What Markets Should You Use for Your Portfolio?

A couple of years ago I made a fundamental mistake: until then I had my portfolio focused mostly on index futures markets. For years I have had with this approach really nice results. But that year, I experienced how frustrating it can be, to go through a couple of periods when index markets are underperforming. That was when I have decided to work really hard and improve my intraday portfolio composed of automated trading systems (ATS).

Smooth equity isn't just about the systems - it is a smart combination of markets, timeframes, trading approaches, and, later on, also innovative position sizing. When you think about it, there is the logic behind it.

Even though in times of financial shocks and surprises there is barely any negative correlation in the markets, there are still some markets which live their own lives - and they offer us smart way for diversification.

The result is that when one of the market groups is not doing well, there is another, which compensates the losses from the first one - and makes the equity overall smoother.

What market groups you should use

This is the first question - what markets groups you should combine in order to get the desired result - smooth equity.

We have following futures groups: Index, Currencies, Metals, Energies, Bonds, and Grains. Every market group lives its own life and you can find at least one noticeable market in every group that can represent the whole group.

Personally, I have experimented with all groups and, besides currencies, I can highly recommend any combination. The currencies are, from ATS point of view, highly unstable (for example in Forex, ATS are failing really fast and it is really difficult to find profitable ATS for Forex). It also depends on how many markets you create a system for, and how many markets you trade with your account. But even with rather a small account, you can trade 3-4 markets. For such cases, I would recommend following combinations:

Combination of 3 markets (pick one market from each market group):

• Index
• Grains
• Energies

Combination of 4 markets (pick one market from each market group):

• Index
• Grains
• Energies
• Bonds

Nowadays, I trade several portfolios that are based on the 4 groups mentioned above. Here is an example of one of them (breakout strategies, 30-minute chart, 5 markets, equity for the last 8 years, trading 1 contract per system):

The net profit for all 8 years and all markets combined is 421,548 USD and the max drawdown is just 12,315 USD.

Smoothen the equity by using multiple timeframes

The second way how to smoothen your equity curve (in a combination of trading several markets from different groups) is using several timeframes for every market (ideally without changing system parameters, or with just small changes).

It is more like a final touch than smoothing the equity, but it brings up an interesting idea that it might be better to add new timeframes instead of trading multiple contracts in the same timeframe. Another option is to optimize also the timeframes (check the results of your system on several timeframes and pick one timeframe for each market - it can, but doesn't have to be the same) - but then, we need to ask ourselves how much of over-optimization this is.

Anyway, here is another example of the portfolio mentioned above, when for every market we add the second, 15-minute, timeframe. The equity is slightly smoother, the drawdown hasn't increased so much, but the profit has.

The net profit is 812,457 USD and the drawdown is 18,815 USD.

What systems to use

The best variant is to have in a portfolio both trend and also counter-trend systems. Still, it is sufficient to have a system that can smartly react on both situations (equally, if possible).

I am specialized in breakout strategies and I can say that it is all you need to have a balanced portfolio across several markets - but only if you have systems trading both long and short. Sometimes you just need a simple breakout strategy that doesn't have great performance (that you wouldn't trade individually), but in combination, you have a nice portfolio with smooth equity curve. You need to constantly focus on the performance of the portfolio - it is more important than the performance of underlying systems. Remember when there is a huge drawdown for one market (system), the others can compensate that and you can still make a profit.

For that, you need to have a quality workflow setup how to create new and new strategies, as you will need a lot of them and for several markets. At the same time, it is crucial to have a setup of robustness testing procedures so that we can add to our portfolio really robust strategies.

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Strategy To Take The Benefit From Stock Option Trading

For some people, stock market is a source of huge wealth. All you have to do is to place orders, sitting at the home comfort. But at times the stock trading can be a risky venture. There are different forms of trading like intraday trading, Long term trading and Short term trading. At ProfitAim, our ultimate aim is to satisfy our clients with maximum profits from their intraday positions with the help of stock option tips as well stock future and stock cash tips.

