Hanover replies to PMs

Hey David,
I came across your post in the higher edge thread about the 5 trading giants you either know personally or have been coached by. The 2nd one you mentioned sounds like Tom Dante, and I know the 3rd is Jarratt Davis. I was just curious who the other 3 are. I’ve learned a lot from Tom and Jarratt, and would be interested in learning from the others. Sorry if you’ve already answered this elsewhere and I missed it.
Cheers!

https://www.forexfactory.com/showthr...9#post10554969

Are you basically meaning that this is the actual 'Trading Made Simple'?

01 STV vs LTV,
02 Bull and Bear Traps,
03 Strong and Weak Hands,
04 Squeeze Trades,
05 C-Liquidity and Paycheck Liquidity,
06 Floors and Ceilings,
07 Volume Cycles,
08 POC,
09 Stopping Volume,
10 Absorption,
11 Successful and Failed Auctions,
12 Buyers and Sellers Auctions,
13 How to read NOFT, Bookmap, Footprint Charts,
14 COT 'secrets',
15 CME group open interest,
16 Measured Moves,
17 Contango and Backwardation,
18 Steepeners and Flatteners,
19 Curve Logic and Effect on Inflation and Interest Rates,
20 Central Bank Open Market Operations,
21 Market Breadth, VIX and TRIN,
22 Market Cycle Phases,
23 BAC_REITS,
24 Bankers Margin,
25 Bond auctions, Yield Bid To Cover,
26 Puts and Calls Ratio and Skew,
27 Risk On/Off,
28 Intermarket Relationships and Dependencies,
29 How Algos Hunt Liquidity,
30 Market Makers and Liquidity,
31 Global Currency Correlations,
32 Curve Yield Spreads,
33 Event Risk,
34 RBOB, Crack Spread, and Refiners Margin,
35 Crush Spread,
36 Sticky and Slippy,
37 Institutional Scalping,
38 Gamma Scalping,
39 Volume and Delta,
40 Yield Rotation,
41 Merrill's Trade,
42 Covered Calls,
43 How to Trade Options Spreads on Highly Correlated Instruments,
44 Profile Taper,
45 Equity Index Arbitrage,
46 Three Tick Back Pressure,
47 Why RR Is Nonsense,
48 The Limitations of TA,
etc...

I'd guess that it's a pretty good starting point.

Hello Hanover, I have come a cross a strategy that has been tested to achieve somewhere between 60-74% winrate with 1:1 RR, from the 4 years of 2014 to 2017 (during the brexit periods it was breakeven in the short term, however overall in the year it was 60%) . I was just wondering, what is your opinion of the number of years of data I should record before trading to be sure that this strategy will continue to be successful for atleast the next year? Also, there are about 70 trade opportunities per year, do you have any recommendations about the trade risk size I should use per trade like 2%, 4% etc?

I'm much less qualified to answer this then the quant traders around here. I've become less of a fan of backtesting, or indeed any kind of testing, as my trading journey has progressed. I'm not sure the extent to which we can depend on past results to indicate the nature and probability of future results. But having said that, I'll attempt to answer your question as best as I can.

First of all, I don't think it's possible to be absolutely sure about anything related to future performance.

As I understand it, a big dilemma with historical data is this: use too little data, and we run the risk of a lack of statistical validity, i.e. we could be fooled by randomness. Use too much data, and it opens the possibility that the oldest data may no longer be representative of current market conditions. To reduce the risk of possible curve fitting, you could split your data up into several sections, for example 12 months per section, and run the same tests over each section. The more consistent the results, then it would seem the more robust your system is, or at least the concept(s) behind it, allowing you to proceed with a greater degree of confidence. On the other hand, if for example the win rate was to fluctuate wildly from year to year, then I would dig deeper in an attempt to find out exactly why. How have market conditions changed during the intervening years? What are the strengths and weaknesses of your system: does it prefer trending or sideways markets, volatile or flat periods, etc? For me, a critical question would be: WHY are you getting the results that you are, across a given period?

As to how much you should risk per trade, this depends on how much worst case drawdown you are PERSONALLY comfortable with. Your testing should be able to provide you with a rough guide (at 1% VAR, WDD might be 10%; then at 2% VAR, WDD would be 20%, etc). A common rule of thumb is to take the worst case drawdown from the testing, and then double it, to allow a margin for error for the future. I've posted the table below many times before. It tells you the probability of the number of consecutive losses within any X trade sequence, given a Y percent win rate. Note that actual drawdown could be significantly worse than us, because the table gives the probability of CONSECUTIVE losses. (For example if you had a sequence of L-L-L-L-W-L-L-L-L that is only 4 consecutive losses, but in reality the losses outnumber the wins by 7).

