Extreme Frustration, but keeping my chin up.

For the past few days I have been in the process of culling out models that have not been performing well over the past few years. On the surface this is the right thing to do. However 3 of the 4 recently discontinued/suspended models have performed very well over the past few weeks:

Narrow Bar #1 NDX: generated a trade a few days ago that made about 0.5%. I have suspended the Narrow Bar models due to a flaw in the logic.

NDX OU: This morning, I closed the NDX OU trade pre-market for a 0.22% loss. The model has performed poorly over the past few years and for all intents and purposes is declared dead. The after hours futures have gapped up 25 points, so that model would be sitting on a 2.0% gain due to be closed at 4pm Wednesday.

NDX 14th DOM: I discontinued this model 15 minutes before the close of today's markets. The initial concept was sound, but the logic filters no longer made sense to me and the model has been performing poorly over the past few years, so I discontinued it. This model would have generated an entry signal at 4pm today. Right now, with the gap up in the NQ futures, that model is up about 1.85%.

Oh, the models that I am keeping, and that have generated positions over the past few weeks have either been scratches for small gains, or have gotten stopped out:

BTBT NDX
BTBT RUT
Payrolls NDX
NDX 1st DOM
NDX Summer Rally
NDX 30th DOM

Right now I am very frustrated. My cognitive side still believes in the models that have performed poorly over the past few weeks, and still believes the models that I have discontinued should stay offline. However, my emotional side is very frustrated. This reminds me of the challenging dynamic I experienced from the summer of 2007 to the summer of 2008. Nearly everything I did was wrong. The entry signals I took often turned into losers, and the entry signals I ignored ofter turned into winners. The basis for ignoring those profitable signals was disbelief in robust models. This happened so often, that I became too scared to trade.

This current environment appears to be different. A string of poor timing where good models produce losers and bad/suspect models produce actual/potential winners. I am not going to change how I trade. Except tonight and tomorrow will probably be rooting for the gap up to be sold! Emotionally, I want to be right, cognitively I won't be changing a thing.

Chin up!


p.s. the gap up may not be all that bad...i have been building a longer term investment position in the FAS for my IRA and some custodial accounts...the FAS may be held for another 3-15 months, depending on how it performs...ideally i want it to go down more so i can build up my position...alas i cant control what it does, so if it decides to put in a run, i will have a partial position, which is better than nothing...

Disclosure: Long FAS.

***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***

Out of Sync: 'Modeled vehicle' ($RUT.X ) and 'trading vehicle' (TFU09) are not exact mirrors of each other. 'BTBT RUT' Stops out.

I know sometimes the 'trading vehicle' can be a bit more volatile than the 'tracking vehicle', but this morning I was able to witness even more volatility than I had imagined.

The picture above displays a 2 minute chart of the Russell 2000 (tracking vehicle: $RUT.X) over a 2 minute chart of the Russell 2000 mini future contract (trading vehicle: TFU09). I drew some support and resistance lines which roughly outlines yesterday afternoon's base, the breakout above it, the run up into the close and then this morning's open.

As we can see, shortly after today's open we sold off. While the tracking vehicle stayed above yesterday afternoon's support line, the trading vehicle traded down to it, and then a good deal below it. I am really learning how volatile the trading vehicle can be compared to the tracking vehicle. I do recognize that TradeStation updates this trading vehicle's chart with every Tick, while this tracking vehicle is only updated every 15 seconds. Still this doesn't account for the trading vehicle trading below the support line for an extended period of time.

The frustrating part of this behavior, is that the Money Management Stop for 'BTBT RUT' system happened to be just around the support line* (see note at bottom of post). So when the TF traded down to that support line at around 945 am, the trading vehicle got stopped out. However, the tracking vehicle never traded to that level, so it didn't stop out.

This is a frustrating part of using one vehicle to model a particular market behavior (RUT), and then using another vehicle to trade this behavior (TF). Sometimes the trading vehicle gets stopped out, but the modeled vehicle doesn't. Talk about slippage when the EOD stats are totalled. I recall about 18 months ago, this happened to me. The trading vehicle got stopped out shortly after the open for a 0.50% loss, but the tracking vehicle didn't, and then it went on to post a 2-3% gain. I was so pissed that day.

