thats enough time to evaluate how well the strategies are doing, and decide whether they deserve to stay in the game, or get replaced by a curated strategy waiting on the bench.

Not all strategies live forever. Sooner or later they loose their mojo, and with have to be retired permanently or put back into the curation process. Every once in a while, they can be recycled;ed into new strategies, which is not depicted on the graphic.


So that’s the entire process from end-to-end. There’s obviously a lot of detail left out for the sake of brevity, but in essence that is it. The key take aways here is that you don’t have to sweat over perfect strategies. Ok is good enough, so long as it’s non correlated with other strategies.

You scale your system simply by getting more strategies into the live campaign, and spreading the risk between them.

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Do More Of What Works – Finding An Edge In Systems Trading

There’s so much information out there for traders. You stick your finger in the air and get bombarded with advice, strategies, stock picks, analysts projections, and that’s all good for traders. The more information you have the better. So, the process of learning how to trade should be easy, right?

Oh, that is so wrong! The problem is everyone has an opinion, and shows like CNBC have at least 100 people everyday telling you what to buy. Fox business, Bloomberg TV, and all those Internet sites all offer you an opinion, which often sounds like statements of fact. Often you’ll here something like…oil is up due to the weak dollar, then within the same minute you’ll hear that oil is up due to the strengthening dollar. It happens all the time.

You can go on the Internet and look up trading strategies, and how to trade. But few if any of these bits of information are quantifiable. In other words there’s no backing study that shows statistical evidence of what works and what doesn’t. And so, you are left to figure it out for yourself. But most of us simply don’t have the time, so we rely on what we think are authoritative sources.

The problem with authoritative sources is that besides the fact that they may be peddling a bunch of bull, but let’s assume they aren’t…a lot of the data may be good for now, but a few months down the line, a year or two from now, it may all be worthless. Things change, for the most part. However, there are some things that seem to endure, basic principles that work. And so I’m going to list them for you here. Future articles will cover each of these points in detail.

  • Choose to trade short term (overnight to days, or weeks) vs intraday.
  • Buy pullbacks over breakouts, learn about hidden divergences
  • Buy after the market has dropped, not after it has risen (kind of like #2).
  • Stops hurt stock performance, the tighter the stop, the worse the performance.
  • Futures are more stop friendly, but dynamic exits are almost always better
  • Buy when stocks, ETFs and futures are above their 200-day moving average.
  • Buy when the VIX is 5% above its 10-day moving average.
  • Lock in gains when the VIX is 5% below its 10-day moving average.
  • Act on intraday highs and lows to increase your edge.

When you apply these broad principles to your trading, you will do better than had you not applied them. As a general rule, strategies that I have developed or are in the process of development, which lead to entries into the market, and my exit components, all follow these general rules. There are other very specific tools I use, that have held up to the test of time as well.

There are two specific indicators I use to help filter out noise and produce clearer signals. One is the 2-period RSI, the other is the rate of change of volume. These two oscillators are as close as one comes to the holy grail of indicators. Neither are standards, for example the RSI comes out of the box with most charting programs with a 14-period, and the ROC Volume doesn’t even exist in most platforms, the Chaikin Money Flow indicator is closest. But from a statistical point of view, these two clearly outshine everything else.

The 2-period RSI does the best job I’ve seen at identifying markets that are overbought and oversold, and the ROC Volume is the best leading indicator prior to a market move.

There is one other thing that I find curious, and that’s the need for traders to find a good shorting strategy. And while I’m sure there are some excellent ones out there, that probably work wonders in specific stocks, futures or markets. I can’t for the life of me find a universal principle to lay my hat dow on, that makes shorting a bit easier. So, as a general rule, I avoid shorting unless it’s handed to me on a silver platter.

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How To Come Up With 200 Profitable Trading Ideas

Sounds a bit crazy, that anyone could think up that many tradable ideas, develop, test and then put them into action. But it’s not so crazy if you have a process, and you’re motivated.