But for some short, generalized answers to your question, I would guess that anywhere between 5-10 years of high quality test data, and a 1%-2% risk per trade, would represent a reasonable starting point.

[EDIT] Sorry, I forgot to attach the table (and the XLS that produces it). Here they are:

Well I think you nailed it H....but just to add to your excellent post :-)

Perry Kaufmann has some great tips on testing for robustness in this podcast. In a nutshell placing too much emphasis on statistics can be your undoing as market conditions can stay stagnant for long periods of time (eg. >10 years or so). The aim of the game is to assess how your strategy stacks up against the greatest variety of market conditions you can muster. Obviously a large sample size increases the chances that you capture a greater variety of different market conditions....but it is no guarantee.

As an alternative to thinking in terms of a defined period of testing or a defined sample size etc.....one way to test for robustness is to test your strategy against as wide a variety of liquid instruments for as great a data set that you can test over. Provided the majority of instruments are favourable....then the greater the chance that you have a robust system. No guarantees.....but a high failure rate will clearly demonstrate that your strategy is curve fit for a particular condition which is what we want to avoid.

Success of a strategy has two heads. How it performs when market conditions are favourable to the strategy deployed......and how it performs when market conditions are unfavourable to the strategy deployed. The aim of making your strategy robust is to develop a strategy that can survive extended periods without significant capital deterioration when market conditions are unfavourable....and of course make hay while the sun shines when market conditions are favourable.

Every strategy has it's weak spot and you can never state with certainty how long unfavourable conditions could last.....but we all know the 'Keynes quote'......"The market can remain irrational longer than you can remain solvent."

This fine balance within these two spectral extremes of risk and return is where you find a 'true edge' as opposed to a 'false edge' delivered by leverage.....

....anyway Perry states it far better than I could ever do....and it is a very worthwhile listen :-)

Side note, what do you think the next big event will be that will cause large volatility in some pairs, such as Brexit? (or perhaps the unpegging of CHF to the franc, not sure if that caused volatility though.)

Just to let you know a little bit about the strategy, it consists off using Fractals, which are non-repaint patterns as you know, and using them in conjuction with Bill Williams MFI, which is a measure of price with respect to tick volume, I believe that indicator helps give you a reading of what is happening through observing the story of the tick volume. My strategy involves added conditions.

"As I understand it, a big dilemma with historical data is this: use too little data, and we run the risk of a lack of statistical validity, i.e. we could be fooled by randomness. Use too much data, and it opens the possibility that the oldest data may no longer be representative of current market conditions"-This is the worst part of finding strategies


"To reduce the risk of possible curve fitting, you could split your data up into several sections, for example 12 months per section, and run the same tests over each section. "

So for this strategy with 1:1 RR:
2017 - 74%
2016 - 60%
2015 - 60%
2014 - 66%

In 2015 & 2016, the first half ot the year barely breaks above even, the second halfs performed better, the whole of 2017 $ 2014 seemed relatively evened out apart from one bad month or two. I would have given the bad early 2016 performance to the brexit volatility causing chaos, however I can't explain the good performance of the last 6 months of 2015, but bad first 6 months of 2015.


"How have market conditions changed during the intervening years?" Apart form the Brexit vote, I'm not familiar of any other events nor how to look for them in the past.

"WHY are you getting the results that you are, across a given period?" Well my strategy is more about price action ultimately, it's more about identifying a potential support/resistance and then identifying the legitimacy of any breakouts past that point and then trading. So I would classify my strategy as more a universal kind of strategy rather than one suited to a specific time and I would hope too currency. But I'm probably wrong.


" A common rule of thumb is to take the worst case drawdown from the testing, and then double it, to allow a margin for error for the future." Seems fair enough, to have peace of mind. For me its never more than 5, so 10% per trade, that makes me nervous, new terrirtory, but I was thinking about 10% or 5% per trade before.TBh I would rather go with 5%, as a bad months loss close to 50 % would make me want to cry haha.



Copernicus:"one way to test for robustness is to test your strategy against as wide a variety of liquid instruments for as great a data set that you can test over." Oh man do you by chance know of any data software applications that could help me acquire data regarding specificly BW MFI & fractals super fast. It's definitely good advice though, and I can see the logic in that statement too.

