Why look for ABC's

[Steve Griffiths]

Hi Everybody,

Many poeple ask me why I designed MTPredcitor and in particular why I look for ABC corrections. In other words why have I have I made the ABC corrective pattern the core of MTPredictor.

Well, this daily chart on Soybeans for the last year answers the question very well indeed.

Just before the two largest moves in the last year there was an ABC correction. In otherwords, being able to enter a trade just as these ABC corrections were ending would have put you in the perfect tarde just as these strong moves started.

This is what I have found from over 20 years in the markets, the end of the ABC correction very often allows you to enter a trade just a a stong moves starts, but not only that, allows you to enter a trade with a small controlled risk. So when you are wrong, the losses are small, but when you are right, the porfits are large - this is the fundemental requirement for a succesful apporcah to trading - large profits and small losses.

The ABC pattern is a very easy pattern that will help you to acheive this goal :)

This is why it is at the core of the three main MTPredictor automatic routines.....

Steve

[Matt Bowen]

Here is another reason to trade the ABC's. (See portfolio screen capture below).

I got a call from a futures trader who said: "I'm not getting good results" using MTPredictor. I said: "that's funny, I'm just sitting here updateding the model portfolio and it's up over 25% for last month... and this is without using ANY position sizing. In addition, we are taking ONLY automatic setups given by the MTPredictor End-of-Day scanner. This is Nothing Advanced, just straight out of the box.

My only question is: "What in the world are these people doing?" You just bought a $1800. piece of software LISTEN TO IT... Don't try to get cute with it and combine all kinds of other oscillators and timing tools to figure out when the best time to enter is...JUST PUT THE TRADE ON, if it does not work, so what, that's why you have your stop-loss in place...to protect you.

Folks, this is about making money, NOT ABOUT BEING RIGHT, the sooner you learn that, the sooner you will start winning.

Ok, lets look at the performance:
We started the portfolio on October 3 and the current value is the close of Weds. To date we have made $12,811.70 on a starting equity of $50,000. (performance = 1 month).

Bottom line: we have achieved a little over 25% in less than 30 days. Not bad when you consider 56% of the trades have been losers.

Notice the 80/20 rule...In other words only three of these postions are making up 80% of the profits. Lesson: GET RID OF LOSERS FAST

All trades have been generated by MTPredictor using End-of-Day data on actual contract data, not continuous contracts.

Our current margin is at $35,767. so including open equity, we still have $27,044 in buying power (or cash).

http://www.openecry.com/traderstoolbox/margins.cfm

The light blue shading = Open Equity (current value of open positions)

(Note) As of this morning the portfolio is up +28.4%

[timo4sho]

Hi Steve,
Hi Matt,

is there any way for us to follow the trade results that you have just mentioned? Are you taking every single automatic signal that the software gives you on a daily timeframe?
Only trading commodities?

[Matt Bowen]

Hi Timo,

is there any way for us to follow the trade results that you have just mentioned?

Sure, as long as somebody is a registered MTPredictor user (in our database)...I'll be glad to send over my trades every morning. You can piggy-back the performance. This is actually a GREAT way for a novice trader to learn how to go through the motions every morning. Yes, all signals from actual contracts (the same one in the newspaper) not continuous contracts.

And the amazing part is your not "Chained to your computer all day". You simply run the scans in the morning then put your new orders as well as stop adjustments and off to work you go...

Yes, this is for Futures/Commodities only. I learned a long time ago that if you want to TRADE stocks you better have about 200k in your account otherwise it's a waste of time...you simply can't get the "bang for your buck" because you have all of these stock opportunities, but not enough cash to play them. Most people try and beat this by trading low priced stocks (under $10.) Don't kid yourself, those stocks are down there for a reason, that's why they call it the "Junk pile". Plus, portfolio managers will not even touch stocks that trade under $10.

A perfect example of this is my Uncle's company: Iconix symbol (ICON) on the Nasdaq. For years this stock traded below in the $2.00 to $5.00 range and nobody even looked at it...now it's starting to pop up on the radar of most in-house funds as they scan for emerging trends or stocks that have unusual volume patterns. (And no this is NOT a recommendation, but rather a good example).

Now, if you want to INVEST in stocks that is an entirely different situation. You can start investing with as little a $500. Remember, investing and trading are completely different games. Again, I just want to point when you are trading stocks...how much of your equity is tied up. If it's an investment, that is one thing, but a trading account is a totally different issue.

