Wednesday, August 29, 2007

TRADING STRATEGIES

Counter-Trend Trading with Simple Range Exhaustion System
Filed under: Trading System That Works, Trading - General — Lawrence Chan @ 11:12 pm Email Author

http://newsletter.neoticker.com/?cat=11

Here is an extremely simple trading system that violates the classic rule of trading, trend is your friend, with very good results. It is an excellent example that illustrates how counter-trend approaches work.

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December 21, 2005
Better OddBall System
Filed under: Trading System That Works — Lawrence Chan @ 9:59 am Email Author


The original OddBall System no longer performs since end of year 2001 (see OddBall System - An Update). Here is an attempt to improve the system.

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November 13, 2005
Stock Trading Using Stochastics (End of Day)
Filed under: Cool Sets, Trading System That Works, Trading - General — Lawrence Chan @ 12:22 am Email Author


Stochastics is one of the most widely used technical indicators in the world. Surprisely, most traders like to modify the original indicator into something else because they find the original implementation too noisy.

I am going to show you a trading setup using the original Stochastics SlowK indicator that works very well on daily data across many stocks that I think you will consider re-examine this classic technical indicator once more.

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November 5, 2005
Formula 301 - #4 Basic Consensus System
Filed under: Trading System That Works, Formula 301 — Lawrence Chan @ 8:42 pm Email Author


I am going to present a system that takes multiple technical indicators as part of its decision making. By combining these indicators through a simple scoring system, we get a very profitable daytrading system that works year after year.

(Lawrence - this system was designed many years ago (before year 2000) and was originally created for a trading platform that was very popular at the time. I was going through some old notes I have and adapted the code into NeoTicker. I am very glad that NeoTicker can implement the same system in 1/10th the amount of code required to implement the system. The original money management code has to be stripped due to various reasons, including NDA restrictions.)

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October 26, 2005
Moving Average Is More Than What You Think - Part 4
Filed under: Indicator Experiments, Trading System That Works — Lawrence Chan @ 11:00 am Email Author


The trading system presented in Formula 301 #3 is a moving average based trading system that works year after year.

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October 9, 2005
Classic Day Trade Modelling
Filed under: Tips & Tricks, Trading System That Works — Lawrence Chan @ 7:41 pm Email Author


Before we have access to intraday day data, how do we test trading systems that last only a day?

Long time ago, thats all we have access to, and I think it is a good idea for our readers to see how traders utilize classic bias without the help of intraday data in creating day trading systems.

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August 25, 2005
Advance Issues Momentum - An Update
Filed under: Indicator Experiments, Trading System That Works — Lawrence Chan @ 9:03 pm Email Author


I and Louis have written an article called Advance Issues Momentum published in the Technical Analysis of Stocks and Commodities magazine, August 2004 issue. Here is an update about this interesting indicator.

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August 8, 2005
Oddball System - An Update
Filed under: Trading System That Works — Lawrence Chan @ 10:15 pm Email Author


OddBall is created by Mark Brown, and was featured in Active Trader magazine. It is a trading system designed for trading the S&P index future (or the emini counterpart). The signal generation of Oddball does not depend on the price data itself. Instead, it is based on the Advance Issues data from NYSE. We originally posted this system’s implementation in NeoTicker and its performance back in 2003.

Here is an update of the current performance of this interesting system.

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August 7, 2005
In Early Stage Of System Development, Avoid Position Sizing
Filed under: Random Thoughs on Trading Systems, Trading System That Works — Lawrence Chan @ 1:00 pm Email Author


Many beginners in trading system development like to play with position sizing scheme. It feels great when you get a great equity curve with spectacular performance by simply twisting what position sizing rules to use and experiment with various sizing parameter settings. I have some bad news for you - such system will not likely perform in real life.

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August 3, 2005
Daytrading The Emini - An Update (Stochastic Midpoint Reversal System)
Filed under: Trading System That Works — Lawrence Chan @ 11:15 am Email Author


Back in August 2003, I have an article called Daytrading The E-mini published in the Technical Analysis of Stocks & Commodities magazine. It described a technique called Data Reduction that improves certain type of indicator performance drastically. The technique is applied onto a basic trading system that works very well at that point in time. We are going to take a look at the system today to see if it is still performing as expected.

