If you check out the StockTickr calendar view, you’ll see that I rarely wound up making trades Thursdays and Fridays. Thursdays, I generally have other stuff to do for a lot of the trading day. Fridays this month were… just plain boring. Still, my P&L, as well as my trade count, were much higher this month, compared to just 6 trades in December. I had one losing day this month, where I was 0 for 4. Until I went and re-read that day’s entry, I didn’t even remember it. I guess that’s a good thing. Man, that day looked like it sucked :-) But, I kept my losses under control.

Here are my results (which you can also view on stocktickr any time you want):

I continue to focus on finding more trades to take per month, to both make more money and ensure that I’m consistently profitable. Obviously, I’m having fun trying out the Box Play, which so far has a 100% win rate for me. We’ll see how far into February that lasts…

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

I took some swing trades from yesterday to today, as well as a day trade today. Here they are:

1. Cosi, Inc. (NASDAQ: COSI)

I’ve been watching some of Muddy’s 10/60 EMA Green volume spike plays, and so I tried this one. The way it’s supposed to work (I think) is that there is a green for the day high-volume surge, where the 10 ema crosses the 60 ema on a 5 min chart. Go over to Muddy’s for the details, and visit his chatroom for candidates in real time.

For this trade, my entry was bad–I bought it late, at the close Tuesday–to see what would happen at the open. My stop was at the red line, $5.83. It didn’t really go anywhere for most of the day today, and I was doing something else during the surge after the Fed announced. I decided to sell at the close today for a 0.1R Loss. Only 13 shares, and the PnL was only -$1.04. I just took this trade for something to do, as I’m still not nailed down to a swing trade system.

2. CytRx Corporation (NASDAQ: CYTR)

This was a much better 10/60 Muddy play. I bought 40 shares early yesterday, as it made a new high at $2.65, and I placed my initial stop at $2.40. The exit is when the 10/60 crosses back down again, or you get stopped out. I held through the day, raising my stop to breakeven as the trade moved in my favor. Today, when the 10/60 crossed back under I sold shortly after the cross at $2.92 for a 1.08R gain of $10.80–the position was up almost 11%, but my stop was also just about as far away. I took such a wide stop due to my need to swing trade to avoid breaking the pattern daytrader rules. Still, if I had used a closer stop, I could have loaded up my position more and made more R’s for my same ~$10 at risk.

3. Trader-X Daytrade: The Allstate Corporation (NYSE: ALL)

The trade details are on the chart (short 21 shares). This is another one I took that never made it to the fib extension, and when the price closed above the 5-ema, I put in a limit order to cover at 1R and got it. I was watching layered support and resistance on this tick chart:

The tick chart is what I used to decide whether to cover at market or put in a limit order. The price was drifting down, falling to a support level, rising up to a resistance level, falling back down to a new support level, etc. Looking at the right side of the chart, it broke the $60.20 level at around the same time that it closed above the 5-ema, which is an exit signal. if it had broken the resistance at $60.40, I would have covered at market, but since it didn’t, I covered using the limit order at 1R and got filled, PnL $6.30. I couldn’t risk a full $10 as my buying power was reduced by other trades, so all R’s are not created equal.

During this end of day time, I saw these two WTF situations on Level II:

Two situations where there was big size at prices far removed from the NASD NYSE and other big MM’s, like it was just ignored. I don’t know if it was a glitch in my feed or really there, but if so you could have arbitraged those suckers with a direct access platform. Does anybody see this often? Not really related to my trade, just curious.

Stocks Mentioned In This Article
Stock	Links
COSI	| |
CYTR	| |
ALL	| |

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

QuoteTracker is an outstanding charting program that I use. It’s got a freeware version with a few limitations and ads, and the full version is free to holders of a funded ($2k) TD Ameritrade account (which I also have). Without that, it’s only $7/month or $60/year. QT is a charting package only, not a data provider or brokerage. You can link to lots of different data sources and even integrate trading within QT with some brokerages (like MB Trading, Interactive Brokers and TD Ameritrade). I get my data from my TD Ameritrade account, and I trade manually through Zecco. Lots of different options there–full details are at the QT site.