While the long term trading involves minimum risks, the intraday trading involves maximum risks. One can take the help of expert advisory firms like ProfitAim Research in their trading venture. The advisory firms hire expert technical analysts, who on the basis of their in-depth research provide accurate stock cash tips and stock options tips. 

Apply Best Trading Strategy: Day’s high and Day’s Low

One should also try to use the risk management tools like Stop Loss to minimize their Loss. Trading strategies like Day’s high and Day’s Low can be used to trade effectively in the stock market. In the day’s High and day’s Low Strategy, the market of previous day is considered. The high and Low of the yesterday’s Market is marked.

Best Trading Strategy: Buy at yesterdays high and Sell at Yesterday’s low

In this strategy, we buy at yesterdays high and sell at Yesterday’s low. We can put pending orders at yesterday’s high and Yesterday’s Low. If the market crosses yesterday’s High, It is anticipated to follow the up-trend. Thus, a buy call can be placed to take the benefit of the uptrend. If, the price crosses the yesterday’s low from above, the stock is anticipated to follow a down trend. Thus, a sell trade can be placed to take the benefit of the down trend. During these up trends and down trends, the trailing sop loss can be used to lock the profits. For example, if the market is in uptrend the level of stop-loss can be moved up as the stock price goes up. Similarly in case of down trend, the stop-loss level can be moved down, as the price moves down. The concept of trailing Stop Loss is very useful in locking profits and preventing losses.

Drastic Movements of Stock Market

Stock Market is a kind of business which is driven by fear, greed, and selfishness, and very few stocks give a chance to earn good profits. The drastic market movements can only be understood by the research specialists who perform continuous analysis. At ProfitAim, we focus on the stocks which have a High win rate and low losing rate.

There are 3 important segments of equity trading. Cash segment, Futures Segment and Options segments are the major ones. In case of Cash Segment, the current price of the equity is traded. In case of options, put or Call can be bought or sold. In case of futures, a future contract is signed. ProfitAim Research provides expert advice in form of Stock Cash Tips and Stock Option tips. Our ultimate aim is to satisfy our clients with maximum profits from their intraday positions.

Standard Deviations, Moving Averages and Reversion to the Mean

For my money, most people make e-mini trading an exercise in futility, bizarre theory, and interpretation of crazy indicators. Had I started trading outside the halls of an institution I suppose I wouldn't know where to start; this business is fraught with as many crazy ideas as crazy indicators. I don't think it has to be that hard. One of the first principles of trading is that prices tend to move from overbought to oversold and oversold to overbought in a manner that rarely strays from a mean price. You can take advantage of this tendency and profit, though few people actually trade Reversion to the Mean effectively.

Back in my college statistics class, we learned that standard deviation is a measurement that is used to objectively quantify the amount of variation in a given dataset. That definition works pretty well for explaining levels of excessive buying (overbought conditions) and excessive levels of selling (oversold conditions) and can give you an insight into when buying levels have exceeded expectations and sellers are likely to enter the market and vice a versa, when selling levels have exceeded expectations and buyers are likely to enter the market. In e-mini trading, I have been tinkering with this idea for nearly 10 years and defining an optimal Simple Moving Average that best represents an acceptable mean price that is uniquely useful for e-mini scalping. This was not the easiest of things, as e- mini scalping is much shorter in time and market breadth than calculations used in e- mini swing trading. (Where reversion to the mean trading is more common)

Without wandering into a lengthy mathematical explanation of how I have arrived at the numbers that best fit my e-mini scalping style, I can say that for most people and average between 200 and 300 will serve you well. I stick with Simple Moving Averages because an Exponential Moving Average weights the most recent price action in calculating a line plot. This is not a helpful attribute when looking at a 200 period data string and distorts the true mean you are trying to determine.

