Traders World Expo VII
“Finding and
Exploiting
Statistical
Tendencies”
By Kevin J. Davey
Today’s Agenda
Who Am I?
How to Find Statistical Tendencies
– Tips
– Pitfalls
FREE spreadsheet tool for
evaluating systems
Disclaimer
U.S. Government Required Disclaimer - Commodity Futures Trading Commission
states: Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures
and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures, stocks or options on the same. No representation
is being made that any account will or is likely to achieve profits or losses similar to those discussed in this document. The past performance of any trading system or methodology is
not necessarily indicative of future results.
CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT
REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF
CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED
WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
Who Am I?
Futures Trader for 20 years
1st or 2nd Place Finisher in the worldwide
futures trading contest 2005-2007
– Over 100% annual return each year
Profiled as “Market Master” in 2010 Wiley book “The
Universal Principles of Successful Trading”
Writer for SFO Magazine, Active Trader Magazine and others
Although I write about futures, consult and offer signals to public, ABOVE ALL I AM A FULL TIME TRADER
My Trading History
During the first 10 years of trading, I spent a lot
time PICKING THE WRONG SYSTEMS!
– Cowboy Trader “1-2-3” method >> LOST $
– Simple Moving Avg Cross >> LOST $$
– “You Can’t Lose…” Method >> LOST $$
Visit my website for article on why scale trading is dangerous
My Trading History
But, those early losses forced me to research the
best traders and ideas
– Market Wizards books
– Other Classic Investing Books
– Van Tharp’s Trading Psychology Courses
Combining what winning traders did with my own
My Trading History
Now, I develop systems using an objective
approach
Data Mining, Brainstorming Limited Feasibility Testing In Depth Testing, Optimization Walkforward Testing Monte Carlo SimulationInitial Real Money Testing
Full Size, Real Money Operation
It takes approx 100-200 trading ideas to yield 1
Data Mining & Brainstorming
Objective is to discover statistically valid
tendencies in the market, and develop
systems that exploit them
Can be as simple as “buy Friday afternoon,
sell Monday morning” or complex as
“when Gold/T-Bond ratio exceeds X, buy
stocks with low beta values”
Data Mining & Brainstorming
Can use variety of tools
– Trading software
– Excel
– High level math/statistics software
No one right way to do this
– Follow my tips, avoid pitfalls
Data Mining & Brainstorming
Example 1 – Seasonal Analysis
Example 2 – Time of Day Analysis
Data Mining & Brainstorming
Tip #1
–
The best statistical
tendencies have a solid,
easily explainable
Seasonal Analysis
Is there a seasonality
play in Orange Juice?
What if I:
– buy in early Summer
-anticipating hurricanes
– sell in Winter – after freeze
is priced in
Is there a
seasonality play in
Heating Oil? What
if I:
– Sell in Fall – opposite of most retail traders
– Buy in Spring
Is there a seasonality
play in Orange Juice?
What if I:
– buy in early Summer
-anticipating hurricanes
– sell in Winter – after freeze is priced in
Why Do You Need Explanation?
Would you fly in a plane
if the pilot said
“I have
no idea how this thing
works, but I haven’t
crashed yet!”
To trade well, you need confidence in
what you are doing – logical
Example 1 – Seasonal Analysis
Look at a number of different commodities
– Buy beginning of one month
– Sell Short 6 months later
– All commodities must have explanation behind them
Run thru past data (20-30
years or more) – Statistical significance?
Go to Testing
Phase
Get a New Idea!
Example 1 Results
Seasonal Strategy - Hypothetical, fixed contracts per
trade, 1/1/2004 to 9/19/10
Past Performance is no Guarantee of Future Results
$0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 0 20 40 60 80 100 120 Ne t P ro fit Walkforward Results
Example 1 Results
Starting with an idea, we were able to:
– look at past data
– determine some significant patterns (without over optimizing)
– put the concept into a comprehensive system
All started with simple explanations to
Data Mining & Brainstorming
PITFALL: Testing thousands of
combinations of entry and exit dates, keeping the best one as
“proof” concept works.
Maybe you are only seeing a statistical fluke!
Data Mining & Brainstorming
Example 1 – Seasonal Analysis
Example 2 – Time of Day Analysis
Data Mining & Brainstorming
Tip #2
– Observations you make about
market, or that you hear
about, can lead to great ideas SO
– Don’t underestimate your
ability to suddenly “discover” market tendencies
Example 2 – Time of Day Analysis
Trader/author Al Brooks mentioned in book that
“usually” day high/low hit in 1st hour for ES futures
– Does statistical analysis back this claim up?