One of the great features of QT is the Paintbars–graphical signals that show up on your charts based on quantitative calculations that you define. Here’s an example of one of my charts:

This chart has two paintbars added, which I chose to show up as a diamond above the candle–gray if it’s a narrower range bar than the previous one, and yellow if it’s an inside bar (which is also a narrower range bar by definition). In the chart above, the second bar is narrower than the first, hence the gray diamond. The third is inside the second, so it gets yellow.

To set this up in QT, you choose Charts>Chart Paintbar Editor from the menu. You get a screen that looks like this:

You can see one of the paintbars that I created in that picture. You create a new paintbar, name it, and then add rules. Rules are the calculations and comparisons made to decide to implement your paintbar on the chart or not. You can have more than one rule per paintbar. If you click the “switch to simple expression” toggle button, you can go to a pulldown list of built-in indicators. By choosing some of these and then clicking the button again, you’ll see the complex expression code–this is a good source of examples to build your own complex expressions. In my example, the words ‘Bar High’ refer to the high of the current bar, and ‘Bar High[1]‘ refers to the high of the previous bar. The number in brackets is an offset of previous bars. The “action” and “else” pulldowns determine what you will do if the conditions you specify are or are not met. You can also change the color involved in the paintbar.

Here’s the code for some of my paintbars:

NRBar:
if ABS(Bar High-Bar Low) <= ABS(Bar High[1]-Bar Low[1]) set color to Gray

InsideBar:
if ABS(Bar High-Bar Low) <= ABS(Bar High[1]-Bar Low[1]) AND Bar High[1]>=Bar High AND Bar Low[1] <= Bar Low set color to Yellow

NR7:
if ABS(Bar High-Bar Low) <= ABS(Bar High[1]-Bar Low[1]) AND ABS(Bar High-Bar Low) <= ABS(Bar High[2]-Bar Low[2]) AND ABS(Bar High-Bar Low) <= ABS(Bar High[3]-Bar Low[3]) AND ABS(Bar High-Bar Low) <= ABS(Bar High[4]-Bar Low[4]) AND ABS(Bar High-Bar Low) <= ABS(Bar High[5]-Bar Low[5]) AND ABS(Bar High-Bar Low) <= ABS(Bar High[6]-Bar Low[6]) AND ABS(Bar High-Bar Low) <= ABS(Bar High[7]-Bar Low[7]) set color to $8000FF

Once you have saved your paintbar, you need to apply them to a chart. Right click on a chart and choose “select indicators”, and you see this screen:

There is an indicator called Paintbar-Top and one called Paintbar-Bottom. ‘Top’ shows up on the price, while ‘Bottom’ shows up linked to a lower panel, like volume or another indicator. Once you enable it with the right arrow, you have to click the “edit” button for the paintbar indicator you want to set up. Once you do, you see this:

Choose the paintbar you saved that you want to use from the “name” list, and then choose your “show on” effect. Hit ok and you’re ready to see them in action! Make sure you save the chart template if you want to be able to keep the setup.

Feel free to post your own paintbar codes in the comments, or to ask questions about any of the above.

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

Only 7 of my stocks are keeping up with QQQQ, in terms of relative volume. If I wanted to watch 7 symbols, I’d trade futures ;-) Though the nasdaq saw some morning selling action, it’s back basically flat now. The dow is sort-of going up, with its TRIN starting to drift down in concert with it. But, the bottom line is, I did not get enough sleep last night, and this is not enough action to keep me awake. I’m too conservative to place bets on the FED aftermath. So, it looks like I’m taking the day off. Not a very exciting way to end the month, but it was a pretty good month for me regardless.

