TheProGuideToTradingIdeas-BetterSystemTrader

The Pro Guide to Trading Ideas Professional traders share their market insights, strategy ideas and sources of inspiration.

BetterSystemTrader.com DISCLAIMER: This guide is provided for educational purposes only. BetterSystemTrader will not be liable for any damages caused as a result of using information contained in this guide. Verify all strategy ideas before using them with real money. Full money. Full terms and conditions are available here.

Jake Bernstein Episode 1 “So we began to put a lot of data into the computer. The data was basically price trends and time of the year, price trend and date. We found some amazing correlations, that on certain dates there was a probability that prices would go higher or lower, specific to certain markets and we found that these probabilities went all the way back to the late 1800s, which is as far back as we have data in the stock market. They're impressive, very impressed with the results. So I'm talking 75, 80% accuracy over the course of many, many years which certainly was statistically significant and so I began to research prices based on seasonality and published my results and before you know it, I was trading very successfully...”

Jake Bernstein is an internationally recognized futures analyst, trader and author.

“In fact, seasonality is most likely, for me, the primary driving force behind stock prices, currency prices, bond prices. In fact, the absolute best seasonal that we have is in the stock market and that begins approximately the last day of October and carries all the way into the beginning of the new year. There's a very high probability pattern pattern beginning the last several days of October into the first several days of November with probability over 80% all the way back to the 1920s. No matter what the underlying economic conditions may have been, so Depression, recession, recession, war, inflation, inf lation, disinflation, disinflation, it doesn't seem to matter.”

He has appeared frequently on radio and television throughout the United States and Canada, including Wall Street Week and CNBC. He also lectures extensively in the United States, Canada, Europe and Asia.

“Most people are very negative on the market so this is a classic example of how knowing the seasonality is very strong and putting that seasonality together with a trigger can give you an opportunity to buy when most people are willing to sell. So the most important thing, and I want to make sure I make this point before we're out of time, is this: It's not just the existence of seasonality. Remember, even a seasonal at 85% accuracy for 80 years is still 85%. We're still going to be wrong 15% of the time. Is there something we can do with that seasonal pattern? The answer is yes, and that's what I call a trigger. So if I know that crude oil begins to move higher late March, early April, I will come to that period of time and I will begin to look loo k for technical indicators suggesting that the trend is turning higher. So in the absence of those technical indicators, I will not take that trade, but if I have the trade with high probability seasonality seasonally and I get a trigger, any traditional trigger, moving averages or otherwise, indicating higher prices, that combination increases my probability of success.”

The Pro Guide To Trading Ideas – www.bettersystemtrader.com

He’s written more than 41 books, along with numerous research studies and newsletters on futures trading, stock trading, trader psychology & economic forecasting.

Jake has pioneered numerous technical, cyclical and seasonal methodologies.

Jakes websites are: Jakebernstein.com Seasonaltrader.com

Page 2 of 26

Cesar Alvarez Episode 3

“Around that time I got to a site called tradingmarkets.com. Run by Larry Connors and he had lots of good strategies there, he quantified his stuff, I tested his ideas, they worked pretty well and I definitely started getting more interested in him and his work.”

"Nowadays where I get most of my ideas is I do a lot of reading of blog posts, that’s where I get my ideas and where I find something. I would see an idea and test it out and if it looks like it has potential I would make it good by adding my own ideas, my own trading style to it.” “Recently what’s caught my eye is dual momentum, a very popular ETF topic on the internet this year. So I definitely have b een doing a lot of research in it recently for my own trading. But again I get it everywhere, I have a huge list of stuff that I coul d… I could stop taking ideas and spend the next several years just whittling down that list but I’m always chasing the latest, greatest ideas too.”

“And for trading ideas, quantocracy.com. Oh man, I just love the aggregation of things. I get so many of my ideas from them now.”


Cesar Alvarez spent nine years as a professional market researcher for Connors Research and TradingMarkets.com. He has been at the forefront of stock market research, having developed a number of successful trading systems now used by numerous investors and fund managers in the United States and internationally. He has given trading presentations both over the web and in person to hundreds of traders. Cesar was also a Software Engineer on Excel versions 3, 4, and 5, helping Microsoft Excel go from single digit market share to owning the market. Cesar attended the University of California, Berkeley where he received his Bachelors of Science in Electrical Engineering and Computer Science in 1989 and his Masters of Science in Computer Science in 1990.