So, what’s the motivation? The motivation is to build an automated trading system that has some very desirable characteristics, like very small draw downs, a smooth equity curve, and distributed risk. But to achieve this, you need a process and a framework.

Most retail algorithmic traders are on a perpetual hunt for the killer strategy. They believe there is a holy grail, and if they push hard enough, if they optimize enough, they’ll eventually stumble upon it through the brute force of determination, endless research and long hours of testing.

The Holy Grail Strategy

Does the holy grail strategy exist? Maybe, but if it does, someone has already discovered it, and they’re either keeping it close to their chest or it no longer works. Rock star strategies will emerge from time to time, depends on market conditions. But these strategies are not available to you, unless you stumble upon one, or through endless testing you find the right combination of parameters…highly unlikely.

Below is a strategy that has made money for 20 years, maybe longer, I don’t know, because that’s as far back as I tested it. There are very few parameters to optimize. It’s super simple, based on a 2-period RSI using daily bars, it works across a number of markets and asset types. I found it in a book by Larry Connors and Cesar Alvarez called, Short Term Strategies That Work. Here are the rules…

  1. The asset being traded is above its 200-day moving average (I used the e-mini S&P 500 futures).
  2. Buy if the 2-period RSI drops below a level of 5.
  3. Exit if the asset crosses above its 5-period moving average.

I coded it up in TradeStation EasyLanguage and I’m testing it to see if it really works. It appears to be super robust. Stays in trades on average for a little over 10 days, has a very high profit factor well over 4.0, and a percent profitable that’s greater than 80%. Is this the holy grail?

The strategy isn’t perfect, in that the average winning trade versus the average losing trade is good, a such and with a really high winning percentage, but it’s a Long-Only Trade and doesn’t trade if the asset is under its 200-day moving average, so there are times I’d be sitting on my hands waiting for something to happen…extended times.

So, is this strategy the holy grail? Hardly. But that’s where other strategies might fill the holes. If I wanted to add another strategy, what should it do, how should it take trades. Is it sensible to add another long-only trader that works on daily bars? Probably not, because the returns are likely to be similar, meaning that when it does good, they both do well, and conversely when one is losing, the other is likely to be losing.

Multiple Non-Correlated Strategies

What I need to do is find another strategy to run along side this one, that has a low degree of correlation of its returns to my 2-period RSI strategy. But here’s the big questions. Do I need to find another super duper strategy? It turns out that you don’t. In fact, you are much better off adding an okay strategy, a strategy that is profitable but simple. But not just one, it’s better to add several, the more the merrier. Each one with a low degree of correlation to the others.

Low Correlation means that the strategies don’t come up with trade signals in the same way. So that when one strategy might be down, the others might be profitable. This has the effect of minimizing the overall drawdown of your portfolio of strategies, and making the profits additive.

Okay, so what does that mean? It means you need to become an idea factory. You need to come up with multiple, okay strategies and run them simultaneously. But why?

Agile Methodology

The answer has a parallel to Agile software development. And while you may not have any experience with agile development, let me describe it a bit for you, and why it works.

Agile development is about breaking up big problems into small ones, then putting together a team of generalists that can do a lot of different things, and then time boxing the project into short iterations, purposed with getting a small piece of functionality completely done with high quality results.

The key here is the iterative process, and okay experienced developers working as a team. They spread the risk, and actually do better work than a few super star developers. They are a lot cheaper too than the super stars.

Become a Strategy Making Machine

So, it turns out that if you add several non-correlated simple strategies to your portfolio, they do a much better job than one or two Rock Star strategies, for essentially the same reason that agile development teams do better. And this is where the motivation comes into play for creating lots of strategies.

Imagine if you could trade like a super star, and all you had to do was assemble several easy to code, simple, not particularly great performing strategies. Of course the strategies would have to be profitable, but there’s a lot of leeway here, the key is the low level of correlated returns, this is much more important than a killer strategy. And the more strategies you can add the better.