I do like QuoteTracker, I think. I am already addicted to trendline alerts (scottrade only has price alerts), so I can get notified when a stock breaks a trendline. Trendline alerts helped me find one of my scalps yesterday. Very nice.

I am also seeing that the registered version has an API, that would allow me to program it similar to the way that TWS allows. So, finally, I have free access to a program that can get me streaming real-time quotes. WITHOUT changing brokers. And I could have had it all along, if I had known! This means, hopefully in the next couple months, I will be looking at charts of my own custom indicators, and working on ways that I can auto-detect patterns like the box play, etc. I think at this point, the main thing holding my profits back is my ability to find the plays I want to take in time.

I read a short book about the TRIN last night, written by the creator of the TRIN. So, that should be pretty definitive. :-) I didn’t know how people were going about applying the TRIN to multi-day timeframes–I thought it was mainly for us daytraders. So, that was interesting. Most of the intra-day stuff was material I already knew. Still, it was a fast read, and I enjoyed it. I have a couple more things to say about the TRIN, but not until I am more rested. Maybe this weekend I will write something up.

I’ve also started reading another one of the Bulkowski books on chart patterns, and I’m finding it very entertaining so far.

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

Strathmore Minerals Corp. (STM.v) is a junior Uranium company that trades on the Canadian TSX Venture Exchange.

1. Why did I take this trade?
There was lots of buy volume pouring in on Friday morning for Strathmore Minerals (STM.v). I bought STM when it broke above the previous day’s resistance @3.75. As noted in the chart, this was not a lower risk entry. Obviously I did not review the daily chart before I took this trade, as I was too focused on the intraday chart.

2. What was the initial stop?

The initial stop was at 3.65. Because it was not well-behaved yesterday (ie. big pullback, did not recover strongly), I moved my stop loss level up to 3.99 after the close.

3. Why did you exit where you did?

Everyone was stampeding for the exits this morning, and I was compelled to do the same.

4. Is there anything you would do differently?

Yes, I will have to review the daily chart more, prior to entering a swing trade.
The execution of my exit was done well (I did not even wait for the price to hit my stop loss before selling); however, the intraday chart indicates that I did not execute my entry very well. I did not need to wait for confirmation of the break above 3.75 before entering. In fact, I should have entered on Monday, when STM broke above 3.40, which kind of implies that 3.78 was a higher risk entry.

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

I traded 4 stocks today with 2 wins, 2 losses.
1. ILL TOOL WORKS INC (NYSE:ITW)

2. PARALLEL PET CP (NasdaqGM:PLLL)

3. UNUMPROVIDENT CP (NYSE:UNM)

4. LYONDELL CHEM CO (NYSE:LYO) (which I played yesterday as well).

Stocks Mentioned In This Article
Stock	Links
ITW	| |
UNM	| |
LYO	| |

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

In addition to the CHAP trade, I made two uninteresting scalps on BSX and PDE. The BSX made 1.4R and the PDE one suffered from a bad fill (f’ing uptick rule). So, I bailed on PDE for just a few cents profit, at my original 1R target! Bad fills suck when you are only trying to scalp a little move. Oh well, I made $50 off it so I can’t complain!

That’s three trades and three winners for the day, which is more than I usually trade. (It’d be like if JC had traded 300 times instead of 100). And, the markets are choppy today, with no real trend in the NYSE TRIN. I fear tomorrow will be just as bad, while the FED stuff still looms.

So, put a fork in me; I’m done. I hope all of you had a good day!

Here’s a box play on the 10-minute charts, with box width of 40 cents. These box plays are unstoppable!

The Setup

Chaparral Steel Company (Nasdaq: CHAP) was up on high volume, but got stuck in a range after making new highs on the daily chart. I was looking for a box play with a breakout on the upside. Instead, I got a box play with a breakout to the downside.

