Sunday, December 21, 2014

Technical Indicators: The Good, the Bad and the Ugly

It is a bit overwhelming when being first introduced to technical analysis. It can be quite confusing, as a lot of jargon is thrown around. As the months go by, I find my self focusing less and less on technical indicators (chart patterns are much more useful, and I don't mean patterns like Head and Shoulders patterns). I find the indicators out there to not be that effective, since they are so overused as trading robots to the numerous retail investors use them, and that takes the edge away.

My Thoughts on Indicators:
Early in my trading career, I followed Tom McClellan and he has always emphasized not to use the same tools everyone else does, as it takes away the edge. I have always taken that as motivation to find new/unique ways of interpreting indicators. For example, with the RSI, I don't look at it to tell me whether a stock is overbought or oversold, there is so much to the indicator, that many don't discuss (or maybe notice). In fact, I find trying to use it to tell if a stock is overbought or oversold is inaccurate and hard to profit from it signal. Ever notice that when a stock is more overbought, it just keeps getting more and more overbought? That's not a very useful way way to exit/short a stock However, I rather keep the ways I read them to my self to, and maintain my edge. The point is, try to think outside the box, even when looking at other indicators, don't just go with the way everyone else reads them.

My Top 2 Indicators:

Friday, December 12, 2014

The $VIX Set To Ruin The Christmas Rally?

VIX Christmas Rally Bearish Market

A few weeks ago I discussed reasons as to why the Market needs to pull back. It did not, but I believe the Market is finally ready to give the bears full control.  Today the VIX  just signaled a very reliable bearish signal that I will discuss below.

The chart above is the S&P 500 and the VIX with 50-1 Bollinger Band settings, which was shown to me by Tom McClellan. When the VIX is above it upper Bollinger Band, the Market gets quite ugly. Take note on the chart below, the VIX is currently above its upper Bollinger band (highlighted with black rectangles). Past instances at these VIX levels resulted in massive damage to all Market indexes. At these VIX levels the bears are clearly in charge. For now it looks like the VIX is set to spoil the yearly Christmas Rally. Until the VIX retreats below the middle Bollinger Band, consider this Market in the bears hands.

Tuesday, December 9, 2014

Importance of Win Ratio Metric & Large Samples Of Data In Trading

By Dylan Johnson

Often I hear many traders talk about making gains on certain trades in net profit terms such as "I made $10,000 on a swing long trade on XYZ." or they also will say "Made 5% on XYZ for a day trade." The biggest problem is that average traders lack or do not understand the importance in analyzing performance metrics for your system or means of trading. In Quantitative Systematic trading the most important analysis of your process is the risk and performance metrics. Over the years there has been a range of conflicting opinions on what is most important, I happen to believe the three most important metrics is P-Fac, Win-Ratio & Maximum Draw Down, but for now we will focus on the importance of the Win-Ratio.

The Win-Ratio calculation: #Winning Trades / #Losing Trades

The Win-Ratio only focuses on the probability your signal, system, or processes success after the trade has been executed then closed. If your trade after said signal has a positive return value its considered a win, if negative a loss. Win Ratio basically acts as the method to calculate the positive or negative probability of your trading or system. Probability measures and evaluates the following: Risk, Luck, Likelihood, Chance, Uncertainty & Randomness. If these concepts are important to your trading then you must consider probability, since it is the only way to factor in these concepts and deal with them properly and evaluating your systems performance.   

Sunday, November 16, 2014

Top 4 Must Read Trading Books From a Hedge Fund Manager

Dylan Johnson 23 is the Hedge Fund Manager at Sardonyx Capital, a fully systematic quantitative hedge fund launching January 1st 2015, the President & Founder of Obsidian Analytics, and creator of the Obsidian Mechanical Automated Trading System. Mr. Johnson has extensive experience in quantitative analytics, systems design, algorithmic trading, and systems testing, dynamic forecasting models, and risk-management strategies. He holds a bachelor of art degree in economics & business from the University of Pittsburgh.

Top 4 Essential Books for a sound and all around beginner to advanced education in quantitative systematic trading.

1.       New Trading Systems And MethodsPerry KaufmanNew Trading Systems & Methods provides a comprehensive overview of trading systems, systems testing, money management and risk management education. The book provides chapters dedicated to each type of method to be used in trading, such as momentum systems, trend following systems, regression systems, time based systems etc. and many more in an encyclopedia like fashion. It includes each systems reasoning, method of use, and provides implementable examples of each. It also is full of information on how to appropriately implement, evaluate, measure performance, and analyze trading systems. This book is great for getting ideas and methods of developing your own system.

2.       Quantitative Trading Strategies Lars Kestner; Quantitative Trading Strategies begins with a complete historical background on quantitative systems trading, and builds the book chapter by chapter teaching the reader how to create a trading system following a scientific process and then how to correctly asses evaluation and optimization of trading strategies. Kestner also presents many profitable trading systems that can be used and implemented by the reader in the financial markets. This book goes into specific details in the design and creation process of algorithmic trading systems.