Example 2 – Time of Day Analysis
Put High and Low Data (and Times) in
Spreadsheet, see what results
date high time low time
Did H or L occur before 10:35? 971211 1030 1220 1 971212 945 1240 1 971215 1535 1125 0 971216 1300 1530 0 971217 940 1555 1 971218 935 1430 1 971219 1550 1110 0 971222 1000 1310 1 971223 1120 1600 0 971229 1615 935 1 971230 1600 935 1 971231 1425 940 1 980102 1615 1020 1 >>> 67% of days,
either High, Low or Both occur in First hour of Trading!
Example 2
So, what do I do now?
Example 2 Results
Knowing this tendency, look for action
Example 2 Results
Today
–
reversal bar
and lower high
(from
yesterday) was
good High of
Day marker
Data Mining & Brainstorming
PITFALL: Statistical tendencies
are only part of a strategy – remember confirming
patterns/indicators, stops, profit targets, and money
Data Mining & Brainstorming
Example 1 – Seasonal Analysis
Example 2 – Time of Day Analysis
Data Mining & Brainstorming
Tip #3
–
Take a well
known/perceived edge,
modify or add to it
Example 3 – Open Gap Analysis
Two popular gap observations
Example 3 – Open Gap Analysis
These observations are generally true, but can
they be “twisted” to be even better?
>>> Buy Mon, Sell Tues is even better than weekend
trade!
Perform Simple Excel Analysis…
-0.40 -0.30 -0.20 -0.10 0.00 0.10 0.20 0.30 0.40 0.50
Fri-Mon Mon-Tues Tues-Wed Wed-Thur Thur-Fri
A v e ra g e C h a n g e (Po in ts )
Example 3 – Open Gap Analysis
These observations are generally true, but can
they be “twisted” to be even better?
>>> Possibly Buy (don’t sell) big down gaps! Also, avoid small gap days
Perform Simple Excel Analysis…
-3 -2 -1 0 1 2 3 4 <-20 -20 to -15 -15 to -10 -10 to -5 -5 to +5 +5 to +10 +10 to +15 +15 to +20 >+20 Opening Gap (pts) A v g D a il y C ha ng e ( pt s )
Example 3 – Open Gap Analysis
Other possible analyses
– Could the Gap day of week be combined with gap size?
– Does Long term trend have an influence?
– Could this be combined with first hour high/low observation?
Basically, anything can be done. Just make sure
– You have enough observations
– You can explain what you are seeing
– You add in other components of a good system (stops, etc)
Final Pitfall
PITFALL: Don’t take cliches,
books or magazine articles as “truth.” Be prepared to verify it yourself, and test variations.
Summary – What Did We Learn?
Tips
– Explain what you find – Always Observe – Re-invent known edge Pitfalls
Avoid overtesting Edge only part of strategy Check “truths” Tendencies
(be sure to verify!)
Buy OJ – Aug Sell OJ – Feb Buy HO – Apr Sell HO – Oct 67% of time, Hi/Lo hit in ES 1st hour
Buy Mon, Sell
Tues better
For More Information
www.kjtradingsystems.com
– Information on my systems
– Articles, videos, webinar materials
FREE For Attending!
Monte Carlo Spreadsheet Tool – I use it everyday
Visit www.kjtradingsystems.com, join mailing list
INPUTS IN LT. BLUE Monte Carlo Simulator
Base Starting Equity $ 15,000 RESULTS IN YELLOW Stop Trading if Equity Drops
Below $ 5,625 Start Equity Ruin
Median
Drawdown Median $ prof Median Return Return/DD # Trades, 1 Year 167 $15,000 1% 21.2% $15,696 105% 4.88
System Name Gen 3 - Mini S&P Only $18,750 0% 17.8% $16,084 86% 4.83 $22,500 0% 15.3% $15,988 71% 4.59 $26,250 0% 13.8% $15,861 60% 4.31
Inidivdual Trade Results $30,000 0% 12.4% $15,718 52% 4.23 Profit/Loss $33,750 0% 11.3% $15,615 46% 4.16 ($317.50) $37,500 0% 10.4% $15,695 42% 4.04 ($892.50) $41,250 0% 9.7% $15,830 38% 3.90 ($155.00) $45,000 0% 8.9% $15,704 35% 3.87 $432.50 $48,750 0% 8.4% $15,761 32% 3.84 $282.50 $52,500 0% 7.8% $15,910 30% 3.84 ($292.50) $32.50 $282.50 $915.00 $107.50 $665.00 $495.00 $795.00 $732.50 ($1,390.00) $1,052.50 $595.00 ($55.00) ($55.00) Rate of Return 0% 20% 40% 60% 80% 100% 120% $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 Start Equity R a te o f R e tu rn
Rate of Return / Drawdown
0.00 1.00 2.00 3.00 4.00 5.00 6.00 $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 Start Equity R e tu rn /D ra w d o w n
FREE For Mailing List Members
“Super Tips”
– 2 Tips for Mechanical/Automated Traders
– 2 Tips for Discretionary Traders
Of all the things I’ve learned in 20 years of trading,
these are the key ones