The thing is, strategies come and go, For periods of time they work great, then other periods they don’t. Sometimes they come to their end of life and need to be replaced. This is why you want to create as many as you can in a steady stream, and keep a number of them on the bench to test and curate, let the good ones rise to the top, and take the place of old and tired ones.

It’s not so hard to come up with new and interesting strategies, especially after you get into the swing of things. There are trading ideas everywhere, and can usually be modeled with a few simple lines of codes. Granted some may take a bit more coding expertise than you have, but those strategies are probably not critical to your success as an algorithmic trader.

Types of Strategies

There are many types or category of strategies possible. In the world of trading most people focus on price action, but the real interesting strategies are those that have some story behind them, with a solid premiss and hypothesis.

Like the effect of bonds after an anticipated Fed rate hike. The rate hike might happen, it might not, one thing is for sure, there’s a high likelihood that bonds are going to move. If you know the day and time of the rate hike announcement, or when a Fed governor might be speaking, you could create a strategy that waits for that event, then goes long or short once the market starts to move. These types of events generally have an effect on bonds for a few days. And detecting a discernible move a short period after the announcement is relatively easy to do in code.

Most strategies fall under one of the following effects on the market, they start a trend or continuation of a trend, or are counter trend makers. Some are mean reverting, or seasonally effected, others are technical, or relationships.

All you have to do is identify some thing that happens, something that interests you, or not, then apply one of these strategy types to try and capture the anticipated moves. Generally the coding is super simple. What you need to learn is how to back test your hypothesis and past events to see how your creation would have handled them. This is where process and testing skills come into play.


So is it possible to come up with 200 profitable strategies? Absolutely. But it takes a process, and an active imagination, and the motivation knowing the good things that will come from it. I’ve created or stole (borrowed) at least three strategies this past week. I’m on pace for generating almost 200 in a single year. They aren’t all winners, in fact a large number of them are complete flops, but that doesn’t stop the factory, rejects are part of the process.

The reality is that you’ll come up with a fairly good strategy that is ready to join your other live portfolio strategies at a rate of one in 20. The rest might have future potential, but after a while they simply need to be scrapped if they don’t meet some minimal criteria. It could be that their time isn’t right, as I’ve opened loser strategies I worked on a couple years ago, and now they perform brilliantly.

So, if your creating 200 strategies a year and 5 percent of them are winners, that means your potentially adding 10 winning, non-correlated strategies a year to your portfolio. Keep in mind, they all won’t stay winners forever, that’s why you need to keep the process going.

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Trading Is a Business, Shouldn’t You Treat It That Way?

You have choices, and as an individual retail trader you have a choice. You can choose to trade as an individual, without any of the asset protections and tax advantages that come with a legal business structure, and choose to put yourself in a hole before you make a single dollar in profit. Or you can choose to put in place a legal structure that will protect your assets and allow you to take significant deductions that could be the difference between success and failure as a trader.

How The IRS Looks At Traders

As an active trader you can elect to have Trader Status in the eyes of the IRS, and in doing so you need to qualify, with some level of interpretation, that you are an active day trader. In IRS Publication 550 and Revenue Procedure 99-17, the IRS has set general guidelines that provide guidance. IRS Publication 550 explains what investment expenses are deductible, when gains and losses from the sale of investment property are to be reported and what type of investments are considered taxable.

This is probably not the definition that most traders qualify for. And it doesn’t provide any flexibility should you decide to change your legal structure later on. Once you elect Trader status, you need to comply with this publication. I recommend you read it. Here’s a synopsis. After which I’ll describe a better alternative in my opinion.

Individuals who elect Trader Status are assumed to make multiple trades daily and do so continuously throughout the year. They spend a considerable amount of time documenting and researching trades and strategies and incur a significant amount of expenses in order to conduct their business activities. Although not specifically required, most qualified traders will open and close multiple trades daily and hold their positions for less than 30 days.