Most mutual funds will tell you they need to diversify to get a balanced portfolio... that's a bunch of baloney...Diversification is a hedge for ignorance.. The job of a mutual fund manager is to manage risk...if you look at many of their current positions, many of them obviously do not know how to do this....Oh' I forgot, they are value funds...so that makes it ok to have a 40% drawdown on the stock...Yeah, whatever!!! All you have to do is look at their performance and see that MOST of them can think outside the box. Most Mutual Funds act like a "Safe Harbor"...a place to park money, (because it may take years to make anything).

As I make a "Case for Commodities" please take a look at the chart below, this will explain why somebody with a $50,000. account is going to have a much better chance making money (If they can follow a set of rules). Think about it for a second, the guy trading the ETF's (spiders) just used up $27,500 to buy one stock and now he's just burned half of his equity available to trade with...because remember, in stocks, you can only margin 50% of you account balance. Now, the guy who bought the E-mini futures used up on $4000 and his still has $46,000 or (92%) of his money available to take additional trades with... this is the part about trading Futures that most other vendors never explain to people.

[Angel]

Hi Matt,

Hope this will help some newbies..........

Continuous contracts allow the display of the long-term history of a market from a single chart. You said that All trades have been generated by MTPredictor using End-of-Day data on actual contract data, not continuous contracts.

My question is concerning historical data. I well understand that you use the contract of the CURRENT month, but for historical data, do you apply "back Adjusted" continuous contract or "spliced" continuous contract ? If not, what is exactly your way of doing ?

Having said that, what is your data provider for trading futures and commodities ?

Thanks for your attention,

Angel

[stevej]

I learned a long time ago that if you want to TRADE stocks you better have about 200k in your account otherwise it's a waste of time...you simply can't get the "bang for your buck" because you have all of these stock opportunities, but not enough cash to play them.

Matt,

What about gearing up trading in stocks using either CFDs or (in the UK at least) spread betting?

No use intra day but for inter day / position trading?

Steve

[mcdirt]

Matt,

Your sheet shows you went Short Heating oil on 4th Oct and that trade is still open (trade 17), I looked at the same trade but passed as the risk was about $5800 for a single contract - that would have been >10% risk on your equity at that time on a single trade!

Trade 8, also for Heating Oil, was opened on 26th Oct (?) and closed on 2nd Nov - you went long while you were already short?

rgds McDirt

[Matt Bowen]

Hi McDirt,

Thanks for pointing that out...actually the trade was for January Heating Oil not for the same month...Very TRUE, That would have closed out my short and made me FLAT. Obviously a typo on my part. Plus, if you go back an try and usr the "T" button on that data (for the DEC. contract) you will not get a trade. If you go to the same data on the JAN. contract you do get a trade.
I will adjust this for the next report.

Yes, the trade was 10% (HOT markets usually tie up more capital...they also can cook-up some mean profits if you can handle the heat).

Thanks for the heads up...

-Matt

[Matt Bowen]

Hi Stevej,

What about gearing up trading in stocks using either CFDs or (in the UK at least) spread betting?

I hear this is a good game in the U.K., but I'm only trading U.S. and Major Futures. I'd like to hear more about this spread betting and CFD's... What's the liquidity like? Maybe Steve and Tony can jump in hear and educate us :D

Thanks,

-Matt

[Matt Bowen]

Hi Angel,

My question is concerning historical data. I well understand that you use the contract of the CURRENT month, but for historical data, do you apply "back Adjusted" continuous contract or "spliced" continuous contract ? If not, what is exactly your way of doing ?

No back adjusted cantracts are used for this test. The reason I use actual contract data is for two reasons:

1.) Sometimes the autual will fire off trades and the continuous (even if they are close in price) might not pick up the trade.

2.) When looking at forward months you get more setups (just make sure you have enough liquidity in the forward contract. For example: If you only look at trading the continuous contract you only look at one Natural Gas Contract.
Notice the trade we are currnetly in is from April Natural Gas and this was probably not picked-up in the Continuous contract.

Also, when you run a search on Continuous contracts you are scanning about 35 commodities. My scans on Forward months give me over 140 different contracts to look at...big difference.

Hope that helps,

-Matt

[mcdirt]

Matt,

Most, if not all, CFD providers have what they call Direct market Access DMA) these days - the CFD provider actually buys the same number of the stock on the physical market and has arrangements in place for shorting. With MAN, you can place an order and see your parcel appear in the market depth on the exchange's data. Therefore the liquidity is the same as the real market.

rgds McDirt

[Angel]

Hi Matt

No back adjusted cantracts are used for this test. The reason I use actual contract data is for two reasons:

1.) Sometimes the autual will fire off trades and the continuous (even if they are close in price) might not pick up the trade.

