Developing my Futures Trading Method

Here’s an example of some of what how I’m working on as part of my new trading method for futures. I’m currently only actively trading on 2 instruments - the DAX and the ES. (That is aside from the normal stocks trading I still do). I’m using the NinjaTrader simulator and I’ve been taking trades daily. I love this tool and just got a full lifetime license.

Anyways, just a small disclaimer, I’m not running it as a tight ship yet and I’m at the beginning of the process so below is just a brain dump. The reasons it’s not full on for met yet are:

1. My rules aren’t firm yet. This has a whole host of issues but I’ll get back to this in another post probably.

2. I’ve got ‘no skin’ in the game. I’m not risking real money during this development phase and that affects things. I’m not “cheating” as that will be silly but the dynamics are different - in my case I think I actually do a lot better when I do risk money in the market to test ideas.

3. I’m stretching myself and spreading a bit thin with the various markets and instruments. I expect this situation to improve after the inital steep learning curve that comes with new ventures like this.

Anyways, right to it. Some of the first considerations and decisions I had to make were way before even considering specific trading methods and rules. In some cases I drew on my experience in stocks and in other cases I had to forget and actively ignore habits and knowledge that came with trading stocks.

1. Which instruments? I decided to go with the most liquid instruments I could find in different timezones. A good trading strategy should work on almost any tradeable market. Besides liquidity I also wanted easy access, low operating costs, good intraday moves, tight spreads.

2. What timeframe? This invovles a lot of trial and error, there’s no forumla, you got to bring up charts for the various instruments you’re considering trading and just try different values to see what suits your personality and style and how fast or slow you want to go. I went with 5000 constant shares on the ES and varying constant shares on the DAX depending on the day’s action.

3. What basic trading style / approach? I’m a trend follower by nature, I’m not attracted to counter trend / range trading. I can take the lower win rates that come with it and have patience to ride longer trends. It’s also actually less work :-) Within the trend following approach I’m most comfortable with taking pullbacks. So I went with that. Price action, identifying trends, finding good risk:reward entry spots and taking a stab at it.

The next set of steps was then to:

1. Scan charts, I do this manually forward walking charts and eye-balling ideas. This is extremely inaccurate and very misleading at times as the eye/brain often sees what it wants to see. But being aware of that helps and it’s a very fast way of throwing different ideas on the table.

2. Come up with some preliminary rules on entry, exit, position size.

3. Start implementing the ideas and taking trades to test the waters. Different markets move and behave differently, there’s no substitute for taking trades on real dynamic data (i.e. either live real-time or playback).

4. Record new ideas, thoughts, lessons learned and analyse the raw data captured by NT which is really extensive.

5. Make adjustments and repeat the above.

So finally coming to an example, here’s a capture of the MAE / MFE analysis for the DAX taken from the Account Performance tab. The MAE / MFE is covered extensively in John Sweeney’s Maximum Adverse Excursion: Analyzing Price Fluctuations for Trading Management.

These results are just based on 55 trades over a few days with a win rate of about 50%. So definitely far from sufficient data, this is just to illustrate the thought process. What we can see is that after entering those trades the average move against the position (MAE) was 2.77 points, the average move in favor of the position (MFE) was 6.05 points. This is not too bad, it shows that the entry + inital stop more often than not put me in a favorable spot to benefit from some trend going my way. The bad part though is that the ETD - average End Trade Drawdown was a very large percent of the MFE. My main take-away from this small part of the analysis was that I was doing something wrong with my exits giving back a huge part of open profits. And that has an adverse effect on the profit factor.

There are many other aspects to developing trading rules. This is just part of how I go about doing it. Different traders approach things in different ways, whatever works and makes money for the individual trader is the way to go.

Other possibly related posts:

• links for 2008-04-20
• Any Israeli Traders out there?
• links for 2008-04-13