Entry Criteria and Trade

Here’s the chart of the trade:

1. I could have picked the previous green bar as the first part of the box play, but I don’t like to start at the top of a wide-range candle. That’s just me. So, I started on the local low about 50.35.
2. A local high is formed at 50.75.
3. The price didn’t quice make it down to 50.35 again, but since it was about 5 cents off on a 40 cent range, I let it go. Also, I was looking for an upside breakout, which would make a higher low good for me.
4. The 50.75 area is hit again. This completes the box. Once the price retraces 25% into the box, a trade will be taken on a breakout.
5. We have a nice orderly breakout to the downside. Initial stop is 50.75, and initial target is 49.95, for a 1:1 Ratio. I’d also exit after any serious push back up from extremely round number 50. In fact, it probably makes most sense to set the target at 50.

Target was hit a while later, in a tiny dip below 50 to 49.94. This was a very stress-free trade, as the price didn’t ever retrace back into the box area after the breakdown.

Stocks Mentioned In This Article
Stock	Links
CHAP	| |

I was away from my screens this morning, so I didn’t get a chance to play this one. But, this makes 8 for 8 non-losers. This one took its time to reach the target, but was only -0.6R at its worst point.

The Setup

Total SA (NYSE: TOT) gapped up on good volume. I noticed that the first 3 10-minute bars were alternating green/red at about the same height:

That’s a sign of a potential box play forming. The ADX on the 10-minute charts was rising, and the 5MA was catching up to the price. I reasoned that by the time a box play finished setting up, the 5MA would be even closer.

Entry Criteria and Trade

I took a look at the 1-minute charts, and saw this one touched at 5 points instead of 4, before breaking out in the up direction. Very nice! Here’s how the trade would have played out:

1. Local high forms the upper box boundary at 67.09
2. Local low forms the lower box boundary at 66.93
3. Local high touches 67.09 exactly
4. Local low reaches 66.92… lower box boundary is lowered to 66.92. At this point, the box is formed. Once the price retraces 25% back into the box, a trade will be taken on a breakout.
5. The price bounces off the upper boundary again
6. The price breaks out after a dip halfway into the box area. A long trade should be taken, with initial stop at 66.92. Assuming a fill at 67.10, a price target of 18 cents would be 67.28.

The price target was hit a bit later. The trade went at most a little over halfway back into the box before hitting the target, which would have felt pretty safe compared to yesterday’s box play (which took me to within 1 cent of being stopped out!).

Stocks Mentioned In This Article
Stock	Links
TOT	| |

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

I hope y’all had a good day in today’s choppy market. I tried to look for some diamonds in the rough so to speak. I traded 3 trades today; one winner, one loss, and one break-even. The first was a long on LYONDELL CHEM CO (NYSE:LYO).

Second was MATTEL INC (NYSE:MAT)

My third trade was a short on USG CP (NYSE:USG)

Stocks Mentioned In This Article
Stock	Links
LYO	| |
MAT	| |
USG	| |

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

I am loving the box play. I’ve spotted 7 so far, and this is the third box play trade I’ve taken. Some of the ones I’ve spotted never made it to their targets, but none of them would have been stopped out. So far, so good. I’ve been incredibly busy, so I haven’t yet gotten them into StockTickr, but when I do I will tag them “box_play”. I am in the process of specifying the entries for the ideas I trade more exactly, so I can similarly tag all of my trades by the type of play they were. This way, I can get better statistics on each type of trade I like to make. More on that stuff later. For now, let’s talk about the money I made today.

The Setup

Systemax Inc (NYSE: SYX) was up for the day on higher than average volume, running towards its 30-day high at 21.00. It had taken a breather and was starting to run up again in a standard kind-of rounded cup formation (10-minute chart):

As the markets were still range-bound, I did not want to make a bet that it would make new highs. But, I would like to play a run up to the HOD @ 20.74. I spotted a box-play on the 1-minute charts.