Cesars website are: alvarezquanttrading.com TranquilityTrading.com

Page 3 of 26

Check out this huge collection of research books, all containing complete strategy rules and performance results.


Page 4 of 26

AmiBroker & Back Testing 101 Can you program a strategy from beginning to end that averages 20%+ returns per year? You will after taking this course.

Course objective The course is designed for those that want learn to use AmiBroker to test their trading ideas but who have very little or no programming experience in AmiBroker. By the end of our eight weeks together you will have the skills to code your trading idea, run a back test on it, verify the results and create trading signals for it. We will code from beginning to end a strategy with a compounded return of more than 20% from 2004 to 2013. Imagine the world of new trading strategies that you could create with new found knowledge.

About Cesar Alvarez your instructor Cesar was been programming and back testing ideas in AmiBroker since 2001. For 9 ye ars, he was the Director of Research for Connors Research where he created hundreds of trading strategies. He has taught AmiBroker at weekend trading seminars. Cesar will teach you the basics of programming and then walk you through the creation and testing a strategy.

For more details visit: http://bettersystemtrader.com/amibroker101 The Pro Guide To Trading Ideas – www.bettersystemtrader.com

Page 5 of 26

Nick Radge Episode 4 “Well, in my book, Unholy Grails which was published a few years ago, we discussed about 8 different ways to look at trend following and built systems around that from very, very simple things. You’ve got your standard channel breakout which everybody knows, kind of from the Turtles. So we investigated things like okay, longer term breakouts like if you make a new highest high in the last 100 days and you see the trend is up, so you’re jumping on board.

The lowest low in the last 100 days, well clearly the trend is down and you can jump on board. Other strategies like buying stocks when they hit new all-time highs. Other things, a very popular strategy that we created was called the 20% flipper and the context is very simple. When price moves from a low point up 20%, then you buy the stock. At the end of the day, if you get a stock that is going to be up 200, then 300, and 400, 500 percent, well it’s got to travel through that 20% barrier first, and you’d just hop on board and if it reverses by 20%, then you can hop off.

Nick Radge is a professional trader, analyst, educator and author. He’s been trading since 1985, was a floor trader at the Sydney Futures Exchange and worked for international banks in London, Singapore & Sydney.

He is an expert in trading system design and technical analysis.

Simple things like that, and you can get some volatility based kind of strategies, for example using Keltner bands or Bollinger bands.” Nicks website is: thechartist.com.au

“In Unholy Grails, the strategy that we did test and showed very promising results was an entry using a Bollinger band and an exit using the opposite Bollinger band, but we use 3 standard deviations for the entry and 1 standard deviation for the exit, just to keep the trailing stop a little bit tighter. And that showed very, very good results. So it’s something like that that in its very basic format that everyone can have access to and is certainly a good platform to start from.”


Page 6 of 26

Kevin Davey Episode 5 “What I would do is I will have a market in mind so we kind of fix that. So let’s just say I want to develop a system for gold just for example. And then I usually have a sense of what kind of timeframe I am looking at and if I want it to be like an intraday system or swing trading system.

So I might have a couple bars sizes in minds so I might do like 60 minute bars and 240 minute bars and daily bars. So maybe I will test out my idea over those particular bars like obviously I don’t want to do every sing le possible bar minute by minute to test them all because then eventually you’re going to find something but I try to just do some general 60 , 240, daily to see what happens. And then I will look at a couple variations of an entry.

Kevin Davey has been developing, analyzing, testing and creating trading strategies for over 25 years, in every futures market from the e-mini S&P to crude oil to corn to cocoa. He placed in the Top 2 of the World Cup Trading Championships from 2005 – 2007 with the results: 2005 – 2nd place with a +148% return, 2006 – 1st with a +107% return, 2007 – 2nd place with a +112% return.