2.) When looking at forward months you get more setups (just make sure you have enough liquidity in the forward contract. For example: If you only look at trading the continuous contract you only look at one Natural Gas Contract.
Notice the trade we are currnetly in is from April Natural Gas and this was probably not picked-up in the Continuous contract.



Thanks and thanks again for your very helpful explanation :)

1) I well understand that before trading at FORWARD months, you have to make sure that you get ENOUGH liquidity in the forward contract : but at which level of liquidity do you have to check ? Any prefered number ?

2) If the current month is DEC.contract you can take a look at JAN.contract and FEB.contract and so on..... How many forward months can you take a look ?

Thanks for your attention

Angel

[Tony Beckwith]

Yes, CFDs and spreadbetting are very big business here in the UK.
We're discussing a commission rebate programme for MTP customers with IG Markets, one of the leading brokers/dealers.
This link explains CFDs (there's more on their site if you wish):
http://www.igmarkets.com/content/sites/igm/en_GB/sh_cfds.html
This link - to IG Index - starts an explanation of spreadbets:
http://www.igindex.co.uk/content/as_index.html

The key trading point with both is how close the broker allows you to place your initial protective stop to the MTP indicated level....crucial for risk control!

Thanks

Tony.

[jtrade]

Also, when you run a search on Continuous contracts you are scanning about 35 commodities. My scans on Forward months give me over 140 different contracts to look at...big difference.


Matt - would you be willing to share this list, please, &/or advise how you manage it (ie. do you update it manually each month or have you found a way to auto-update) ?

Would you nevertheless say that the vast majority of trades actually taken are on the front month contracts ?

Thanks,

J.

[stevej]

... I'm only trading U.S. and Major Futures. I'd like to hear more about this spread betting and CFD's... What's the liquidity like?

There are numerous providers in the UK, but have a look at deal4free.com and capitalspreads.com as examples.

You can trade numerous indices, commodities, forex, the UK FTSE 350 components, about 200 S&P 500 components and much more.

Liquidity is no difficulty trading EOD although getting a firm price in a fast moving market intraday can be. Gearing can be 10 - 20 times the amount deposited.

Placing a stop at the MTP suggested level is not always possible although nothing prevents you selling manually if things go wrong. With EOD trading I do not, in any event, find this a real problem.

Steve

[Matt Bowen]

Hi jtrade,

I've had several request for the Commodity letter. I'll try and have the first copy ready for Thursday Morning. In addition, here are the 141 commodities that are currently "Active" with enough open intrest / volume to trade. The list will have to be updated on a regular basis, so if the Commodity newsletter is a hit I'll just update the list in the newsletter. If you want to check Volume and Open interest numbers look at the Premium Futures Quotes and Charts (on the right side of the box) (http://www.atticuspartners.com/quotes_and_charts.htm
This is a good URL for those of you who are position traders and just want to check your positions during the day and you only have internet access.


http://www.mtptrader.com/A.gif
http://www.mtptrader.com/B.gif
http://www.mtptrader.com/C.gif
http://www.mtptrader.com/D.gif

[Matt Bowen]

Hi Angel,

Answer to Question #1

Look at the Chart below. The area in read is where the Front month is for the Aussie Dollar... then in the green area this is where we roll over to the new contract.

What do you notice about the area in red? Prices are all over the place and the volume is VERY thin. It's what we call a "Shot-Gun blast chart" where the blast hits the side of the wall and it's all over the place. You can't trade a chart like the red area.

Now, notice the green area the bars start to look normal right? That's because the DEC. contract is now the front month and the most liquid.

Answer to Question #2

You can look at as many forward months as the charts permit. Take for Example Crude Oil... Dec. Jan. Feb. Mar. Apr. all look good, but May and July are a little thin...I will still look at them, but will not trade them until the charts start to fill in and we get more liquidity. I know this a not a great way to learn how to trade a forward contracts, but it's the same way I learned from my Grandfather...Experience is ALWAYS the best teacher.

Hope that helps,
-Matt

[Angel]

Hi Matt,

THANKS :)

Have a good trading day all,

Angel

[jtrade]

Thank-you very much, Matt, for your very helpful response - I look forward to your commodity letter.

J.

[Matt Bowen]

Our MTPredictor Model Portfolio as of the close 11-10-05

All trades have been generated by MTPredictor using End-of-Day data on actual contract data, not continuous contracts.