My standard deviation (SD) settings are higher than I expected, but for my trading style they seem to have worked well over the last 3 to 4 years. I generally use a channel with the inside ring the lowest standard deviation (SD 1.5-2.4) level that will produce a reversion to the mean and the outside ring(SD 2.8-3.5) is generally the extreme point where you can expect a powerful reversion to the mean. With about 4300 trades recorded and charted, I've had a range of results (depending on volatility conditions) that varies from 78% success on the low side and 85% on the high side. Like all things in trading, reversion to the mean is an exercise in probability and market conditions are a prime variable in determining Reversion to the Mean success.

The day got rid of all the goofy indicators and oscillators and learned Reversion to the Mean, order flow, and began to understand price action was an important day in my e-mini trading life.

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Learn Using Indicators the Right Way in Binary Options Trading

When traders learn using indicators the right way, it can prove to be a valuable tool to make money in the binary options market. There are many types of indicators available in the market and the parameters they measure are momentum, volatility, trend and volume. You can use one or more indicators to measure a single parameter.

Trend indicators and oscillators

Trend indicators can be used to spot reversals of the trend or can be used to spot support and resistance. Oscillator indicators move around a specific level or move between upper and lower level. Traders make use of these technical indicators to determine whether the market is overbought or oversold. This can enable the trader to get a good signal when the divergence is drawn between the price action and the oscillator.

The popular trend indicators include:

• Bollinger bands,
• channel,
• Ichimoku Kinko Hyo,
• moving average and
• parabolic SAR.

Popular oscillator indicators include:

• MACD (moving average convergence divergence),
• momentum,
• RSI (relative strength index),
• RVI (relative vigor index) and
• stochastic oscillator.

Mistakes to avoid in using technical indicators

One of the biggest mistakes that traders make when they are using technical indicators to trade is that they use too many of them and this can be confusing. Each technical indicator gives specific trading signal.

If for example the trader uses four trading indicators they can get four different trading signals. If these different signals do not appear at the same time it can lead to a lot of confusion and the trader many make wrong entry points. This can result in loss making trades.

The other big mistake that traders need to avoid is using many indicators from the same category. If you have 3 - 4 trend indicators giving the same trading signal it does not mean that the trade will definitely be profitable. It is important to learn about the specifications of each indicator to be able to trade successfully with them.

Most successful traders tend to combine technical indicators with fundamental, sentimental and news indicators to get a broader picture of the market. This enables them to enhance the results and increases the potential to make profits.

One the downside if you use more indicators you may become confused with the large volume of information. It can also become difficult to monitor the signals in an effective manner.

When you learn using indicators the right way, you may be able to save a lot of time and effort in understanding the price momentum of the underlying asset.

Most traders tend to get overwhelmed with too much of information and clever use of indicators can help avoid this scenario. It is best to make use of them to measure various aspects of the trade so that you are able to make profits consistently.

Article Source: Here

Why You Should Be Careful With Too Small Stop-Loss

In the past, I met several traders, that experienced live results completely different from their backtest results. The cause was a seeming triviality - too small stop-loss. Let me explain to you today, why this can be a problem, what to be aware of and how to avoid this danger. The following topic is just about those breakout strategies that are using STOP order to open a position and, at the same time, they are using too small stop-loss (this article is not about strategies using market order). What is too small stop-loss? Well, it depends on the market and the timeframe. But in general, it is a stop-loss smaller than the size of an average bar of our main timeframe. Let me give you an example - if we are using a 30-minute chart with an average bar value 250 USD, and our strategy is working with an 80 USD stop-loss, we are heading into a serious trouble. The live trading results might (and in most cases almost probably will) be totally different from those that we have from the backtest. Let's take a look at the reason why.

This problem occurs when the stop-loss is so small, that some of the trades have entry order and stop-loss on the same bar. Let's say we have an entry STOP order on the price 100 and also a stop-loss on the price 99. Now, imagine that the bar opens on 98.7, it goes to 100.1 and we open the long position - and the stop-loss is set up to 99. And all of this happens within the same bar - i.e. within this one bar, the entry order is activated, the position is opened and the stop-loss is set up.