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July 31, 2005
You Need More Than A Single Setup
Filed under: Random Thoughs on Trading Systems, Trading System That Works, Trading - General — Lawrence Chan @ 2:46 pm Email Author


Trading for a living requires a lot of discipline. It also requires a lot of streets smart if you trade discretionarily. One thing that many beginners missed is a basic concept of having multiple setups learned and practiced correctly.

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July 29, 2005
Moving Average Is More Than What You Think - Part 3
Filed under: Indicator Experiments, Trading System That Works — Lawrence Chan @ 9:07 am Email Author


Some readers are very forthcoming, they simply email me and complained to me for wasting their time in talking about moving average as something that is useful at all. I replied through email asking for their patience and wrapped up this third instalment as soon as I can.

Moving average based trading systems still exist and work very well still, even today. Here is a basic scalping setup based on average range channel, which in turn is based on simple moving average, that works very well for many years.

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July 27, 2005
Advance Issues Pattern 2
Filed under: Trading System That Works — Lawrence Chan @ 10:56 pm Email Author


After demonstating a pure daytrading short signals in Advance Issues Pattern 1, we are going to look at the data to see if we can figure out a daytrading pattern that works from the long side. Since year 2000, the S&P 500 is in a major downtrend, is it possible that there exists long side pattern that can make money?

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July 23, 2005
Advance Issues Pattern 1
Filed under: Trading System That Works — Lawrence Chan @ 11:00 am Email Author


NeoBreadth enables our users to collect user defined breadth data within NeoTicker, both in real-time and in reconstruction of historical breadth data. The analysis of customized market breadth data is not a common topic in technical analysis as NeoTicker is the only platform that can do that properly. How useful are customized breadth data? How do we utilize these information?

I’ll present a simple trading system based on advance issues of S&P500 as our first example on how to tap into the power of complex breadth analysis.

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June 28, 2005
Open Range Breakout Daytrading System
Filed under: Trading System That Works — Lawrence Chan @ 11:37 pm Email Author


Open range breakout system is a well known concept. It is a variation of the classic N-bar breakout system. This concept is so widely talked about because it works. I will show you a new twist of the concept that is never discussed anywhere else.

Introduction To Types Of Trading

Introduction To Types Of Trading:
By Jason Van Bergen

One of the most confusing aspects of the trading profession is there is no single definition of "trader". Traders come in many different shapes and sizes, colors and varieties.

Traders generally focus on a specific class of security, mostly common stocks, but they may also trade equity options, commodity futures, financial futures, futures options, bonds, foreign markets, and so forth. The security of choice also dictates the specific market(s) on which they trade: NYSE or Nasdaq, Chicago Board Options Exchange, The Chicago Board of Trade and so on.

When trading common stocks, professionals will generally undertake one of several styles and stick only to that style. This is an important point since traders are always at the risk of being distracted by the din of ubiquitous market commentary and conflicting trading styles. Traders are constantly soul searching and questioning their own chosen approach. Some amount of experimentation is advisable, particularly at the beginning of your trading career, but deviating from a disciplined, focused approach can be disastrous later when you are establishing your style.

Some of your first decisions will determine where your niche is and what type of a trader you want to be. There are at least five distinct styles of common-stock trading, each completely unrelated to the others. The style that you choose will likely reflect your intellectual strengths, your understanding of various aspects of the markets' operations and your temperament.

Here are the major styles of equity trading:

Scalping - The scalper is an individual who makes dozens or hundreds of trades per day, trying to "scalp" a small profit from each trade by exploiting the bid-ask spread.

Momentum Trading - Momentum traders look to find stocks that are moving significantly in one direction on high volume and try to jump on board to ride the momentum train to a desired profit.

Technical Trading - Technical traders are obsessed with charts and graphs, watching lines on stock or index graphs for signs of convergence or divergence that might indicate buy or sell signals.

Fundamental Trading - Fundamentalists trade companies based on fundamental analysis, which examines things like corporate events such as actual or anticipated earnings reports, stock splits, reorganizations or acquisitions.

Swing Trading - Swing traders are really fundamental traders who hold their positions longer than a single day. Most fundamentalists are actually swing traders since changes in corporate fundamentals generally require several days or even weeks to produce a price movement sufficient enough for the trader to claim a reasonable profit.