Our current margin is at $35,692.00. so including open equity, we still have $35,853.90 in buying power (or cash).

http://www.openecry.com/traderstoolbox/margins.cfm

The light blue shading = Open Equity (current value of open positions)

[ericd2281]

Matt,

I think the End of Day Commodities report is great for those traders like me that prefer to trade using EOD data. I would like to continue to receive the report.

So far the results are very impressive.

Thanks for your help thus far.

Regards, Eric

[mascurioso]

Thanks for this Matt. Very useful to keep updated.

Mas

[Matt Bowen]

Hi Eric and Mas,

Thanks for the kind words, I did think I many people would like a trade report like this but it seems to be a real hit with the MTPredictor Commodity Traders.

Here is a copy of what the Daily report will look like:

http://www.mtptrader.com/MTP11-11.pdf

If MTPredictor user want to receive the letter they can just send me an e-mail: matt@mtpredictor.com and I'll add them to the list.



Have a great weekend,

-Matt

[Angel]

Hi Matt, Eric, Mas and all.....

Your sheet shows you went Short Heating oil on 4th Oct and that trade is still open (trade 17), I looked at the same trade but passed as the risk was about $5800 for a single contract - that would have been >10% risk on your equity at that time on a single trade!

Yes, the trade was 10% (HOT markets usually tie up more capital...they also can cook-up some mean profits if you can handle the heat).


Concerning the fact that you take trade >10% risk, would you mind to give us a trade commodities report with a fixed ratio of 2% risk on your equity at that time on a single trade ?

Sincerely, many newbies like me can't handle this level of risk......and in my humble opinion, it would be a better way of doing for education.

Thanks for your attention,

Cheers

Angel

[Matt Bowen]

Hi Angel,

Thank you for your comments and what a great question. Steve Griffiths and I were actually talking about this earlier in the week. In any case, I just want to commend you for addressing the question…It takes a smart individual to even think at this level so you are well on your way to becoming a great trader. Again, Thanks for asking and I hope many people will really study this question. The answer below is not geared toward you Angel, but rather the entire community.


The short answer is simply this:

Yes, the Heating Oil trade-risk was over 10% and if that is too much risk then throw-out the trade. If you throw out the trade (as of Friday’s close) we are left with +$18,467.00 in total profit and -$10,370.00 in losses for a total profit of +8,094.00 or a +16.1% return. This is why I tell people with a professionally managed portfolio 80% of the profits are going to come from 20% of the trades.




The Long Answer:


First, let me say that there are several ways I can answer this question because every trader will have a different “Risk Tolerance” and they will be starting with a different amount of “Risk Capital”. As you can see from the portfolio I’m not even using position sizing in the money management because that just confuses the hell out of people, especially new traders who are trying to get a handle on the trade setups. Plus, I'm trying to control the overnight margin. I will introduce position sizing once we get the portfolio up to 100k. I’m trying to keep these results a simple as possible so that everyone can participate (without confusion). Remember, what people don’t understand they will not participate in (can you blame them) It’s like being at a table and everyone’s speaking a different language. Position Sizing is very easy to use once understood as Steve outlines here: http://www.mtpredictor.com/SlideShows/EOD-Calc3/EOD-Calc3a.html However, lets keep it very simple to start off with because most people don’t even know how to manage trades once they are taken.

The second thing I tell traders is that we are trading with “Risk Capital” and most people just don’t understand this (or don’t want to understand it) and it’s one of the biggest downfalls to their trading. Trading with “Risk Capital” is money you can afford to lose without impacting your economic household. In other words, if this money is lost and it’s going to impact your standard of living then guess what…you can’t trade with it.

Now let me explain why: “If you are trading with money that you cannot afford to lose you are going to do two things:

1. You are trading “SCARED MONEY” and this will impact your performance because you will prematurely exit on otherwise good trades that are not given enough room or time to mature…and the reason you bailed on the trade is because you are guarding the cash with your life and the pressure is so intense that you say: “I just can’t handle this position. (and just about the time you sell it turns around and starts running into a profitable trade).

2. People who trade “SCARED MONEY” do not honor stops because they cannot afford to lose the money. In other words, when the trade says: “GET OUT” they just freeze!!! Trust me, I’m a former broker, I’ve seen people destroy themselves with only one trade because they could not take the loss. Instead they opt for a margin call and the brokerage firm steps in and takes you out of the trade for you…then you have to cough-up the difference. All this because you wanted to RATIONALIZE your way out of the loss. When people say psychology is not a big deal in trading they are only kidding themselves. It plays a HUGE ROLL with a new trader. As the trader matures, the psychology has a less impact because the trader is following the rules and using dicipline in their trading. As suxh, trading becaomes more mechanical.