The qualified trader is allowed to file a Schedule C and deduct business expenses, which includes education, entertainment, margin interest and other trading-related expenses. You can also take a Section 179 deduction and write off of up to $19,000 a year for computers and other equipment used in trading activities.

A qualified trader can elect a Section 475(f) or the mark to market (MTM) accounting method. Under MTM, traders aren’t bound by the $3,000 net capital loss limit and can deduct all losses in the year they occur, providing the maximum tax relief for that year. This also allows traders to avoid the 30-day wash sale rule.

For active traders, these benefits are obvious, but these guidelines are open to interpretation by the IRS and the courts. Only a small percentage qualify, even some whose only income is derived through trading. That’s a big gotcha!

A Better Trader Business Structure

You can receive the same tax advantages as a qualified trader by creating a corporate entity to trade through, such as a Limited Liability company or Limited Partnership. You’ll receive the same tax benefits without having to qualify.

The legal entity receives less scrutiny from the IRS because they assume that no one would go through the trouble and expense of forming the entity, unless they were committed to trading as a business venture. But the truth is, creating a legal entity is a piece of cake. Here’s the big difference, it’s extremely difficult to change elections such as MTM once chosen. With the company, if there is an advantage to changing accounting methods or legal structure, you can simply dissolve the company and re-form it.

More Options As Your Trading Business Grows

As your business grows you can setup more legal entities to take advantage of a myriad of tax benefits and strategies. You could have a separate company for each primary strategy you employ, and create a general partner as a C Corporation that oversees each of the LLC’s. By doing this, income from one of the LLCs (up to 30%) can be transferred to the General Partner corporation to take advantage of additional tax strategies.

And there’s more. You could list family members as employees and take advantage of deductions like salaries, health care, educational expenses, and retirement accounts. You could even create reimbursement plans to fund medical insurance premiums.

Your retirement accounts, like IRAs and 401(k)s, can be transferred into a 401a, a type of pension fund that allows contributions of up to $49,000 per year that can never be attacked by creditors or legal claims. Because a corporation pays taxes on net income, the goal is to pay as many expenses as possible with pretax dollars and to minimize taxable income. The true benefit of having your own company, avoiding taxes and keeping more of your money in your pocket.

A corporate business structure provides excellent asset protection because it separates the business from the individual. Long-term assets can be held by one of your LLCs that can use accounting methods better suited for investments. All assets are protected from creditors and the legal liabilities of the individual because they are held by separate legal entities.


Is it all peaches and cream having all this legal structure and complexity, of course not, but that’s what accountants are for. And the fee you pay them is also tax deductible. The money you spend on an accountant and a good corporate lawyer will pay for itself many times over. For traders who are profitable but cannot or don’t want to qualify for trader status, trading through a simple business is absolutely essential. To get the best tax advice and legal protection, you should speak with professionals who understand the formation and operation of legal entities for traders.

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5 Reasons Why Automated Trading Is Not For You

All types of trading has its ups and downs, and it would be irresponsible if I gave you the impression that automated trading solves all problems, because it doesn’t. So I thought I would share with you 5 reasons why automated trading may not be right for you.