Thanks for your objective Point of views.
Lastly thanks hanover & Copernicus for your time to comment, I'm sure you are all busy with your various lives.

I wish I did Hmsr.....but I am very fond of fractal analysis......have a bit of a search on Bill Dreiss who operates a very successful CTA using fractal algorithms. :-) Because of my lack of coding proficiency I had to develop my own back-testing models in MSExcel where I would import historical data from a range of sources into the models to test them......I then bumped into a great bit of backtesting software (soft4fx) which made my life easier with testing some of my discretionary systems on the MT4 environment.....I then dump the data into a few home grown systems in MSExcel and MSAccess to analyse.

It sounds like you might have a good system on your hands H...but just to err on the safeside...it would be worthwhile testing across mean reverting conditions (eg. during the period 2010 to current day with most of the FX instruments which is the period you have tested in) versus divergent market conditions (eg. GFC period) and pre 2000 for currencies (this period enjoyed divergent conditions associated with interest rates for 30 plus years).

If you are uncertain why your system did not perform during a particular period...it is essential that you find out the why? One of the best tips from H in his post is to have a thorough understanding of when your system performs and when it doesn't. You need to be able to identify which market conditions this occurs in...and then you can test your system during those unfavourable market conditions to see how efficient it is at capital preservation.

Thanks. I'm glad that you were able to pick up on this, and fill in a lot of the gaps, as my knowledge of quant trading methods is skimpy.

Also, I'd be interested to get your views on Daniel Fernandez, if it's not too much trouble. Many of the ideas and techniques that he discusses in his blog go way over my head.

Cheers mate....but I think your modest-self effacing nature does you an injustice H. It's a privilege having you on this forum mate. The ultimate sanity check for me :-)

PS Regarding Fernadez's blog....I haven't got into it H....but it looks intense. I don't consider myself a quant by any means, but rather someone with an active interest in portfolio management with a risk management background (eg. a generalist rather than a specialist). It looks to be more down the line of Pip's, Gold the Hun or FXEZ's et al cup of tea.

A lot of the Blog's content would be way over my head.....but from a quick perusal there is some great subjects that catch my eye. FWIW...My tendency tends to be towards a philosophy of catching the market anomalies as opposed to trading the churn and as a result, finding robust trading solutions that exploit the abnormal ...... and once I have found simple but robust solutions I can do something with them in regards to blending the return series and scaling up position sizing within strict risk management constraints. :-)

I don't want to disturb cat's thread any further, so I'll reply here.

I don't wish to boast, but in my 16 years of studying the markets, I've read a lot of books on technical analysis, and some by well known authors. Hence if a vendor offers pay-for coaching in technical analysis, I'm not interested because I'm pretty sure I would have read something that's fairly similar somewhere along my journey. But if there's an opportunity to learn techniques used by bank or institutional traders, then I'll consider paying for it, if I believe that I might learn some important concepts that I'd be unlikely to find anywhere else, and the price is not prohibitively high. Of course I know that this industry is rife with charlatans and bogus information, and I realise that I'm not infallible, but after 15 years I back myself as being a fairly good judge of who knows what they're talking about, and who doesn't.

I try to be polite to people even if I think they are disingenuous, and even if I have no intention of buying their product or service. Jecklom fitted into that category, especially after he kept sidestepping my offer to prove himself, and also the way that he handled petty criticism. Here is another example where it possibly seems like I was siding with this person, but I had absolutely no intention of buying anything he might have been offering. A few months ago, there was another thread/member who was selling what he claimed was institutional grade information, and I was courteous to him too, but after the answers he gave me, I certainly wasn't rushing for my credit card.

On the other hand, there's a course about br0ker operation and manipulation being run by ex Goldman Sachs trader, which does interest me, but I'm busy developing some stuff of my own at the moment, so I'll keep that one up my sleeve, and make a decision about it sometime next year.

Another example was Darkstar's book Orderflow Trading for Fun and Profit. My decision was based on my assessment of the quality of information in Darkstar's posts, the fact that the book promised strategies and techniques beyond TA, and it cost only $150, hence I had little to lose. It turned out to be a good read, significantly improving my knowledge at the time. But I decided not to buy further education from Darkstar as I felt that, where necessary, I could apply the ideas in the book by myself. If a vendor is selling education, I generally prefer to ask questions and base my decision on the nature and quality of his replies, rather than insist on evidence like trade explorers or myfxbook, which can be manipulated or faked. If strategies or education is TA-based, you can often find something similar for free, if you look around, in which case paying a vendor is a waste of money. A lot of due diligence comes down to common sense.