Entry Criteria and Trade

1. A low is formed at 20.57. I draw the lower box line.
2. A high is formed at 20.63. I draw an upper box line.
3. The 20.57 low is re-tested.
4. A high is formed at 20.64. I move the upper box line to 20.64. Now the box is defined. If it retraces 25% of the way back into the box, the trade will be taken on a breakout.
5. The price dropped almost halfway into the box, so the trade was taken @ 20.64 when it broke to the upside. Profit target is 7 cents above the box, and 20.71. That was perfect, from my perspective, as I could get out just under 20.74, where some selling pressure was likely to be.

… and though just after the trade I was within 1 cent of stopping out, it soon ran up into a more comfortable range. A little later, my profit target was hit. Every now and then, I get email about “why do you take a trade for only 7 cents?” These people don’t understand that it’s all about the expectancy of the system. You can get rich 1 R at a time, I promise!

Since it usually takes 20 to 30 minutes for a box play to set up on 1 or 5 minute charts, I like to think of these as cousins to dummy-style entries (tight 30-minute range during a pullback), only with demands on the internal structure of the 30-minute consolidation. If you think the stock can run higher than the box height, there’s no reason you have to take all your profits at that point. Right now, I’m just playing the trade as prescribed, to get a feel for it.

Stocks Mentioned In This Article
Stock	Links
SYX	| |

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

To the uninitiated, the unfamiliar, and the untrained, you may be thinking, “Sure, any joe blow can post a winning trade hours after it’s been made - how about posting a trade in real-time ??”

In other words, instead of posting our trades (way) after the fact, why don’t we post our trades in real-time, or minutes after we’ve entered them?

 If you’re interested in peering over the shoulders of the traders here so that you can see what stocks they’re looking at, then what you’re really after is knowledge on building up your own watchlist.  In that case,  then look no further than MtM’s own handy dandy, home-brewed market scan as a starting point for building up your own watchlist.  Pick and choose from that list as you wish, and use your own technical criteria to filter it down to a manageable size of your own choosing.

 If you’re interested in peering over the shoulders of the traders here so that you can learn how to trade, and understand why the trade was made, and figure out what to look for in a trade, then may I humbly suggest that you review the posts in the “Trades” category in this blog.  And then go back and re-review the posts again, but this time, treat them as free lessons in trading which can be applied to the very stock that you’re looking at right now.   We all try to discuss our rationale for taking the trades that we made, so by learning about why did what we did, you are getting the equivalent knowledge to watching us trade in real-time.  In other words, learn about how/why we did what we did, and then you too can do what we do - without having to peer over our shoulders in real-time.

 And, don’t be afraid to ask questions.  After all, we are all here to learn, and one of the better ways to learn is to ask questions.  And we won’t bite - at least most of us will try not to !!

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

If you are trading with a goal of maximizing your long term profits, you should be concerned with maximizing your expectancy. But, if you are like me, and you want to keep your electricity on via trading stocks, expectancy isn’t the right measurement to use. In this article, I’ll explain how to gauge your consistency. In other words, what percentage of your days/weeks/months can you expect to be profitable? This is useful if you are designing a system, and also useful if you want to know more about the system you already use.

Note: Many of the ideas in this article are largely derived from the first 6 pages of this elitetrader thread, started by user Acrary. I’ve tried to expand on that material with more detail and graphs, to make it easier to understand. Plus, it’s a lot more fun to read without all the elitetrader noise…

Expectancy: the Premier Profitability Measure

If you want to know if your trading system is profitable over the long haul, you want to know about your expectancy. You can find lots of articles on the web about expectancy, so I won’t spend long explaining it here. Briefly, it is computed as:

Expectancy = win_rate * avg_win - loss_rate * avg_loss

For the purposes of this article, I am going to ignore exact breakeven trades. This means that the loss_rate is directly related to the win_rate, and expectancy becomes:

Expectancy = win_rate * avg_win - (1 - win_rate) * avg_loss

A positive expectancy means that if you took an infinite number of trades, you would have more money than you started with when you finished (assuming, of course, that you didn’t bust your account during a bad drawdown–see this article for more about the risk of ruin, and this article for more about comparing the risk at different account sizes). Similarly, a negative expectancy means you’d have less money after an infinite number of trades, and a 0 expectancy means you’d break even.