  1. Crap In – Crap Out
    You might be thinking that the problem with your strategy is your human frailties, that you can’t hit the entry just right, or you exits are not optimal, and maybe by automating  my strategy all those problems will go away. And you might be right.
    But wait, do you even know if your strategy makes money? Have you back tested it and know what your edge is, I mean really know, not just some flowery endorsement by a trading guru. Maybe that strategy is pure crap, and no amount of automation will fix it. It’s quite possible that by trading it by hand, and injecting some of your intuition, that you’re doing better than if it were automated.
    Never assume that just automating a strategy will produce profit, because it won’t. Developing and putting a strategy to work takes a lot of effort, with some very specific things you need to do to give your strategy a better than even chance. The results you get are directly proportional to the smarts and effort you put in.
  2. Your Emotions Won’t Just Disappear
    You’ve probably heard the gurus, and everyone else you know, tell you that you have to take your emotions out of your trading. Sounds easy right, just act like a robot, but it’s not…so why not let the robot do the trading, then I can offload the pain and accept what the automated systems gives me, right? Wrong!
    As long as you’re putting your money into the game, and putting it at risk, those emotions will be there, there’s no escaping it. While it’s true that automation helps relieve you from making hard decisions, the stress, greed, anger and elation are all still there. Don’t let anyone ever tell you different.
    The only thing that helps temper your emotions is the confidence you have with your system, and that comes from knowing how it will behave, and having the experience of how it works in real-life situations.
  3. Automation Won’t Make You Disciplined
    One of my customers was marveling on how well his automated system was performing. He said I turned it on last week and it made $700 fro me. I thought…great, maybe he’s finally gotten over his impulsive ways, that led him to selling out at the bottom and piling in after the market had already run up. Then he drops the bomb…”Yeah!” he says. “I had to turn automation off a few times and manage the trade.”
    I pointed out though, had he not touched the system at all, he would have made over $3000. But he said…”I didn’t seem like it was making the right decisions.”
    Let me just say this. If you’re gonna interfere with the automation everytime you think you know better, then you’re no disciplinarian. You’re just a discretionary trader with an expensive toy. Discipline is born from good habits, that follow a prescribed plan, reinforced through repetition over a period of time. It’s up to you whether your discipline is focused on the goal or not. Automation should be left alone, that’s the plan. Another part of that plan is to periodically review the performance and make sound decisions based on objective evidence, not gut feelings as you go.
  4. You Can’t Compete With the Big Boys
    Don’t think for a moment that because you are now automated, that you can go out there and just turn the money spigot on, like those big hedge funds and their high frequency trading. You can’t. They operate in a completely different world, with huge infrastructure, dozens of highly paid data scientists, and specialized networks that use order types that you don’t have access to.
    There’s simply no way you’re going to take your scalping bot and compete as a retail trader, against the pros. It’s like saying you’re little league baseball team can compete with a major league team. Not gonna happen.
    But, the good news is that you don’t have to. There are plenty of opportunities for you to exploit that the big boys won’t even touch. You can work in the crevices and cracks of the system, with a kind of nimbleness that those huge behemoths simply can’t. And there’s lot’s of money to be made there, because now you’re competing with all those other retail traders, most of which are as clueless as you once were.
  5. You Can’t Just Forgettaboutit
    Unattended operation, leaving your systems to go on their own for days or weeks on end is simply stupid, and you’re asking for the trading gods to punish you, and they will. While it’s true that you don’t have to stare at the screen all day, which is a big relief. You do have to check in periodically to make sure there are no problems, like runaway trades, or orders that didn’t get filled, of feeds that went down, or computer systems that decide to freeze up or crash. All kinds of things can happen.
    So, you have to check in periodically. On my intraday traders, I check in several times a day depending on when they trade, on my swing traders I check in at least once a day.
    If you have a full-time job, and you think you’re going to run multiple strategies, then you better have pretty good flexibility in that job and a lenient boss, so that you can check often and take action when necessary. My systems have gone weeks without issue, but if I were not there when a serious problem arose, like a runaway trade, it could’ve cost me months of profits, even with all the safe guards.

There are things you can do to mitigate risks, like trade multiple accounts, and divide your trading capital among them. Also, run multiple strategies, with tight risk controls on each, and distribute the risk across all the strategies. This is just good practice.

I hope this list has opened your eyes, and made you aware that automated trading may not be for you, or that trading in general may not be for you. My goal is to provide you with quality systems and then train, coach and mentor you to ensure that you have a great chance for success and will make money. If I were to mislead you and tell you automated trading is like a money printing machine, and all you have to do is turn it on, then that would be grossly irresponsible. My number one goal is complete transparency, because only then can you know the truth about automated trading.

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Where Do You Get Trading Ideas?

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.