The next item that needs to be addressed is “Risk Tolerance”. I can’t possibly know what every trader’s “Risk Tolerance” is on this bulletin board. Some people start trading with 100k others with 10k. The point is that this is “Risk Capital” and once a person labels or declares it as “Risk Capital” then they are not psychologically governed by its performance. Obviously, if you start trading with 10k it’s going to knock out some of the available trade setups, which is fine because it forces you to start small and grow as a trader.

Angel, I agree a 10k portfolio would be nice to look at maybe somebody here would like to volunteer or step up to the plate. I’m working 16 hours days and I’ve got my hands full tracking this portfolio and to be honest with you, I just don’t want to track another portfolio. Most people have no idea how tedious and time consuming this portfolio stuff is…they rather just look for trades and spray bullets all over the place.

In any case , if somebody does wants to run the numbers here, I will be glad to throw the results into MSA and compile a 10k Risk Report using the fixed 2% equity. I’m only one person here, I can’t do everything, but I’ll be glad to help.


This is a good time to share with you two books that will really help new traders understand the topic of “Risk Tolerance” Both books a written by Mark Douglas:

http://www.superbookdeals.com/cgi-bin/moreinfo.cgi?item=2121&bisac=

http://www.superbookdeals.com/cgi-bin/moreinfo.cgi?item=11833&bisac=

Also, Dr. Alexander Elder wrote a great amount about this in his 1992 classic: “Trading For A Living”. Now, there are three parts to that book: Psychology, Trading tactics and Money Management. The part about the trading tactics (using indicators) is for neophytes
So don’t waste your time reading about indicators (everybody knows they most canned/standard indicators are worthless anyway or they will find out sooner or later). However, the parts about psychology and Money management are EXCELLENT.

http://www.superbookdeals.com/cgi-bin/moreinfo.cgi?item=2663&bisac=

[stevej]

Matt,

Thanks for this, it is most useful.

What method of trade management are you using for the portfolio?

Steve

[Angel]

Hi Matt, Hi all,

What a great and complete response.....

One more time, let me thank you for all of your time consuming on this portfolio stuff.

Great week end for all,

Angel

[Matt Bowen]

Hi Stevej,

Until the portfolio gets to 100k we are simply using 1 contract to trade with (to make this easy for others to follow and participate). I'm trying to show people that the automatic setups (because this is how 90% of trades will use MTPredictor) are extremely profitable in themselves. I'm also keeping it simple without any money management (other than standard stops given automatically by MTPredictor).

If people want to dig deeper into Money management they should have a look at Ed Seykota's web site: http://www.seykota.com/tribe/risk/index.htm Over time, however, the fixed-fraction system grows exponentially. This is why Steve made a great choice in adding it into the program.

Could the results be better with Position Sizing...Yes!!!, but with new traders you must first walk before you can run. I want new traders to see how easy it is to become successful with MTPredictor (If they can follow the rules).

I find that most traders are like Alcoholics, they just don't want to quit screwing around and get serious. It's like they are intoxicated by all the oscillators, trend lines, chart patterns, Advance/Decline, divergence, sentiment, put call ratios and so on...that they end up playing a game of "VISUAL OPTIMIZATION" (meaning they see what they want to see) on the screen. The Bottom line is people don't want to commit to trading...which is nothing more than simply managing risk.

I find a lot of traders suddenly wake-up one day and see they have wasted two years sitting in front of the screen trying to build a better mouse trap, only to find they have no results or even losses simply because they were not committed to trading. Being committed to trading does not mean looking for the Holy Grail... It means taking the trade and managing it, that's it! Don't make trading so complicated.

[ericd2281]

Gentleman,

I ran the numbers on Matt's model portfolio in a trial version of MSA.

I used the following to produce the attached output:
1)Avg. Win $2,852
Max Win $13,183
Avg. Loss $(1,037)
Max. Loss $(3,769)
% Wins 52%

2) 200 Trades per Year.

22 Trades in 40 days(Today-Matt's Start Date). 40 days is 10.9% of a year. So, 22 / .109 =200.

Hope this helps.

I would recommend that each of you download the MSA program which will allow you to modify the portfolio to fit each trader's exact needs. This program will give you much more information than a customized spreadsheet ever will.