Novice traders might experiment with each of these techniques, but they should ultimately settle on a single niche, matching their investing knowledge and experience with a style to which they feel they can devote further research, education and practice. Entire textbooks are devoted to each style, although many titles such as "Day Trade Online" or "How to Get Started in Electronic Day Trading" are unclear about what type of trading they espouse.

I devote the balance of this article to explaining scalping, a trading technique which which the trader scalps small profits by exploiting the spread of a slow-moving stock. Here are articles that explore the other types of trading: momentum trading, technical trading and fundamental trading and swing trading.


The Scalper
The scalper generates trading profits from stocks that are not moving, make tiny (or teenie) profits from each trade by buying a stock on the bid and then turning around and selling at the ask. Provided that the stock does not move, scalpers can profit all day by making dozens (or hundreds) of trades, buying at the highest price at which they feel comfortable and selling at the lowest price that guarantees sufficient profit while still being attractive to buyers.

The scalper's role is exactly the same as that of the market maker (also known as the specialist), a dealer who, by trading stock from his or her own inventory, maintains an orderly market in any given stock. The specialist is basically a scalper on steroids, as the specialist trades many times more volume per day than the average scalper. The specialist, however, is bound by strict exchange rules while the individual trader is not. For example, on the Nasdaq all market makers are required to post at least one bid and one ask at some price level, thereby making a two-sided market for each stock that they cover.

Due to the overlap of roles, the scalper is always competing with the market maker for profits. Unfortunately, the lowly scalper is almost always at a disadvantage due to the market maker's advantages: superior execution speed, perhaps a greater knowledge of trading and the ability to "bluff" the market by placing a bid or ask that exaggerates his or her own true position.

The other factor working against the scalper is decimalization, whereby stock prices that were previously quoted in fractions are now quoted in decimals. With fractions, scalpers were always aiming for at least a sixteenth of a point in profit, also known as a teenie, equating to 6.25 cents per share. On a 1,000-share trade, for example, buying a stock at 10 and selling it at 10 and one sixteenth, a scalper would generate $62.50 in profits before commissions.

With the advent of decimalization, teenies are now toast, and the difference between bid and ask may be a single penny. On the 1,000-share trade described above, buying at $10 and selling at $10.01 generates only $10 in profits, most likely not even enough to cover trading commissions.

This is not to say that scalpers' opportunity for profits have been lost. Depending on the stock traded and its liquidity, spreads may remain much higher than a penny, allowing scalpers to generate even more than a teenie. By increasing the number of shares bought and sold (trading 2,000 instead 1,000, for example), scalpers can compensate for any realized decline in spreads, but this comes at the expense of increasing their risk. As for any style of trading, finding a niche from which he or she can derive profits is the trader's utmost goal. Once that niche is found, the scalper can refine his or her technique, successfully trading for pennies just as he or she was trading for teenies.

Again, here are other articles on the other types of trading: momentum trading, technical trading and fundamental/swing trading.

Scalping: Small Quick Profits Can Add Up

Scalping is a trading style specializing in taking profits on small price changes, generally soon after a trade has been entered and has become profitable. It requires a trader to have a strict exit strategy because one large loss could eliminate the many small gains that the trader has worked to obtain. Having the right tools such as a live feed, a direct-access broker and the stamina to place many trades is required for this strategy to be successful.

Scalping is based on an assumption that most stocks will complete the first stage of a movement (a stock will move in the desired direction for a brief time but where it goes from there is uncertain); some of the stocks will cease to advance and others will continue. A scalper intends to take as many small profits as possible, not allowing them to evaporate. Such an approach is the opposite of the "let your profits run" mindset, which attempts to optimize positive trading results by increasing the size of winning trades while letting others reverse. Scalping achieves results by increasing the number of winners and sacrificing the size of the wins. It's not uncommon for a trader of a longer time frame to achieve positive results by winning only half or even less of his or her trades - it's just that the wins are much bigger than the losses. A successful scalper, however, will have a much higher ratio of winning trades versus losing ones while keeping profits roughly equal or slightly bigger than losses.