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How To Trade Oil Futures – The Basics

Crude oil (CL) is one of the more active commodities to trade. It has tremendous volatility and excellent liquidity. Oil is affected by global economic and political conditions, almost to the same extent as US Treasuries. The price of crude oil affects the price of many other assets, including stocks, bonds, currencies and even other commodities. This is because crude oil remains a major source of energy for the world and is a defect currency in many ways.

Crude Oil Contract Specifications:

  • Ticker Symbol: CL
  • Exchange: NYMEX
  • Trading Hours: 9:00 AM – 2:30 PM EST.
  • Contract Size: 1,000 U.S. barrels (42,000 gallons).
  • Contract Months: all months (Jan. – Dec.)
  • Price Quote: price per barrel. Ex $65.50 per barrel
  • Tick Size: $0.01 (1¢) per barrel ($10.00 per tick).
  • Last Trading Day: 3rd business day prior to the 25th calendar day of the month preceding the delivery month.

Cude Oil Fundamentals

  • Light Sweet Crude Oil is traded on the New York Mercantile Exchange (NYMEX). “Light Sweet” is the most popular grade of crude oil that is traded.
  • Crude oil is the raw material that is refined to produce gasoline, heating oil, diesel, jet fuel and many other petrochemicals.
  • Russia, Saudi Arabia, and the United States are the world’s three largest oil producers.
  • When crude oil is refined, or processed, it takes about 3 barrels of oil to produce 1.5 barrels of unleaded gas (RB) and 1 barrel of heating oil (HO).​

Crude Oil Reports

This report is released every Wednesday at 10:30 PM EST, unless there’s a holiday, then it’s released on Thursday at 11 AM EST. The report is usually considered bullish if the actual reported inventory is significantly lower than the expected inventory level, and bearish if it is higher. We say usually because there may be other factors that could affect how the market perceives the report, such as seasonal conditions, or storage anomalies.

TIP: On the days of the report, if you are a day trader or scalper, my experience says don’t trade Crude Oil between 8:50 Am and 10:35 AM EST. The market is erratic on report days during these hours. Wait until the report has had a chance to settle and the market digests its content before trading.

Price Movements

The price of crude oil (CL) is highly correlated to the economics of gasoline (RB) and heating oil (HO). In fact, all three of these contracts are often traded together either for hedging by refiners, or speculation by professional traders in what is called the Crack Spread.

The Crude Oil market is by and large a trending market. There is a high level of volatility however, which can cause price to jump or plummet. These spikes are typically followed by a regression back to the mean direction, unless the event results in a major supply disruption. Crude often gets stuck in prolonged ranges after a big move, identifying these ranges is crucial to exploiting excellent trading opportunities.

The U.S. dollar is a major component in the price of oil. A higher dollar puts pressure on oil prices. A lower dollar helps support higher oil prices. Crude oil also tends to move closely with the stock market. A growing economy and stock market tends to support higher oil prices. However, if oil prices move to high, it can stifle the economy. At this point, oil prices tend to move opposite the stock market. This usually becomes a concern when oil moves above $100. In the past, prices in the $120-130 range bring about capitulation.

Profit Targets for Day Traders

When day trading Crude Oil futures set your profit target between 0.15 to 0.20 cents. This seems to be in line with the intraday swings for the CL contract.

A Target of 0.15 cents with a single full-sized contract translates to $150 ($10/tick or 0.01) and 0.20 cents equals $200, so that’s plenty of profit potential but it’s not going to make outsized demands on your trading strategy like if you were shooting for a lot more, like 0.40 or 0.50 cents. I’m not trying to tell you there aren’t bigger moves, in fact I’ve seen plenty of times rallies go well beyond $1.00 or more. I’m just trying to give you a target that can make profits consistently.

Day Trading Crude Oil Futures

Crude oil is one of the favorite markets of futures day traders. The market typically reacts well to pivot points and support and resistance levels. You have to make sure to use stops in this market, as it can make very swift moves at any given time. It is best to day trade within the context of a larger global macro strategy, rather than rely on pure technicals.