A lot of times I al ready have kind of an entry idea so let’s just say some kind of breakout system okay. Well I might just apply a simple stop loss to it just to see, “Hey, does that breakout system work?” And then I might also put in an exit of exit after X number of bars a nd then I can look at the results and say, “Okay well this entry seems to be valid,” or seems to give some kind of edge for maybe five or six bars or something like that but after that maybe it falls off.

He now trades full time for his own personal account and coaches small groups of traders to significantly increase their trading results. He’s written a book on building algorithmic trading systems and has been featured in a number of other books and magazines.

Kevins website is: kjtradingsystems.com

So just looking at that on some limited testing I can kind of come up with a good idea for an exit possibly and also kind of refine the entry. By the time I get to the next step which is more detailed testing I pretty much had my system and I know what timeframe I’m looking at.”


Page 7 of 26

Strategy Factory ARE YOU TIRED OF CREATING “TERRIFIC” STRATEGIES THAT COLLAPSE IN REAL TIME TRADING?

DO YOU FIND YOURSELF IN THESE SITUATIONS?   



Have you ever bought or developed a terrific looking trading system, only to lose money trading it? Have you had a trading idea, but were unsure how to determine if it really had an "edge?" Do you evaluate all your trading systems differently, testing some to death, but trading others with real money after only minimal testing? Do you ever find yourself struggling to think of new trading ideas?

I MAY HAVE THE ANSWER YOU ARE LOOKING FOR! If you said "yes" to one or more of the questions above, my "Strategy Factory" workshop may be just what you need. During this one-day online class, followed by 6 months of one-on-one e-mail support, you'll have the know-how to start up and operate your own "Strategy Factory" - a repeatable process to successfully develop multiple trading strategies. This is not your typical trading course: This is a complete workshop on proper strategy development, taught by award winning full time trader and best selling author Kevin Davey (that's me!). PLUS, you'll also receive fully disclosed code for 3 profitable strategies - strategies that I actually trade. NOTE: You must be able to program strategies to take this course. If you can ’t see the offer on page 5.

For more details visit: http://bettersystemtrader.com/strategyfactory The Pro Guide To Trading Ideas – www.bettersystemtrader.com

Page 8 of 26

Howard Bandy Episode 6

“About eight years ago I wrote the first edition of my first book Quantitative Trading Systems. And my feeling at the time had been that so much of the literature that was available to ordinary retail investors that was not working for money management firms, so much of the material that was available was lacking in rigor.”

Dr Howard Bandy has university degrees in mathematics, physics, engineering and computer science, completing graduate studies and research in modelling and simulation, statistics and some of the early work in artificial intelligence. He has over 50 years experience in research and applications of modelling and simulation of financial systems. Howard has previously worked as a senior research analyst for a CTA firm and as a consultant to trading companies and individuals.

“I wrote a book called Mean Reversion Trading Systems that’s an extension of the work in the Quantitative Trading Systems book. It has several unique original transformations. One of them for example simplifies the RSI indicator and removes the necessity that the look back period be an integer number of days.

He is a speaker at international conferences and is the author of 5 books on quantitative trading systems.

Howards website is: Blueowlpress.com


Page 9 of 26

There is some other transformations that are quite helpful and most recently my latest book is Quantitative Technical Analysis. It’s printed and bound and was published in January 2015. It focuses on risk and has extensive material on trading system development both from a trading system development platform perspective and from machine learning, pattern recognition, and artificial intelligence. It has several unique research findings, risk normalization, universal objective function and importantly, a technique for setting position size trade by trade in response to recent performance of the trading system.”

“Disregard previous knowledge of what may or may not work, identify an objective function that when satisfied the trades that fit the objective function are already ones that the trader knows he or she will be comfortable with and then open up all opportunities to look long-term and short-term to look at what we would typically call mean reversion or trend entries or pattern entries or seasonality entries. But they have a very open view of what the possibilities are.”


Page 10 of 26

Rob Hanna Episode 7 “I do a lot of studies on the market… There would be little seasonal things or it will say the markets been down three days in a row and we are hitting the 20 day low and we are above the 200 day moving average, how has the market performed in the next 3, 4, 5, 6, 7, 8, 9, 10 days from that? And so you can see, “All right, it's been up 60% of the time" or 70% of the time or whatever it is 4 or 5 later and just by doing the little studies like that I am able to set my market bias.”