Regards,
Eric

[ericd2281]

Gentleman,

Please find attached the Monte Carlo Analysis for the previous simulation.

Regards,
Eric

[Matt Bowen]

Hi Eric,

I agree with you, traders should seriously take a look at the Market System Analizer software: http://www.adaptrade.com/product.htm

Michael Bryant built a great money management Windows application for stock and futures traders.

Thanks,

[Angel]

Hi Eric and all,

Your Stuff is very helpfull and it's very kind of you to share it with us :)

Just one humble question concerning the 22 trades in 40 days. You calculate 365 days in a year, but wouldn"t it be easier to make this calculation with the exact open trading days number in a year or 250 days ?

Thanks,

Have a good trading day all,

Angel

[mascurioso]

Matt,

Thanks for the explanations and the insights.

I have a few questions:

1. What was it about the HO trade that made you think the probabilities were so good that you should risk fully 10% of the model portfolio's account? What was it about that market at that time that made you think it was "HOT"?

2. You said "I'm also keeping it simple without any money management (other than standard stops given automatically by MTPredictor)". You also also talk about not using any position sizing. Assuming you're not using the term "fixed-fraction position sizing" interchangably with the term "money management", and that the "money management" you're referring to has to do with setting proper stops, what other money management could you use? If my assumptions are wrong, please let me know.

3. You said you're using 1 contract for educational purposes (thank you), but I notice that trade #21, the Long GC trade, is for 2 contracts. Is this a typo, or is there another reason for 2 contracts?

Thanks,

Mas

[Paul]

Matt, it's very simple : I'm still wondering if I'm going to trust MTPredictor or not, but you're scaring me away. It is explained everywhere on the website that the most important point about MTPredictor is that it allows you to control your risk. But on the other hand, you publish a performance report where you lose around 7% of your capital in 1 trade.

When will you publish a performance report day after day, with the same amount of risk per trade (eg 2%), and then we'll see if you manage to be profitable ? And don't tell us 50,000 $ is not enough capital for you to do it. If it is not, then use stocks, not futures. Or simply start with more capital.

Many thanks,

Paul

[Steve Griffiths]

Hi All,

As developer of the MTPredictor techniques and software I wish to correct to position here.

Matt was just demonstarting set-ups from his own portolio. He was not suggeting you trade like this using MTPredictor.

My approach and the core part of MTPredictor is risk control, and as such you should never risk more than 2-3 %, (or even lower intraday) on any trade. Position sizing for a constant risk per tarde is then what makes money over time.

Risk control is fundemantal to a succesful trading approach, and as such is a core part and core function of MTPredictor.

I hope this helps clear up this question

Steve Griffiths
Developer of the MTPredictor software porgram

[ericd2281]

Angel,

You are correct about my annualization of MTPredictors results based on one month. I used an incorrect formula in Excel, the correct formula is NETWORKDAYS(state date, end date).

The correct (I believe) analysis is shown below:

22 trades from 10/03/05 to 11/15/05(today).
10/03/05 to 11/15/05(today) = 28 days.
28 days / 250 trading days per year = .112

22 trades / .112 = 196.429 ~196 trades per year.

The change from 200 to 196 trades (4%) should not change anything too much.

Also, I will run the numbers for Matt's model portfolio removing the Heating Oil trade that is being questioned by several members.

Regards,
Eric

[ericd2281]

Please see below the updated review of Matt's portfolio without the Heating Oil trade included.

Also, if anyone is interested I can forward an Excel file with the individual trades & results so anyone can modify/manipulate the # of contracts traded to fit their individual needs.

Regards,
Eric

[ericd2281]

Please see below the Monte Carlo Analysis of Matt's portfolio.

The big idea I am seeing in this report is a confirmation of the Low Risk/High Reward trading method that is the foundation of the MTP program. This is shown in the High Return to Drawdown ratio.

Regards,
Eric

[Angel]

Hi Eric,

Thaaaaaanks for your very good stuff Eric :)

Just one question, I noticed on your last MSA result that the Max drawdown is 4.78%. Right ?

Take the LAST updated portfolio result post #25, take the 12 first lines WITHOUT the oil trade (trade 19) and do some math. What could be the drawdown ? A drawdown of 11.04% (from trade 2 to trade 22 less the oil trade).

My humble question is : could the MSA results be significant ?

Thanks

Angel

[Angel]

Hi Eric, Hi all,

My last post was not clear at all, I beg your pardon for that :(

I wanted to say, knowing that we get a drawdown of 11.04% (the first twelve lines less the OIL trade of the last commodities report) for a starting account of $50.000, are Monte Carlo simulations REALLY reliable in this case ?

