Trading update for Wednesday, 9/28/11

As I mentioned yesterday, it looked like the FAS was getting ready to generate a daily swing sell, and the FAZ was getting ready to generate a daily swing buy.

Well today, both of those setups were triggered. The FAS sell is circled in red, and the FAZ buy is circled in green:

Since I am still on the fence about the the market impact of a possible $3-5 Trillion dollar fund for European sovereign debt, I decided to favor going long the FAS for a longer term hold, as opposed to long the FAZ for a shorter term swing. This continues to be my bias.

I have an order to buy 1 lot of the FAS at 10.35 or at just above today's high of 12.14.

Barry Ritholz's Big Picture blog had a good article today on the importance of taking the stop loss if you are a trader, a bank or a country. Managing risk is what keeps us in the game, and taking the stop loss lets us play another day.

Disclosure: No positions in the securities mentioned.

***remember this is an illustration of what i am trading and my thinking...it is not a recommendation for you or anyone else to buy or sell this or any other security...trade at your own risk...my positions my change at any time without notice***

'NDX 30th DOM' generated a Long Entry Signal for Yesterday's Close

The 'NDX 30th DOM' System Trading Model, generated a Long Entry Signal for yesterday's (Tuesday's) Close. This model is based on the behavior of the NDX on the 30th calendar Day of the Month (DOM). It is due to be exited at today's (Wednesday's) Close unless its Money Management Stop is hit intraday.

As we can see from the Equity Curve chart shown above, the model is currently trading at it's all time high.

Here are some of the model's Performance Statistics:

• Model Tracking Vehicle=NDX
• Start Date=11/1/1985
• Number of Trades=38
• Average Trade Return=0.70%
• Win Rate=79%
• Average Win/Average Loss=1.1
• Profit Factor=4.15

The caveat with this model is its Money Management Stop can be pretty high, currently about 3%. The size of the stop for this model can vary greatly, as it is derived from a proprietary calculation that factors in the ATR (Average True Range) among other things. Currently the stop is the largest it will ever be. Over the life of this model, the Money Management Stop has been hit twice (5.3% of the time), and when it was hit, it was in the 1.4%-1.9% range.

Disclosure: Long the NQU09.

Disclosure: The performance results shown above are for Model analysis purposes and do not include commission or slippage. The model is built on data from the NDX, but I trade the model with the NQ e-mini. Actual trading results from the NQ usually differ from the model results of the NDX, with the NQ showing somewhat weaker performance data. Nonetheless, I still trade this model with the NQ and when executed according to the plan, it has generated consistent profitability for me.

***remember this is an illustration of what i am trading and my thinking...it is not a recommendation for you or anyone else to buy or sell this or any other security***

'SPY Gopher' generated an Entry Signal for Wednesday's Close

'SPY Gopher' has generated an Entry signal for the SPY at yesterday's Close. This is one of my favorite systems. I have been trading this model since about Trade 65 (Equity Curve chart above). Whenever it goes through a drawdown, it has always gone on to ultimately make new Equity Curve highs. And it has just generated another entry signal.

Model Performance Stats:

• Model Tracking Vehicle=SPY
• Start Date=2/2/1993
• Number of Trades=94
• Average Trade Return=1.2%
• Win Rate=69%
• Average Win/Average Loss=1.4
• Profit Factor=3.18

The caveat with this model is its Money Management Stop is very high, currently about 3.5%. Historically, if I can handle risking that much capital on the trade, the performance of the model over the following year has been very good. The model generates 5-6 trades/year, which on average returns 6-7%/year. Each position is modeled to be open for 5 days unless the Money Management Stop closes the position sooner.

Disclosure: Long the ESU09.

Disclosure: The performance results shown above are for Model analysis purpsoses and do not include commission or slippage. The model is built on data from the SPY, but I trade the model with the ES e-mini. Actual trading results from the ES usually differ from the model results of the SPY, with the ES showing somewhat weaker performance data. Nonetheless, I still trade this model with the ES and when executed according to the plan, it has generated consistent profitability for me.

