Jun 30 2009
End of month thoughts and future plans
My trading account lost another -1.6% in June. This performance follows and 3.5% loss in May after 9 consecutive months of gains.
I am not going to be stupid about this. I refuse to give those gains back. I will probably put together my new trading computer on Thursday or Friday, but it’ll take me a good week to get everything to settle down, especially when I am putting Linux on it. If it only takes me 2 days to make everything settle down, I still need to get over the thrill of getting a new computer before I trade.
Going forward, I feel I need to completely change my trading. No more index ETFs, no more ProShares Ultra garbage, no more retarded options. I feel that my entries and exits have been too much based on gut feeling. What has worked for me in the past is that I short the market when it’s high and go long when it is low. As long as I buy the dips and sell the rips, I won’t get too hurt badly if I do not have a stop loss. If I use stop losses, then I slowly bleed to death with small losses. I know I cannot continue like this forever because the gains are too unpredictable, I have to work hard at it just to get those gains, and there will be some day in the future where this gut feeling approach is going to break down hard. The amount of money I have also been making has not really been worth the time.
Going forward, I think I am going to move into futures trading. At this point, my trading account is big enough to comfortably trade 1 contract and still remain well above margin requirements. Futures is where the real money is, but it is also the fastest way to lose your money. I will not be stupid about this.
Given my duties as a grad student, what I am looking for is some sort of opening bell play where I put on a trade shortly after the market opens, put on an OCO order to get out of the position, and just walk away and go to school. The OCO order will have a stop loss and a target. The trade will play out however it plays out. The whole ordeal should not take more than 20 minutes each day.
Right now I have some opening bell strategy with some backtesting that looks good. However, I firmly believe that there is no such thing as a free lunch and I will be forward testing it with fake money, and adjusting it until it consistently rakes in fake money. Then I will devote cold hard capital to the strategy. Until I can be convinced that this strategy will work day in and day out, I won’t do it. In the meantime, I am not going to waste my time with petty trades.
I think one of the big issues in trading futures is that it’s too easy to get unnecessarily stopped out. I think there is a partial solution to that.
The ES contract which is the S&P 500 e-mini futures contract is $50 per point, each tick is 0.25 point or $12.50. The ES is currently at 916.25 as I blog right now, making the contract worth $45,813. However, thinkorswim only requires that you put $5,625 down to get the contract.
There is another contract, the YM, which is the DOW e-mini futures contract. This contract is $5 per point and each tick is 1 point or $5. The YM is currently trading at 8404 making the contract worth $42,020. Thinkorswim requires $6,500 down to get the contract.
Comparing these two contracts, we see that the values are roughly equal. Also note that the ratio YM/ES is 9.17, but let’s play with nice round numbers and call that 10 and assume that if the ES goes up 1 point, the YM will go up 10. Of course the percentage correlation will not be perfect and on top of that the ratio isn’t exactly 10, but it isn’t bad approximation.
Each ES point just happens to be worth 10 YM points.
Each tick on the ES is $12.50.
Each tick on the YM is $5.
Although the YM tick size is 40% of the ES tick size, from a signal theory standpoint, the difference is much larger. In signal theory, the signal power of quantization error is (step size)^2/12. What this means is that the quantization noise power of the YM is only 16% of the quantization noise power of the ES. With a 6.25x reduction in noise, we’re talking about a 7.96 dB increase in SNR, and that’s an extra 1.32 of ENOB. That extra SNR is going to reduce the number of unnecessary stop outs.
I can’t believe I am talking like this.
Now of course there is no free lunch. The YM may have much lower quantization noise power compared to the ES; however, the ES is far more liquid than the YM. But given that I would only be trading 1 YM contract, the lower liquidity of the YM isn’t going to be a big issue. If I had a super duper large trading account and had to trade 500 contracts at a time, then trading the YM would not make sense and I should probably move over to the ES. Just to get to that point, I would need $3.25 million to meet the margin requirement and a few factors extra on top of that just to not be stupid.
UPDATE: To be precise, it should be SQNR instead of SNR since quantization noise may not be the only source of noise.
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