That’s great, but when’s the last time you made an infinite number of trades? :-) What I’d really like to know is, am I going to make money most weeks? months? years? Profitablility and consistency are not the same thing!

Consistency Graphs

So, to get started, let’s look an example consistency graph for a system with positive expectancy. There’s going to be a lot of graphs like this one in this article, so let me explain what they mean.

The horizontal axis describes a number of trades taken during a given time period. The vertical axis tells what percentage of those time periods will be profitable, given that you took that number of trades. This was computed via a monte-carlo type analysis, with 2000 trials per dot on that chart.

So, let’s say you trade the depicted system, and you tend to trade 20 times a month. This graph tells you that you will be profitable around 95% of months you trade. If you trade 30 times a day, then this graph tells you that you will be profitable about 97% of your trading days. If you trade 10 times an hour, then you will be profitable around 85% of the hours that you trade. So it works on any timeframe… you get the idea by now.

See how the graph starts out in the 70% range, and converges on 100% consistency as the number of trades goes up? In general, all graphs of positive expectancy systems look like this, in that they start out near the win rate % consistency, and converge on 100% consistency. The width of the path, and the speed of the convergence will vary.

Now, let’s look at a graph for a system with negative expectancy:

Pretty much the inverse of the positive expectancy chart. It basically says, the more you trade, the less chance you have of being profitable. As an aside, this is exactly why your best bet at a roulette table is to bet everything on one round. Roulette has a negative expectancy for the player, so the more you play, the less consistent your profits will be.

Finally, if your system has an expectancy of 0, the graphs all look like this:

… as the number of trades increases, the consistency % forms a band around 50%. Makes sense.

Effect of Expectancy Size on Consistency

So, by now, you should know that a positive expectancy is necessary both for long term profits, and consistent profits. You might wonder if a larger expectancy system will be more consistent than a smaller expectancy system. The answer, which surprises a lot of people, is: no.

Here are consistency graphs for a range of expectancies from $40/trade to $440/trade. They are only marginally different:

If you think about the meaning of expectancy, you will realize that the $440/trade system will make a lot more money than the $40/trade system. But, for any given set of trades, expectancy is clearly not the aspect of the system that governs the consistency of the profits. We’ll just have to keep looking….

Effect of Win Rate on Consistency

Well, surely, if my system wins more often, I will have more consistent profits? It turns out, winning more often increases expectancy, but does not necessarily do much for consistency of profits. Here are several consistency graphs for systems with increasing win rates. You can see that, after you get above 10 to 15 trades per day/week/month/whatever, the graphs all look about the same.

It makes sense that the win rate would have sway over the answers when there are fewer than 10 trades per trial. So few inputs go into the profitability calculation, that a little luck in either direction changes the answer. Also, at the extreme end, any 1-trade-per-trial run will have a consistency % equal to the win rate (since the single trade is profitable at exactly its win rate).

Effects of Profit Factor on Consistency

Now, if you are an astute reader, you’ve noticed that in the preceding two sections, each graph had a constant “Pf” label at the top. And, since each set of graphs had fairly constant conistency, you might conclude that this “Pf” is what really gauges the consistency of a trading system. You’d be right.

“Pf” stands for “Profit Factor.” The equation for it has the same terms as the expectancy equation, arranged differently:

Profit Factor = (win_rate * avg_win) / (loss_rate * avg_loss)

Since the equation is so similar, you can see by simple transformation that the profit factor will be 1 whenever the expectancy is 0:

• (win_rate * avg_win) / (loss_rate * avg_loss) = 1
• win_rate * avg_win = loss_rate * avg_loss
• win_rate * avg _win - loss_rate * avg_loss = 0

Similarly, the profit factor will be greater than 1 whenever expectancy is greater than 0, and less than 1 whenever expectancy is less than 0.

