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.

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.

September 24 2013 Links

Some interesting links I’ve come across:

Asia-Pac Futures Scalping Brokers & Data

Thanks to John Grady at NoBsDayTradying.com I’ve been looking at trading order flow.

I’ve picked up a copy of Jigsaw’s Depth & Sales Ninja Trader plugin.

I’m in Western Australia, so trading US Treasuries begins at 11pm, or European Bonds at 2pm. I’m self employed so my hours are flexible, but I have a young family which does limit my flexibility at times. Trading the Asia Pacific markets would fit well but I’m concerned with the low volumes and lack of broker support.

AMP Futures, through CQG data feed, seemed to offer the important bonds and indexes. Unfortunately I’ve only come across negative statements regarding AMP Futures. Like these:

I’m most concerned about the customer support issues. If I’m in a position and I lose my connection then I need to get out with a phone call. The out of band connection must be reliable.

Incidentally, I’ve called City Index a number of times and have always got through to a helpful person. Thinking about it now, they’ve probably provided me with the best customer service of any business, especially outside the financial services industry.

Mirus Futures looks good so far, but they don’t connect with the Asia Pacific region. I’ve been running on their demo with Zen-Fire data for a couple of days.

When it comes to accessible markets, Interactive Brokers are seemingly well ahead of other brokers. Their commissions are also very competitive. I know they’re fairly popular among retail stat arb traders which is reassuring. My main concern with IB is that their real time feed is not actual tick data, but aggregated tick data collated 20-30 times a second. I don’t have enough experience to know if this will be a problem or not. I suspect it won’t be a practical issue, but who knows…

Another alternative would be to hook in to a separate data feed, but from my recollection eSignal and CQG were the only Ninja Trader providers connected with Asia Pacific markets. eSignal would cost about $150 a month – probably beyond my 1 lot trading returns for the time being… and CQG supply data through affiliated brokers – AMP Futures in the case of Ninja Trader. I’ve already voiced my concerns about AMP Futures above.

I’ll probably go with IB.

Another, probably unavoidable issue will be connection speed. Given that I’m in Western Australia, we’re a 250ms ping to the US, 130ms to Singapore, and 70ms to Sydney. I’m not sure what affect this will have on scalping but I remember from my Quake World days, lag mattered! Short of moving country, or getting in with a prop firm to trade Asia Pacific markets, I’m stuck here.

In terms of startup costs:

  • $400 Jigsaw Depth & Sales
  • $1,000 Ninja Trader
  • $10,000 capital required for IB
  • $1,000 computer

Monthly operational costs:

  • $50 Jigsaw Depth & Sales trading interface
  • $50 exchange connection costs (generous estimate)
  • $50 internet connection
  • $10,000 loss of interest (not much today)

I use a Macbook Air as my work computer. I’m running Ninja Trader through parallels which does work, but is not ideal. I’d say a dedicated trading setup is required. Then I need to weigh up a Desktop vs Laptop vs VPS. I’ll leave that for another day.