Update April 2014

I’ve been focusing on scalping FGBL for a few months now. I’ve looked at FESX and some futures in the Asian market but I feel most at home with FGBL. There were some large rips going in to Easter which have made me a little uneasy though!

I’ve played with volume profiles, 1 tick and 3 ticks charts along side my depth and sales. These help me to integrate the large picture but take away from my focus on the D&S. I’m tempted to ditch the tick charts and either mark up my D&S with short term levels, or clear trades between moves. After watching the tick charts for a few weeks I feel like I’m more aware of what medium term signals I want to watch.

I’ve made significant progress in writing some code this month. I continue to underestimate this type of work. Code is relatively easy for me to produce and so often I underplay it’s value. This time I’ve created generic infrastructure that reads level 2 data and provides functionality to run trades against the data. This has given me huge flexibility.

There are many things I want to test and analyse but my first experiment is this…

Where are the optimal places to take a trade?

Pretty important one I reckon. The problem I have found is that I can pick the trend/movement of the price action pretty well, but I often miss the trade due to execution. It’s pretty easy to miss trades when scalping with limit orders.  So how do I get in at the correct time, what should I be looking for, etc.

What I’m doing with my code is taking a trade at regular intervals and tracing it’s progress until it either hits it’s stop loss or take profit. The hope is that I will be able to determine times when a trade had a high probability of getting hit and profiting. I also want to look at the potential to enter off market orders. I have many other questions but these are the broad queries.

The trick for me going forward is going to be:

  1. Focus focus focus. Keeping digging in to D&S and scalping. Ignore distractions, trading and otherwise (damn you Titanfall).
  2. Find confidence from my own analysis.
  3. Continue a process of self improvement as per Steenbarger.

Forward Guidance is Forward Guessing

Choice quote from a speech given by Richard Fisher from the Dallas Fed in Hong Kong.

Truth be told, although many of us have econometric models and all of us have a phenomenal team of economists who help us develop our projections, these estimates are, in the end, largely guesswork. Especially the further out in time they go. Yet the press and the markets focus on them as though they were the writ of all-knowing, all-seeing monetary sages.


Update March 2014

This year I have found my determination to make trading work for me. I’ve had an on/off relationship with trading for the last 10 years. At the start I was fortunate to have a colleague introduce me to the basics of trend trading forex with basic risk management. Unfortunately the idea of trading forex price action straight from candles never sat well with me. I couldn’t develop the confidence from that style of trading.

Since then I merely pottered around the trading industry. I built my web development business and became engrossed/distracted in that for a while. All good until I had my first baby and confirmed my disillusionment with the web industry (a post for another day). I moved back to a solo web development career and started looking at trading again.

Around September 2013 I stumbled across the Propex website, read their introductory PDF, and was referred to No BS Day Trading. I purchased the No BS basic material and was enlightened by what I read. It became clear that the information in the DOM was the level of detail that I needed to find confidence in a trade.

I ended up taking John’s Eurex webinar in early December to get a better feeling for how this “trading thing” works. I learned a lot from that experience and felt like I was on my way.

Since the start of 2013 I’ve been watching the DOM and charts religiously. Given my time zone and family commitments I’ve found the first two hours of Eurex open to work best for me. Organising myself and finding a routine has been a challenge but I think I’m there now. I’ve started to keep a diary and record each trading session. I’ve also begun a diary to dump my thoughts and determine my next actions. Staying consistent and developing a routine of continuous improvement has probably been the theme since the start of the year.

My focus has largely been scalping FGBL. I began to notice some patterns around previous day extremes in early February and this lead me to consider the same patterns around key levels. I wasn’t sure what those levels would be. From watching the DOM I had noticed that intra-day levels were constructed and produced similar patterns to what I had noticed at the previous day’s extremes. This lead me to auction theory.

I began to investigate auction theory and the application of that theory. I’m lucky enough to be in a chat room where some folks trade this style and it’s been good listening to their discussions. I’ve watched this movie from L2ST and there was some nice info about trading off auction theory and trading balanced vs imbalanced markets.

Then this morning I read this post about a prop trader’s enlightenment around scalping.

So this is my method: I just stare at the fucking screen and watch the bell curves forming on the side volume histogram. Once they are maturing, I fade the edges, and keep fading them. Then if some news comes, or i feel momentum is building in the movement( you can easily tell that if you are truly staring),  i switch from fading to going with it, and I enter before hand itself and anticipate the breakout of the range. That’s it really.