Now it is important to understand why this can be potentially a dangerous problem. It is quite simple. There are several backtesting platforms which are not able to recognize, with the wrong setup or when the data resolution is not fine enough if the stop-loss was or wasn't hit on an entry bar. In other words, there are certain situations when, in reality, the stop-loss was hit right after the position was opened, because right after the activation of the entry order, the market starts heading south. However, our backtesting platform evaluates the trade as a profitable one (from now on I will write about TradeStation as it is a platform that I primarily use). How is it possible?

Let's continue with the demonstration of the situation described above. In this situation we can see the rising bar, i.e. the one that has a close price above open price and, at the same time, the close is close to its high.There is an assumption that the bar was raising the whole time and TradeStation assumes that the "inner" move of the bar, i.e. the way the bar was generated, was constantly rising, a straight line.

TradeStation is simply following the logic that when the bar closed close to its high, the process of generating this bar was rising. In such situation, TradeStation assumes that the bar opened on 98.7 and the price was continuously rising to 100.4. And during this time, it also activated our buy order on the price 100.

Nevertheless, this is very inaccurate and dangerous assumption. What if the bar was first rising, activated our purchase order, but then it reversed and went back down, below our stop-loss, and then started rising again to close to its high?

This is a totally realistic scenario that is happening every single day and that would result in a clear loss (right after we open the position) - and yet, TradeStation (and potentially also other software), defines the situation as if there wasn't any correction inside the bar at all. So no stop-loss was hit and trade ended up as a profitable one. This is the root cause to major problems as in the backtest you clearly see a lot of profitable trades that, in reality, would end up as losses - and right after we start trading this strategy live, everything starts falling apart...

Protection #1

Luckily the situation isn't so serious as it looks like and the backtesting platforms, in general, take this risk into consideration.

The first protection against this threat is simple and, to a certain level, highly efficient. TradeStation calls it LIBB (Look-Inside-Bar-Backtesting), others call it different names, like Bar Magnifier. The point is that when you turn on this feature, the program looks inside the bar to the level of the finest available data resolution (in most cases it is 1 minute), if there wasn't any inside correction after the entry order was activated, or if there was a correction on the same bar when we entered and the stop-loss was hit.

Despite that it sounds like a great solution (which is today a standard part of most platforms), it doesn't have to be sufficient when it comes to small stop-losses. Why? Imagine a situation when your stop-loss is 80 USD, but the average bar of your finest LIBB resolution (i.e. mostly 1 minute) is 150 USD big. In this case you are experiencing the same problem as described above, when the platform is not able to determine whether the stop-loss inside the bar was hit or not and it makes, again, just an inaccurate approximations that are driven by the above-described logic - if the bar closed closer to its low or closer to its high. In other words, you are again at the beginning and with too small stop-loss, not even LIBB will help you, and the problem still persists.

Protection #2

So, we are getting to the point when we need to go a little bit deeper to solve this problem.One of the solutions would be to use even finer data resolution - down to the tick level. But this isn't as easy as it sounds. Firstly the tick data history is not so easily accessible, or just for a very short period. And if these data are available, they are really expensive. But even if you still purchase tick data, you need to solve several technical issues - as the tick data are usually so big, that most of the platforms won't handle so many data, crashes or runs backtests incredibly slow (I can confirm this).

Protection #3

So we need to use much simpler solution - and that is the necessity to use reasonably big stop-loss. And what is reasonably big stop-loss? Simply use stop-loss that is at least 1.5-2x bigger than the biggest 1-minute bar on your chart. It is simple and you can avoid several problems. For example, if the biggest 1-minute bar for all your data history was 300 USD, use stop-loss at least 450 USD. Period.It is simpler and safer to get used to higher stop-losses than lying to ourselves and subsequently be surprised why such a nice backtest equity is quite the opposite of results of live trading.

Happy trading!

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