***remember this is an illustration of what i am trading and my thinking...it is not a recommendation for you or anyone else to buy or sell this or any other security***

'NB #2 SPY' Generated an Exit Signal for Wednesday's Close

'NB #2 SPY' Generated an Exit Signal for Wednesday's Close. The position was held for 1 Day as is directed by the model. The Money Managment Stop was not hit. The position generated a profit of about 0.8%, very close to the average trade return of 0.7%.

The position had been up nearly 2% by late morning but then pulled back prior to the FOMC announcement at 215pm. Market participants found things to dislike about the announcement and the SPY continued to drop and just about filled its opening gap up. A rally during the last 45 minutes brought the SPY back up to close about 0.8% higher than yesterday.

A bit of a roller coaster but with System Trading this is par for the course. Once the model has been built, the 'plan the trade' portion is complete and I can put my IQ on the shelf. Once an entry signal is generated and the position is put on, I have to pull my EQ off the shelf and 'trade the plan'. Now, no matter what kind of ride the market goes on and no matter what my emotions may go through, I have to follow the rules of the plan.

I was not happy to give back the near 2% intraday gain, but there was nothing I could do about it except to 'trade the plan'. Needless to say, I was happy to see the EOD bounce back to decent profitability. Interesting how my 'happiness' was strongly corelated to how this position played out. I bet my 'happiness curve' would have been higher and steeper if I was not monitoring this position minute by minute today, but rather playing with my son and/or hanging out with my wife. I think one of the skills I need to continue to develop is to emotionally detach myself more and more from the outcome of any individual trade, knowing that if my overall System Trading Portfolio is full of robust trading models, then the profitability will come over following 12 months. Currently, I would give my System Trading Portfolio a B+ for robustness. Emotionally digesting the Portfolio's robustness and profitablity is a work in progress.

However, I did greatly enjoy the telephone conversation I had with my trading friend JE (over at http://myestradingjournal.blogspot.com/). He found a unique way of using the ATR Volatility Bands that I developed and have written about. It just goes to show that the creative process knows no bounds, and what one has not concieved of, another has already put into motion. Nice job JE!

'NB #2 SPY' Generated an Entry Signal for Tuesday's Close

NB #2 SPY' Generated an Entry Signal for Tuesday's Close. The position is only held for 1 Day, so unless its Money Management Stop is hit intraday today (Wednesday), the position will be closed at 4pm.

'NB' stands for 'Narrow Bar'. In addition to Tuesday's Daily Bar in the SPY being the narrowest bar for the most recent X number of days, there are two additional price related filters. This model has a Profit Factor=3.14 (which is above the 3.0 that I strive to find and trade), average trade returns 0.7% (excluding commission and slippage) and generates 2-3 trades/year.

At the time of this posting, the position is up about 1.5%. Who knows where this will be by the end of the day, especially since today is FOMC day. But my plan is to hold it until 4pm or I get stopped out.

Disclosure: Long the ESU09.

***remember this is an illustration of what i am trading and my thinking...it is not a recommendation for you or anyone else to buy or sell this or any other security***

'SHOE SPY' generates a Short Entry Signal

'SHOE SPY' has generated an Entry Signal on the Short side for the Thursday Open of the SPY. 'SHOE SPY' stands for 'SHort Option Expiration SPY'. The trade is due to be Exited on Friday June 19 at the 4pm Close, unless the Money Management Stop is hit before hand.

This Strategy is based on the behavior of the SPYder's during Option Expiration week, and is built on data that goes back to 1993.

This Short biased strategy performed extremely well during the bear market of 2000-2002 (Trade #32-52 on the Equity Curve Chart above). Though it did hit an new Equity Curve high in January 2008 (Trade 78), it has since booked its largest drawdown, during a period when the S&P 500 dropped by nearly 50%! The model appears to be out of sync with the market behavior during Option Expiration week for the past 18 months. The model may be broken.

I used to trade this model with 100% of capital, but I reduced that to 60% of capital when I put the trade on this morning. As of about right now, the position is about 1% out of the money.

I may need to do one or more of the following:

• stop trading the model


• rebuild the model


• reduce the position size even further for future entry signals

Disclosure: Short the ESU09.

***remember this is an illustration of what i am trading and my thinking...it is not a recommendation for you or anyone else to buy or sell this or any other security***