The main premises of scalping are:

Lessened exposure limits risk - A brief exposure to the market diminishes the probability of running into an adverse event.
Smaller moves are easier to obtain - A bigger imbalance of supply and demand is needed to warrant bigger price changes. It is easier for a stock to make a 10 cent move than it is to make a $1 move.
Smaller moves are more frequent than larger ones - Even during relatively quiet markets there are many small movements that a scalper can exploit.
Scalping can be adopted as a primary or supplementary style of trading.

Primary Style
A pure scalper will make a number of trades a day, between five and 10 to hundreds. A scalper will mostly utilize one-minute charts since the time frame is small and he or she needs to see the setups as they shape up as close to real time as possible. Quote systems Nasdaq Level II, TotalView and/or Times and Sales are essential tools for this type of trading. Automatic instant execution of orders is crucial to a scalper, so a direct-access broker is the favored weapon of choice.

Supplementary Style
Traders of other time frames can use scalping as a supplementary approach in several ways. The most obvious way is to use it when the market is choppy or locked in a narrow range. When there are no trends in a longer time frame, going to a shorter time frame can reveal visible and exploitable trends, which can lead a trader to scalp.

Another way to add scalping to longer time-frame trades is through the so-called "umbrella" concept. This approach allows a trader to improve his or her cost basis and maximize a profit. Umbrella trades are done in the following way:

A trader initiates a position for a longer time-frame trade.
While the main trade develops, a trader identifies new setups in a shorter time frame in the direction of the main trade, entering and exiting them by the principles of scalping.

Practically any trading system, based on particular setups, can be used for the purposes of scalping. In this regard, scalping can be seen as a kind of method of risk management. Basically any trade can be turned into a scalp by taking a profit near the 1:1 risk/reward ratio. This means that the size of profit taken equals the size of a stop dictated by the setup. If, for instance, a trader enters his or her position for a scalp trade at $20 with an initial stop at $19.90, then the risk is 10 cents; this means a 1:1 risk/reward ratio will be reached at $20.10.

Scalp trades can be executed on both long and short sides. They can be done on breakouts or in range-bound trading. Many traditional chart formations, such as a cup and handle or triangle, can be used for scalping. The same can be said about technical indicators if a trader bases decisions on them.

Three Types of Scalping
The first type of scalping is referred as "market making", whereby a scalper tries to capitalize on the spread by simultaneously posting a bid and an offer for a specific stock. Obviously, this strategy can succeed only on mostly immobile stocks that trade big volume without any real price change. This kind of scalping is immensely hard to do successfully as a trader must compete with market makers for the shares on both bids and offers. Also, the profit is so small that any stock's movement against the trader's position warrants a loss exceeding his or her original profit target.

The other two styles are based on a more traditional approach and require a moving stock where prices change rapidly. These two styles also require a sound strategy and method of reading the movement.

The second type of scalping is done by purchasing a large number of shares that are sold for a gain on a very small price movement. A trader of this style will enter into positions for several thousand shares and wait for a small move, which is usually measured in cents. Such an approach requires highly liquid stock to allow for entering and exiting 3,000 to 10,000 shares easily.

The third type of scalping is the closest to traditional methods of trading. A trader enters an amount of shares on any setup or signal from his or her system, and closes the position as soon as the first exit signal is generated near the 1:1 risk/reward ratio, calculated as described earlier.

Conclusion
Scalping can be very profitable for traders who decide to use it as a primary strategy or even those who use it to supplement other types of trading. Adhering to the strict exit strategy is the key to making small profits compound into large gains. The brief amount of market exposure and the frequency of small moves are key attributes that are the reasons why this strategy is popular among many types of traders.

(For further reading, see Introduction To Types Of Trading: Scalpers.)



By Vadym Graifer

Vadym Graifer, author of Techniques of Tape Reading (McGraw Hill 2003), How to Scalp Any Market (2004), The Master Profit Plan - Your 5 Step Trading Plan Workbook (2005) is a featured speaker at International Trader's Expos, Financial Forum Conferences and seminar lecturer at post secondary institutions. He is the managing partner of RealityTrader.com, a hands-on training company, working with a global community of individuals to achieve high levels of trading success. Vad is a professional trader and an international private trading mentor for RealityTrader.com. He has also published articles and interviews in industry magazines, corporate product newsletters and trading forums. See nasdaqscalper.com for more on scalping.