So after the tracking vehicle got stopped out this am for a 0.50% loss, but the modeled vehicle didn't and then both started to bounce back up, I began to fret that another day like the one from 18 months ago was in the works.

So what did I start doing? Well, I got pissed off some more and started rooting for that damn tracking vehicle to start trading back down! And of course it didn't go down, but continued up for a bit. Then as we all know, the RUT and the rest of the major market indices put in a lower high just before 10 am, and then headed south. The modeled vehicle hit its stop just after 10 am, and I was thrilled!

The lesson here, is I need to recognize that sometimes the trading vehicle is more volatile than the tracking vehicle, especially as it relates to the TF/RUT. When I use real tight stops, like the 0.5% stop for this model, I may want to increase the stop for the trading vehicle a bit, say to perhaps 0.70%. This might help mitigate this volatility related slippage.

I wonder if the opposite has ever worked in my favor? Such that the tracking vehicle got stopped out, but the trading vehicle didn't. I do recall that within the past 6 months or so, a trading position get stopped out (within 15 minutes after a particularly volatile FOMC release) at a much better price than the modeled position did, perhaps by as much as 0.50% I have only recently begun to monitor how much of a difference there is between a position's modeled return and its actual trading return, and have discovered that on average its around 0.15% lower than the modeled return.

*i know, i know, placing a stop at support instead of under it is a recipe for whippage, but the logic of this stop is not based on previous pivots, s/r lines, etc. but rather is based on a specific % below the entry price...in today's case, the stop level and the support line just happened to be essentially the same.

When my Portfolio is both Long and Short, what direction do I root for?

Right now, my System Trading portfolio is about 10% long the NQU09 (via 'BTD Index': http://stbsmb.blogspot.com/2009/06/btd-index-generates-entry-signal_16.html) and about 60% short the ESU09 (via 'SHOE SPY': http://stbsmb.blogspot.com/2009/06/shoe-spy-generates-short-entry-signal_18.html). I find myself rooting for the long and then rooting for the short and then rooting for the long and then.... Since the ES and NQ are highly correlated, I should expect them to pretty much move in tandem with each other. If I keep on rooting for both, then I will surely make myself crazy, yet I find that I am doing it anyway.

So if I am going to root, then which direction should I root for? On balance I am net short so I should root for the downside.

By why root at all? This is not professional baseball that has me rooting for the home team (Go Red Sox!). However, the very notion of rooting suggests I am too close to the trade emotionally, too involved in its outcome.

If my models are robust, then the winning trades and their profits will come over the next 12 months whether I root for them or not. While the rooting can be fun, perhaps it is a sign of being too tied up in the trades outcome, of too much ego involvement.

Perhaps this dynamic is also related to my tendency to exit winning trades too soon, specifically if they have not reached the price target or the time stop. Going back to the baseball analogy, if my team is winning, and I can call the game early, then I get to book the win and thus improve my record! But somehow I don't think the opposing team, the umpires and MLB would allow such a thing. Since I trade on my own, I am also my own coach, manager and umpire. Whenever I am inclined to exit a trade early, I should consult my coach, manager and umpire to see if it is an acceptable thing to do. Somehow I don't think they will!

This has been an informative post for me to write. I hadn't previously made the connection between rooting and exiting a wining trade early. Perhaps there really isn't a connection and I just went off on a tangent. But perhaps there is. Since it is a pretty human thing to do, I don't know if I can stop rooting for a particular direction (long/short) or a particular sports outcome (go Sox!), but at least I have brought this dynamic to my attention. This in itself is a win.

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Confession: As a boy growing up in New York during the 1970's, I was a New York Yankee's fan. I have been living in Massachusetts since 1986, and became a Red Sox fan in 2003. My wife is a huge Sox fan, and we have watched or listened to nearly every Sox game since 2004. It has been great fun being on both sides of one of the greatest rivalry in professional team sports. I have tremendous respect for the Yankees and their organization, but when it comes to rooting I am all about the Sox. Periodically, I like to remind my wife that I was a Yankee fan. She responds with the usual grimace when I express such blasphemy.

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Disclosure: Short the ESU09, Long the NQU09.

***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***