For education, how else should we interpret the "Return-Drawdown Ratio" ?

Thanks for your attention

Best

Angel

[Matt Bowen]

Here is a great article for traders who are looking for the Holy Grail:

http://www.mtptrader.com/Van1.pdf

Please take some time to study this interview, it will provide you with many
clues as to how you can turn yourself into a winning trader.

[mcdirt]

Matt, thanks for the Commodities report. Reading the figures you provide, I have two queeries ...

1. You use the last close price for your "exit price" on current trades - it would be more realistic to use your stop - ie the current stop for Dec Gold is 462.20, which is the best price you will get out at today, yet you have 479.10 in the sheet. You only have 462.20 in the bank, the 479.10 may never be realised.

2. What rules are you using for your trade management - the US Stocks EOD rules as posted on the web site? I don't see how the stop on Gold moved to 462.20.

rgds McDirt

[Matt Bowen]

Hi McDirt,

Thanks for your post... Let me explain first as this will clear up the confusion of what the word "EXIT" means on the spreadsheet.
The exit is the closing price, it's not where I plan to exit the trade. Again, it's just the close for that particular day.


1. You use the last close price for your "exit price" on current trades - it would be more realistic to use your stop - i.e. the current stop for Dec Gold is 462.20, which is the best price you will get out at today, yet you have 479.10 in the sheet. You only have 462.20 in the bank, the 479.10 may never be realized.

Having said that, we put on two contracts we got long at two different places the lat fill was 462.20so once the trade closed at the 2 to 1 profit area I moved the stop up to breakeven = 462.20

2. What rules are you using for your trade management - the US Stocks EOD rules as posted on the web site? I don't see how the stop on Gold moved to 462.20.


I'm waiting for the trade to go to 2 to 1 before moving the stop to breakeven. That's why you see, Steve got out of the KC Wheat trade at breakeven yesterday and I took a $622. hit. No big deal, I'll make the money back in spades, just give me a few weeks :D

[mcdirt]

Matt - thanks, understood.
OK, you've got a few weeks :)

rgds McDirt

[Matt Bowen]

Hi McDirt,

When these people call up looking for 80% or 90% winning trades I just start laughing because they just don't understand how the game is played. It's like a basketball player showing up to play a hockey game.

If you look at the numbers they are very good....after 34 trading days we are up 48% and what's even more amazing is that I'm only right on 33% of my closed out trades. We will get a drawdown, but the point is: the individual trader has a huge advantage (if they are disciplined) vs. handing your money over to a fund.

These numbers are very close to what Philippe posted a few months ago:

http://www.mtptrader.com/showthread.php?t=297

Have a great weekend,

[mcdirt]

Thanks Matt, understood. Reading Mark Douglas and his analogy to casinos is what brough this home to me, must read that book again, for the 4th time.

I also thought I read somewhere that Steve said that he was changing the "standard" rules to be that you don't move your stop to break-even until the close is >2R and was going to incorporate that in v5 trade management. Is that true, or is my memory playing tricks?

rgds McDirt

[mcdirt]

Matt, some queeries about your futures list ....

1. ED-200612 is the first Eurodollar contract shown on your list. The earlier contracts look OK to me liquidity-wise. Why are they omitted?

2. HG-200602 and S-200609 are missing, though they do appear to have less liquid charts than preceeding and subsequent charts, why is this - any idea?

rgds McDirt

[ericd2281]

Matt,

I think that many other traders here may have the same question as I have.

Do you have/know of any good reference information for us to understand how to understand and interrpret open interest and daily volume on futures to determine if a market is liquid enough to trade? Also, is there any way to get some idea about the max. number of contracts one could trade without changing the price significantly? (For example, if I am trading a $200k account with 2% risk per trade ($4,000) and an oats trade (or something else) comes up with a low initial $ risk)

Regards,
Eric

[Matt Bowen]

Hi McDirt,

Thanks Matt, understood. Reading Mark Douglas and his analogy to casinos is what brough this home to me, must read that book again, for the 4th time.

Yes, both of Mark Douglas' books are must reads. In fact, I wish people would read them before they even make their first trade. There is so much "CRAP" being sold out there in this industry that its just screws people's heads on backwards.

I also thought I read somewhere that Steve said that he was changing the "standard" rules to be that you don't move your stop to break-even until the close is >2R and was going to incorporate that in v5 trade management. Is that true, or is my memory playing tricks?