“When people are trying to come up with ideas on what they should test or understand what the market is doing right now, that's the easiest way to start; just look at what the market did today and describe it. "Oh, it was down 1%. It hit a 10 day low or a five day low or it’s coming off of a 50 day high. Breadth was this, volume was high, volume is low – anything you can use to describe the market action whether it's what happened today or what's happened over the last week or two weeks; anything you can use to describe it you can then test. So just taking notes or make little observations about what the market is doing whether that's whatever market you are trading it doesn't really matter and then what may be some correlated or inversely correlated markets are doing as well and you can see, you will come up with a lot of ideas to go ahead and test things.” “So you look for extremes in the data. Whether it's the highest volume in 10 days, whether it's the highest high price wise in 10 days, whether breadth is the strongest in 10 days, whether measures of volatility are reaching the highest level in 10 days or maybe reaching the lowest level in 10 days you've got this real contraction going on; both of those are giving good information.

So it's a matter of just kind of looking at things and trying to see where the extremes might lie and keeping your mind open to – it can be an extremely exciting thing that's happening like, “Wow, it had the b iggest rally in 10 days." Or it could be an extremely I could say bori ng thing that's happening, “Oh, it's been the tightest range we have seen in a month", the market did nothing today. So what normally happens after you get those really tight range days so those are the kinds of things I would look at.” “I use three measures, I look at price action, I look at internal and I look at seasonality. If one of them is lining up okay that's a nice thing but if on average or if all three are saying, “Hey it looks like you've got a really bullish edge right now," that's a great signal. So if you can take different looks at the market that are unrelated, seasonality is normally a good thing to use. Price action however you want to define it could be a price based system. You could look at breadth as a separate thing, you could The Pro Guide To Trading Ideas – www.bettersystemtrader.com

Rob Hanna has been a fulltime market professional since 2001. He first began publishing his market views and research in 2003. From 2003 to 2007 his column “Rob Hanna’s Putting It All Together” could be found twice a week on TradingMarkets.com. In 2008 Rob began Quantifiable Edges and in 2012 Rob opened his 2nd website, Overnight Edges. Overnight Edges is now part of the new InvestiQuant site. Both sites use historical analysis to assess current market action and odds. Rob utilizes price action, volume, breadth, sentiment, seasonality, liquidity flows and more to conduct his research. In 2010, Rob published his book ‘The Quantifiable Edges Guide to Fed Days ” receiving high acclaim from many in the industry. His work has been widely referenced and quoted over the years. He has also served as a guest speaker at a number of speaking engagements. Robs websites are: Quantifiableedges.com Overnightedges.com Investiquant.com

Page 11 of 26

look at volume analysis, you can do volatility analysis. There is a lot of different ways… At Overnight Edges, we call looking at the three systems and call it an ensemble system and it is actually something that weather forecasters use a lot; not that they’re the best at what they do but like traders, they are going to be wrong sometimes, they are going to be right sometimes. But they will take computer systems and what they have found is that if you use multiple systems and then look at kind of the averages of what those systems are saying you are better off than any singular system. So from a trading perspective, what that is saying is that if you have seasonality strong and you've got bullish evidence from price and volume you're much better off than if you are just looking at one thing, you are just trying to trade seasonality, you're just trying to trade price and volume.” “So the idea behind Overnight Edges it was something that was the end of 2004 or so I first ran a chart of the SPY, the US ETF for the S&P 500. And I wanted to see how much money it made if you bought the open and you sold the close. And I also did it from buying the close and then selling next day's open. What I found was fascinating to me and that was that all of the money and more has been made at night when the market has been closed. If you bought the open and sold the close every day you would have lost money for many, many years even during most bull markets.

