UNDERSTANDING THE MARKET

Now, I want to show you some ways that I have found to understand the markets using some of the systems that I trade.

I am not going to go through all these numbers. I am going extract one month to explain what I do. This is the kind of information that I keep for example on my 30/34 strategy. I actually have this data on every trade I did using that system for the past 8 years. This chart is a little chart that shows the process that I go through.

The entry point of every trade is recorded and how far it ran before it changed direction. In other words I record from where the signal was on the entry to the top or the bottom of the swing. I am going to pull out one month of data to show it to you.

The first column, this is actual data from the month of October this year, the entry point to the time to the time it reversed (this is a stop and reverse system) would have given me 26 points. It really ran to the extreme swing high or swing low a total of 36 points. The data in this chart is for the ES contract. If I had been willing to take 45 points on each trade and you can see the pattern all the way down to 35. If I had taken 45 points I would have made the full 36 points and so on.

If I had been willing to take 35 points I would have gotten 35 points on the trade. Here I would have gotten 30 points, and here I would have gotten 25 points.

When you go down to the bottom of the chart and you add up the month, this system would have given me 20 points net if I had taken every signal on a stop and reverse. Look at this, from the time of signal to a swing high or swing low was 140 points and I am trying to figure out how many of those points I could get.

In the type of market we are in I could never have gotten 45 points or 40 or 35. But if I had always been willing to take 30 points on every trade, I would have made 40 points total or twice as much as I would have on a stop and reversal approach.

This type of information allowed me last winter to tell people that I would suggest to stop playing the 30/34 system even though it even though it had been profitable to the extent of over 500 points a year for the last 7 years. I could see that it just wasn’t
running and the swing highs and lows were narrowing. It was time to stop playing this kind of a system. That is how I use this type of a chart.

Here is another one of my trading charts. This one I have actually put up in the room before. This is the bond chart – 5 min bond chart – here is the 34 ema. This day, almost the entire day, I didn’t want to take any CCI signals except shorts. The ema was telling me the market was in a down trend. CCI was pretty much telling me the same thing, all day long, except for one little period here – BE SHORT. The CCI and the 34 ema were confirming each other.

Now, what this chart does – I record this as I am trading during the day. Here is a Zero Line Reject that ran for 13 points after the CCI gave me a signal. Here is another Zero Line Reject that gave me 21 points – possible, I didn’t get the entire profit but the profit was there if I had stayed in. Here is another Zero Line Reject short that ran for 17 points. Here is a Trend Line Break crossing the - 100 which
was a buy by CCI but I would have lost on if I had taken it. There is also a buy here that would have made 8 points and I have another buy here that would have made 9 points.

So what I do during the day, I code all the entries I make on CCI. I may not have all the entries that actually occurred as I may miss some of them. This is what I saw and this is what I use to be in the market .

The interesting thing about this chart is and one of the reasons I use this chart is because I stayed short all day long. This chart gave me the opportunity to add up all the short positions to get 81 bond points if everything was perfect. But everything is not perfect. I managed to get 60% of the moves. Out of the 81 points in real trading
I got about 45 points. That was a good day. I did not take the long positions because they were counter trend. Even on this day the counter trend CCI trades would have been worth +10. I just choose not to take them BECAUSE I AM ONE OF THOSE PEOPLE WHO LIKES A VERY HIGH WIN RATE. I hate to lose.

What do I do with this data? It goes onto this sheet but also goes into EXCEL. Let me explain this chart. I keep track of Zero Line Rejects and Trend Line breaks – what ever I am trading. I don’t need the information every day. If I have a random sample, I am happy if I just have a few days out of the month.

On this chart, I get a signal to go long or short on a Zero Line Reject. It ran for 20 points (the first trade) after I got the signal. If I were taking only 10 points I would have gotten 10 points out of it. If I were taking 12 I would have gotten 12 points. You can follow across the line to see the results with different targets. If I were taking 20 points out of a trade, I would have received all 20 available points.

The 2nd trade that day only ran for 12 points instead of 20. Again, you can see the results across the line. Why do I do this? When I get to the end of the month I get some valuable information from this chart.

These are total points for the month if I always took 8 points on each trade. I would have gotten 196 out of 561 total possible – close to 50%; still a pretty good return.
If I had taken 10 points on each trade I would have received a total of 233. If I had always taken 12 points I would have gotten 265 but if I tried for 14, I would have gotten 285 total points. Now I am clearly over 50% of the total available.

Taking Zero Line Rejects, if I always took 8 points that would be 12.3 points per day per contract on average. If I always took 10 points I would have gotten 14.6 on average per day, and if I had always taken 12 I would have gotten 16.6 and if I had taken 14 I would have gotten 17.7 per day. As you see – it is starting to flatten off here. It is saying to me, you aren’t going to be any better off going for 14, 16 or 18 points than you would if you were shooting for 12 points.

According to data, I had 33 winners and 12 losers for a 73% win rate for Zero Line Rejects for September if I always took 8. If I always took 10 points I would have had a 69% win rate and you can follow the data for other targets across the board here.

Now some of you may recall that during September when we were saying 80% win rate on Zero Line Rejects. The reason for that is that I get out when the CCI tells me to get out, not when it is reaching an objective. Going for an objective, using this as an exit strategy, what this really tells me is this. If I know the optimal return is based on waiting to 12 or 14 points, it tells me don’t take a weak CCI signal to get out of the trade. Don’t run, because the optimum exit is 12 or14 points. If I am at +3 points and I see the CCI begin to turn a little bit, I am not going to run if I know the optimum return is at 14 to 16 points.

This win rate down here at 73% was really 80% for the month of September using CCI exits. It occurred up here. That minus 5 was really a tiny little + getting out with the CCI and this -4 was also another little gain. So when I posted that the CCI win rate for the Zero Line Reject was 80%, it was based on fact. It was not based on guesswork. I know exactly that the market characteristic is telling me to go for 14 or 16 points.

I will still get out if the CCI tells me, but I am going to be real careful before I get out.

A SIMPLE SYSTEM – THE ZERO LINE CROSS STRATEGY

Here is another one of the things that I use. This is the ES contract. The strategy is based on a zero line cross. You go long if the zero line is crossed going up and you go short if the zero line is crossed going down. I like the results of the system except for one thing. It trades about 15 times a day and that is too much for me. I like 3, 4 or 5 trades a day. But if you did nothing with the CCI and go long or short as the zero line crosses occur, during the study period I selected which was 9 days, it averaged
4 and ¼ points a day. You just have to like a lot of zero line crosses.

Replying to a question: Yes, this is a SAR system. You are in the market all day. You reverse positions every time the zero line is crossed. You are either long or short depending on the direction of the zero line cross.

I tend to break the day down into three 2 hour periods. I like to see what the market is doing during the morning, during the mid day and during the afternoon.

Surprisingly, on this chart, what this chart said what that during the mid day the market made a little over 2 points. That was better than what it did on average during the morning or the afternoon. So, at least based on information from this source, the observation that it is not wise to trade during the middle of the day – it just isn’t true.

The floor traders pointed this out to Woodie when he visited the floor. They don’t go to lunch during the middle 2 hours of the day. They go to lunch when the market gets quiet. That may or may not be in the middle 2 hours of the day. So, for some systems, trading in the middle of the day can be good.