It feels like we’re on the same road. My feeling for now is that you can definitely trade by price action alone, but it can be made more effective by finding price action validation with correlated markets and auction theory.

Shredded Futures Orders For Early Price Notification

Some nice info described in a LinkedIn HFT group post. Scott describes how hit bids/offers are provided with an ACK packet before the prints or order book is updated. This means if you can get a sacrificial lot early in the queue and the rest of your order slightly behind that lot, then you can decide to leave or pull the rest of your order before other traders have the same information as you. Further posts in the thread say the CME is actively preventing this, but there are work arounds.

If there is 250 (size) on the bid (ES for example); with an institutional data feed you can see how many individual orders comprise those 250. You will normally see an average size per order of between 5 and 10; that means there are some larger orders mixed in with many 1 lots.

When an order fills, the owner of the order gets an ack from the exchange before the trade prints and well before (in HFT terms) the book size is updated. The owner of the order knows the price traded before everyone else.

So as you correctly state, the owner of the order pulls the rest of their (shredded orders). They can do this because they knew how many orders traded in front of that fill and if that is sufficient to give a statistical probability the level is going to trade through, they pull the orders.

This process can be repeated many times on the same price level if when placing the orders, a time delay is introduced between each placement (or possibly between a small group of orders). You may be 230 out of 250, 215 out of 250, 190 out of 250, etc. If you get to an order in your order stack that means too many orders have traded at the level for the risk profile the algo is using, the algo cancels the remaining orders.

The Trading Holy Grail

Here’s a great paragraph from the book Trading for a Living.

W.D. Gann

I gave up the search for the trading holy grail a long time ago. The more I look, the more that I see professional traders that simply find high probability setups and trade them. The setups are a combination of strength/resistance levels, trend lines, basic indicators like moving averages, and vwap.

The highly recommended book Street Smarts starts the book with a method that takes the other side of the well known turtles momentum trade. The idea being that most of the time the turtle trader loses more often than they win, but when they win they win big by catching momentum early. Taking the other side of that trade and keeping a stop loss would therefore suggest good results.

SMB covers a trade in great detail where a stock gets dumped, but then begins to trade up but gets stuck under VWAP. The reasoning for the resistance on VWAP is that brokers are scored based on their performance against VWAP. The SMB guys have really good content. Here’s the video of that trade.

The SMB guys also stress setups in their book One Good Trade. There’s a few rules but some of them include stocks that are up or down 3% in pre-market, stocks with exceptional news, expectation beating news, etc.

Don Miller looks for setups with a couple of seemingly basic indicators on tick and short time frame charts. The videos on his Trading After Dark site are worth a look.

Lastly, in this video below Anne Marie discusses using basic indicators to find places where others might be looking to make trades. The idea being that many people make decisions off the basic indicators. Specifically she mentions that she uses pivot points and stochastic momentum index.

One Good Trade and @2yrflipper

I took a break from Dalton’s Mind Over Matter and read through Mike Bellafiore’s One Good Trade. This was a great book for perspective on what it takes to be a professional day trader, and how to get there. Highly recommended. His focus on the book is trading US equities and  searching for “stocks in play” for a suitable setup, and then reading the tape for playing the trade.

In contrast, BTFDtv had a chat with @2yrflipper about how he scalps futures. This is one of the best discussions of scalping that I’ve heard so far. No suspicious motives, no bullshit. Worth a look, comes in two parts: one, two.

How To Start A Fight

Tell someone you believe in minimal government.

I’m two for two this week. At least I’ve found something to do at the next Christmas party. Just be ready for the “who would build the roads?” question.


Reminiscences of a Stock Operator

I recently finished reading Reminiscences of a Stock Operator which is recommended by many traders. Having now read the book I’ll add my recommendation to that list. The book is a great trading book, though from an entertainment perspective it does get a bit repetitive part way through.

My strongest take away from the book is that market manipulation is nothing new. The author goes in to great detail as to how he and his colleagues manipulated prices for their own ends. It’s worth noting that the manipulation had considerable limits and was dependant on fundamentals and the market’s temperament.

He also discusses his earlier years trading the bucket shops. From his stories it seems that little has changed except for maybe the scale of operation and technology.

The author placed great emphasis on his ability to read the tape. This is of particular interest to me as I’m looking to trade off Depth & Sales. This book helped me understand that there are many different approaches to trading.

I’m moving on to the new edition of Mind Over Markets by Dalton & Jones.