Who knows... I trade'em they way I see em. I like to give the trade a little more room to run. If I know I'm going to be stopped out 6 out of 10 times, why not give it some breathing room? Trading is really a personal thing. After you trade 15 or 20 years your going to develop your style. I would suggest ALL new trades follow Steve's guidelines. Then after the person sees how all of this works they can test or move their stops accordingly. You have to remember these are "Guidelines", otherwise Steve would have just made a set of mechanical rules and thrown it into a black-box. If that were the case, you would be better off just selling the signals and save your self a hell of a lot of time from developing software, manuals and other teaching aids. I personally have been teaching people how to trade "Discretionary trading" for over 12 years and I think most people would be far better off trading signals or mechanical models because human nature is to "screw with it" or try to make it better. Most people want more control over their trading. Most people feel like they have better control when they use oscillators and they want to believe it's telling them it will work and they have an edge, but you can't control the market any better than you can control an 800 pound gorilla. Again, I sound like a busted record, but management of the trade is the ONLY thing you can control in trading.

[Matt Bowen]

Hi McDirt,

1. ED-200612 is the first Eurodollar contract shown on your list. The earlier contracts look OK to me liquidity-wise. Why are they omitted?

Yeah, the was an error on my part...I simply selected the wrong group of contracts. The correct ones are listed below.

2. HG-200602 and S-200609 are missing, though they do appear to have less liquid charts than preceeding and subsequent charts, why is this - any idea?

Dunno, it's been the way for years...Must have something to do with the Commercials/Hedgers not wanting to spread-trade those months. That's about the only reason I can see.

[Matt Bowen]

Hi Eric,

Do you have/know of any good reference information for us to understand how to understand and interrpret open interest and daily volume on futures to determine if a market is liquid enough to trade?

Nope, that's someting you learn by experience (It's also the best teacher).

However, we can look a little deeper into this by examining first the account size and the position size.

Which you stated was the following:

(For example, if I am trading a $200k account with 2% risk per trade ($4,000) and an oats trade (or something else) comes up with a low initial $ risk)


The picture below tells us first: "How Much?"

[Matt Bowen]

continued...

Next, what I did was look at the trading last week to get an Idea of what kind of fills you might expect to get or how the liquidity would accept your orders. As you can see from the chart below from Wed. to Fri. the trading was a bout 83 contract...and you need to get 31 off for this trade. The liquidity would aceept this order, but you would most likely want to split this trade into 2 or 3 orders 10,10 and 11 would work fine. The distance of this move was $325.00 from the high to the low... so having said that you can factor in the slippage. But keep in mind the front month is changing...I don't have volume levels for Friday, but I know on Thursday the OATS had more OI than the DEC.

***PLEASE KEEP THIS IN MIND***
The DEC. contract is getting ready to roll-over and you can see this as the open interest is larger in the MAR contract than it is in the DEC. contract. So you are probably going to see better liquidty in the MAR and possibly better fills or easier to get filled in MAR vs. DEC. If you have Real-Time futures quotes pull up both contracts and look at the volume on the intraday charts and you can see what effect a 10 lot order is on the market...you'll be able to see this much better.

As for a book on this specific question...None (that I know of). It's actually a great question, I don't think you will find this type of question in books, because most authors just assume you are trading in liquid markets.

Hope that helps,

[ericd2281]

Matt,

Thanks for the response. I had guessed that was the answer, but I was hoping there was some information to help get me started in the right direction and help avoid any misinformation that may be out there.

Regards,
Eric

[marketwaves]

totaly agee with you

more people should understand that trading is about averages......
-------------------------------------------------------------------------

[rrs]

Hi Eric,

In addition to Matt's informative and thoughtful reply to your questions, you may also wish to look at the Futures Liquidity page in the Technical Analysis of Stocks and Commodities magazine. This is table appears most of the time in this magazine and it reports the trading liquidity of futures contracts.

In addition to liquidity, the other important consideration in choosing contracts / stocks to trade is volatility. There are several ways to measure the volatility of a stock or a futures contract. It is often a good idea to monitor the volatility of a trading instrument. Often when the volatility diminishes you may see a corresponding change in the liquidity.

The importance of paying attention to liquidity and volatility of stocks / futures contracts is well illustrated by:

1) Logical Trader -- a book written by Mark Fisher

2) Blog entries on this subject by Teresa Lo at http://powerswings.com/FAQ/2006/02/13/atrp-average-true-range-percent/

Regards,

Rama.