Although I post quite often in my spare time, I don't take trading forums very seriously. I don't care too much if there are people being cheated by charlatans. In my view, threads aimed at exposing individual scammers (e.g. here), however well-intentioned, are a waste of time. Probably 90%+ of the strategies being touted on the commercial forum will bleed money if traded for long enough, and there are always gullible people who are victims of their own greed, laziness and folly, no matter how many warnings or disclaimers that they read. As a novice I wasted a lot of money on useless EAs and systems myself, but hopefully I'm a little wiser now! If people buy products or services without performing sensible due diligence, then I have little sympathy for them. In my opinion people need to take responsibility for their own decisions -- an especially necessary character trait for a trader -- and understand that there are consequences for making poor choices. If individuals don't take responsibility, then governments and authorities will have to intervene and there will only be more regulation, which tends to constrain both capable and foolish people alike. For example, I'd be disappointed if spot forex was banned altogether in my country (NZ) merely because a majority of losing traders complained bitterly enough.

Anyway I wish you a safe and happy festive season and a prosperous 2018.

David

[Footnote: please excuse any spelling and grammatical errors, as I'm merely dictating this off the top of my head into a speech-to-text webpage.]

i wish you good festive season and year 2018 too, good trades and good health condition.

by the way: i dont care for good grammar or spelling, when its possible to understand all is fine. and your textes are always perfect to understand. i always write very fast my textes and correct later the spelling mistakes when i have more time.

Hi David,
Always interesting as usual..
Thanks for your post.
[ opportunity to learn techniques used by bank or institutional traders] , any appropriate link , book, docs referring to these words?
Happy trading.
All the best for 2018.
Tomcat98

Hello Hanover & Co.

What is your opinion of forex traders applying for positions at proprietary trading firms, to learn about other trading methods, with the end goal of trading forex?

I applied for trainee trader to 3 proprietary firms in Sydney, Genesis, Propex, & Starbeta, the interviews thus far were promising. Is this a good move?
I'm just unsure about, any and everything.


Have a holly jolly time everyone.


HMSR

I chat occasionally was one ex-prop trader, but he's based in the UK. I'm strictly amateur myself, as I've said many times before forex is merely a hobby for me, hence I'm not really qualified to comment. I live in NZ and hence I don't know any of the companies that you mentioned.

I guess that all you can do is apply for the role with these firms and await for their response. If you do get offered a position, then you'll find out soon enough whether or not you enjoy working in that type of environment, and whether you want trading to be a long term career. Obviously I don't know you personally, your work habits, how well you relate to other people, cope with pressure, etc etc or what you're specifically hoping to achieve. But I expect that it will be a great hands-on learning exercise, as you will get to meet and work with professional traders who are at all different levels. And of course if it doesn't work out for you, you can always move on and try something else.

If it was me, and I was younger, and was offered such a position, I would see it as a great opportunity and a challenge.

Good luck.
David

Can some one share what are job requirements of a prop traders. Thanks and Regards

See 1 2 3 4 5, and plenty more using Google.

So I applied talking about my experience, and how I created many strategies that got better with time and all the problems I had to address in the process of making the strategies. I told them I'm willing to take a break from university for a few years to get established. I mentioned I have about 2 years of experience. I have a bit of work experience doing unrelated jobs. I applied for the position of trainee trader, not an experienced trader. That's the gist of it, I got the interviews, and I've been given unofficial offers to take on the trainee program, however I've been given some time by both companies to consider this role due to the caveats of no base salary, long hard hours daily from 5am in the training process, likely failure at the start as most trainees experience this, thus a longer period without pay, so too the strict initial period of training will be based on Aus 3yr Bonds and similiar which is a significant downside for me as I believe I have my advantages in Forex, So I may not perform so well by chance at the beginning.

-HMSR

Do banks or institutional traders have any edge against retailers except illegal (or limited legal) insider tips? Please read a old Bloomberg article: http://business.financialpost.com/ne...-markets-rates
In addition, when we see their trading performance, it doesn't look they have strong edge: https://www.forexfactory.com/showthr...th#post8521845
Perhaps, information learned from Skenobi's thread is enough for most people...

Many thanks for the links. I'll read the articles when I get a chance over the next few days.

Obviously it's the choice of every individual as to what information he deems to be useful, in terms of his own knowledge/trading.

I'm away for a few days now, for Christmas and New Year. I'd like to wish everybody a safe and happy festive season and a prosperous 2018.

David