Here are some charts of systems with increasing profit factors. They are randomly-generated systems with respect to win_rate, avg_gain, and avg_loss… the only thing I’m controlling is that the profit factor of each is rising. It’s easy to see that the profit factor is highly correlated with speed of consistency convergence of a system, and that higher profit factors require fewer trades per period to give a good guarantee of consistency.

If you think the graphs from 1.5 to 3.5 look very similar, check the y-axis! The convergence is getting much faster! (On some of these graphs, Mathematica cut off the early numbers, because it converges on the 99% range so fast that it decided to blow up the 99-to-100% range. Recall that the point for 1 trade-per-period will always be very close to whatever the win rate happens to be, no matter how fast it converges after that.)

Reading that last chart, you can see that if you find a system with a profit factor of 6, and you can trade 15 times a day with it, you will make money 99.95% of days you trade. That means you will have a losing day once every 10 years, if you trade 200 days a year. Oddly enough, I bet you feel pretty bad that day… so try not to let it throw you off! :-)

These trials confirm the advice given in the elitetrader thread, which gives the following guidelines for trading frequency versus profit factor:

By looking at my graphs, you can see what the guidelines are for any level you want to target, for profit factors from 1.5 up to 6.

Simplifications

I already mentioned that I ignored breakeven trades. This has only a marginal effect on the outcome, while simplifying my job a bunch. If you make 10 trades a day, and 9 of them are exactly breakeven, then maybe you should do some mental translation when using graphs like these. If your truly breakeven trades are relatively rare (like they are for most people), then you will be fine.

I also assumed during the random trials that a win is always the avg_win, and a loss is always the avg_loss. I could have been more exact by making a probability distribution of wins and losses, via a standard deviation from the averages. Assuming the variance in the wins and losses is not very large, doing this wouldn’t affect the message of this article, and would just make the graphs a bit more noisy. And, I could eliminate that noise by ramping up the number of trials per dot up from 2000 to more like 1,000,000 anyway. So, I didn’t bother. However, if your trading is all over the place, then you could have much wider swings in your profitability than depicted here (especially if you don’t trade often). Do try to keep the variance in your gains and losses as small as possible, if only because it makes it easier to reason about and predict your own performance.

Conclusions

So, here are some guidelines you can take away from all this.

If you are designing a system for consistency:

1. Maximize the profit factor.
2. Double-check your win rate to make sure your risk of ruin is acceptable
3. Trade as many times as you can, within the parameters of the system.
4. Get the variability of your returns under control (using something like the modified sharpe ratio, for example)
5. Tune the expectancy (or add additional systems) in order to make enough money.

If you are designing a system for maximum profit:

1. Maximize the expectancy.
2. Double-check your win rate to make sure your risk of ruin is acceptable
3. Trade as many times as you can, within the parameters of the system
4. Use the profit factor to frame your month-to-month profitability expectations. No reason to be down on yourself for a losing month, if your system should only win 60% of all months!

If you already trade a system, and you want to be more consistently profitable:

1. Find more trades to take within your system’s parameters. This doesn’t mean you start taking questionable trades, just to get the count up. Instead, you have to be more efficient about finding and exploiting opportunities to trade.

(this is why you’ve seen me post every now and then about needing to find more trades to take… it’s the only way I know of to be more consistent, without changing my system!)

If you’d like to see the Mathematica notebook that I used for this investigation, you can read the html version of it.