There is no shortage of trading opportunities in crude oil from day to day. The market is very active and it has plenty of volume. Crude oil is a 24 hour market, so be cautious of possible overnight moves that can take you by surprise. Much of the same principles that apply to stock index futures also apply to crude oil futures. If you like trading the e-mini S&P, you will probably like crude oil too.

Crack Spread Trading

In my opinion, day trading technicals is too risky, but many traders find it okay. I prefer to trade a spread, like one of the Crack spreads. My favorite is Crude (CL) vs. Heating Oil (HO) in a 1×1 spread, because of the very high correlation between the two products (r = 0.90 on a daily basis). This provides a level of risk aversion because it’s essentially a hedged trade. The primary trading methodology is mean reversion.

There are other popular Crack Spreads, such as Crude (CL) vs Gasoline (RB), and an all inclusive trade with Crude, Heating Oil and Gasoline, which is usually traded in the ratio of 3x2x1, but this is typically the type of trade a refiner would do to hedge their business

I trade Crude vs Heating Oil, and offer a course and mentorship program for this spread. If you are interested in learning to trade the Crack Spread, contact me at 508-446-0517. And look out for future posts on the Crack Spread.

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Highly Correlated Spreads

Spread or pairs trading is a very effective way to hedge your risk exposure to the movements of the broader market. With pairs trades you can make profits through simple and relatively low-risk positions. The trade is market-neutral, which means the direction of the overall market does not affect profit or loss…it’s the change in the relationship between the pair that you are trading.

The primary goal in choosing a pair to trade is that they are highly correlated. This correlation ensures that you are trading the relationship and not the price. You make profit by waiting for the difference in price to diverge by some statistically significant amount. This change represents the divergence in the relationship. At some point this relationship has a very high probability of regressing back to the original price difference. The higher the correlation, the higher the probability that the relationship will regress back.

So, we use statistical tools to measure correlation with a measure called the correlation coefficient, which is on a scale from -1 to +1. A +1 indicates perfect correlation, while a -1 indicates perfect inverse relationship. There are virtually no pairs with perfect correction, but pairs with coefficients above 0.70 are considered to be candidates for pairs trading. Mathematical proofs have shown such pairs have a 75% probability of regressing after a divergence.

This is a very strong edge that traders can use to their advantage. And the reason why pairs trading is so popular with hedge funds, investment banks and professional traders. Very few retail traders use the strategy because there are few good intuitive to use tools available. FYI, if you take my course you will be provided such tools.

Finding Great pairs Can Be Challenging

Unless of course if someone does it for you. And that’s what I have done for you here. I have ferreted out the futures contracts that have the highest correlations. I personally trade most of these pairs using a proprietary methodology and set of rules, employing a strategy called statistical arbitrage.


The “r” value is the correlation coefficient of the pairs shown. The charts plot the difference in the notional value of the pairs. That’s what we analyze using statistical tools to determine when to act on the trade. All the pairs use a ratio of 1 to 1. Meaning the smallest position size would be 1 contract long and 1 contract short. My favorite trades happen to also be the most highly correlated. Two are Treasury futures called the NoB and FYT, and the other is an Energy futures pair called the Oil-Heat which is a type of Crack Spread.

There’s a fantastic tool available on the CME Group website that helps identify the most highly correlated pairs called the Cross Correlation Calculator. The screen shot below shows the tool, and I have blocked off the most correlated pairs. There’s very few that every achieve a correlation Coefficient higher than 0.60, which is the standard I used for blocking them off. I wouldn’t trade the pair unless it had a value greater than 0.75.

In future articles I’ll go over each of these pairs and talk about specific strategies that can be employed on top of the basic statistical arbitrage strategy that will further increase your probability of profit. If you would like to learn how to execute those strategies now, then sign-up for my course, it’s a fantastic value, and includes one-on-one lessons and mentoring.