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

Good Trading begins with a good trading environment. One element of a good trading environment is having the right tools. I’ve been reading about Boogster’s Daytrading computer system. It’s a pretty nice setup, with bonus advice on LCD setups thrown in for good measure. But for my Prosperity Game, I need to kick it up a notch. For this round of the Prosperity Game, I will spend $2000 and $2500 all at the same time. If you step into my virtual office, you will see the following ultimate daytrading computer system:

ZenView Quad 19s Quad LCD Monitors (with DVI connectors) - $2299

There aren’t too many multi-screen displays available in the market, and of the few companies that carry them, this one stands out. Although purchasing 4 LCD monitors separately is cheaper, it will not offer the beneficial space savings offered by the stacking Quad LCD’s. This is not only more pleasing to the eye, but is also more practical, as it reduces the clutter on my desk. Usage of the monitors is broken down as follows:

• LCD1: I will use this monitor to track Market Sentiment as follows: displays real-time charts of Futures, ETF’s, TICK, TRIN, and select favoured momo stocks
• LCD2: Displays real-time charts of Canadian stocks and my watch list of 70 stocks.
• LCD3: Displays real-time charts of stocks that I am actually trading
• LCD4: Button Trader and a FF Browser with Yahoo!Finance, my blogroll, StockCharts, and BigCharts

Logitech® EasyCall™ Desktop - $99.50

The neat thing about this wireless optical mouse/keyboard combo is that it has a couple bells ‘n whistles integrated into the keyboard to provide for easy VoIP calls: speakerphone, one-touch calling, and connectors for a stereo headset. This is great not only for calling in any special requests to your broker, but also to just chat with your buddies when the market action is slow.

Anitec’s GI200 SLI PC - $2084.90

This clone PC is juiced up with the following configuration:

• Intel Core 2 Duo E6700 (2.67 GHz)
• 1.024 Gb DDR2-667 RAM
• 512 Mb DDR2 - 667 RAM
• 2x nVidia eVGA e-GeForce 7600GT KO Edition 256MB PCI-Express
• Seagate 320GB - SATA 3Gb/s Hard Drive
• LG GSA-H22N 18x DVD±Writer
• 10/100/1000Mbps Gigabit Network Adapter
• Integrated 802.11b/g Wireless Adapter

The reason I need a 2.67 GHz Dual Core CPU is because with so many charts and watchlists up on display, I need a CPU that has enough horsepower to process all the real-time data. This is the current problem that I am experiencing with trading from my laptop (which caused me to move an old desktop PC into my office) - with so many charts and watchlists up, just opening a FF browser with a couple of tabs will cause the CPU to increase to 100% usage.
The other cool item are the two(2) identical nVidia graphics cards. Having the same 2 nVidia video cards in one system allows them to be configured in SLI mode - this is where the two GPU’s are networked together to share the video/graphics rendering burden amongst the 4 monitors.

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

I just realized via a post on uglychart that I can use QuoteTracker as my charting software for free, since I happen to have an old Ameritrade account lying around. That may be great news for me, since I spend too much energy fighting with Scottrade’s platform (and their occasionally wrong charts!). I wonder if I can set it up to get quotes from Ameritrade, and place orders through scottrade? If not, I can just enter orders through scottrade’s platform. No big deal. I’m going to play with it this weekend! Thanks, Ugly!

Great… one more thing I want to get done this weekend… it’s amazing how fast things pile up! I’ve got so many articles I want to write, now that I’ve been staring at options stuff for a week! I hope you’ll all enjoy it. Between that and some StockTickr work I’ve been promising Dave for a while, and some IB TWS API investigation I’m doing, not to mention all the binge drinking I have planned, something’s going to have to give :-)

Secondly, I wanted to point out the Trade 4 Cash blog, to anyone who hasn’t seen it yet. I think this trader’s style is interesting, and quite a bit different that what most of us day/swing-traders do. That’s why I tried to convince him more than once that what he really wanted to do was contribute here. I think he would have been a great addition and contrast for Move the Markets, but it just wasn’t meant to be. So, until I can get him to change his mind, check out his site. Even if you don’t end up following his trades, you will probably still find some of the weekly articles interesting (such as this one about how some of his systems do better without stops).

If I get anything written this weekend, then I’ll see you then. Otherwise, have a great weekend and let’s finish off January deep in the green next week! I’m going on 10R so far in January, which in risk:reward terms is my biggest month ever, I think.