Well what Overnight Edges does is it tries to break it down to determine when are you more likely to get a gap up and more likely to get a gap down and it looks at different things like I mentioned – price action, seasonality and so forth. So what I do at Overnight Edges is I look to get long at the close of trading if there is a bullish edge or I might look to get short if there appears to be a bearish edge and then I would get out the next morning assuming my stop or target hasn't been hit before then. ” "I did some studies with the S&P 500 breaking out and what I found was that if it breaks out on volume that is lower than the day before you’ve got a better chance of seeing it follow-through over the next week or two than if it breaks out on higher volume. And that kind of blew my mind at first but it's held over the years and I continue to see it.” “Those Fed days, I went back to 1981 and they have consisten tly done substantially better than the market to the tune of like seven or eight times better as far as the expected amount that you would see the market move up on a fed day versus on any other day. But they are not all like that. So what the Quantifiable Edges Guide To Fed Days does is it breaks down the fed days, it breaks down what happens leading up to a fed day, what happens actually on the Fed day. The most interesting part to me is the fact that these Fed days have done so well over the years but most of the edge, the upside edge happens between the close the day before and the actual announcement.


Page 12 of 26

Generally if you get weakness going into a Fe d day that means people might be having anxiety about what the Fed is going to say and they might be exiting positions ahead of the announcement. And what happens is most of the time the announcement isn't like worst-case scenario or as bad as they fear and you get a nice little rise. But if people push the market higher into a Fed announcement because they are anticipating something wonderful happening normally it is not as wonderful as their imagination either and you don't get as strong of an upside edge although it is not the downside edge, it is still, you still get a smaller upside edge for those fed days.” “Well one indicator I like to use that I have shown on the blog years ago and it is part of market timing course now is NASDAQ versus the S&P relative strength. So that's an interesting one for me. What it does is it looks at how strong the NASDAQ has been over the last 10 weeks versus how strong the S&P has been. And generally when the NASDAQ has been the leader, the market has done well and when the NASDAQ has lagged the market has done poorly. So now you would expect so when the NASDAQ is leading, the NASDAQ has done well right? So that's pretty self-explanatory. But when the NASDAQ has been leading, the S&P has actually done well. The S&P has made since 1971 when the NASDAQ came into existence, the S&P has made almost all of its gains when the NASDAQ has been leading it. Part of it is due to higher beta of the NASDAQ; it is going to be more extreme up moves, more upstream down moves. But part of it I think is also due to the fact that when investors are bullish and they are pushing money into the market and you've got a positive bullish market atmosphere you're going to get more money going into aggressive type stocks and those are the ones you find are the NASDAQ versus the S&P 500. And whatever you can do this with country analysis, you can do it a number of different ways but the idea that when more aggressive type stocks are doing better it's a better thing for the market most of the time.”


Page 13 of 26

“If you take an RSI-2 system, you can do something simple like say, ’All right I want to go Long the market anytime the RSI-2 goes below 25 and then get out when it moves back about 50 or 60 or 70 or whatever the number you want and then you can do the reverse on the shor t side’. If you are in an environment where there is a lot of mean reversion that we work great. If you are in an environment where there is a lot of daily follow-through, short-term follow-through you actually want to the reverse of that. You'd be saying, ‘If it gets down to 25 I want to go short.’ And I want to hold it until it goes back above 25 or 30 or 40 or 50 or whatever.”

“So I was looking for basically extreme selloffs in S&P 100 stocks. And the reason I just use the very largest cap stocks here is that if you're going to build a system that's buying into extreme selloffs you want to have institutional support. So if when you're dealing with these real large cap stocks, they've got tons of institutions that own them. When you are dealing with a small-cap stock you might have one or two institutions that own it. So if one of them decides to get out that could cause the capitulation and then there is no one there to cause it to bounce. But if you've got a lot of institutional support there is always someone else to buy it back and cause it to bounce. So this is a long winded way of saying that I am looking into by real oversold conditions in individual stocks. And what I have found is that when you've got a large number of these individual stocks all capitulating at once they are all likely to bounce; the market is likely to bounce and it becomes very likely to bounce and it becomes a real reliable indicator for me over the years. So what I do, the CBI is just basically a simple count of the number of catapult triggers I have on at any one time and what I found is that when it gets over 10 or so you've got a real strong indication that the market is going to put in a good bounce in the next few days and that's not only a short-term bounce, a lot of times an intermediate term bounce.” “One I liked recently was Jay Kaeppel - Seasonal stock market trends. Jay has a lot of interesting work and I felt that was a neat book as well.”


Page 14 of 26

Gary Stone Episode 8 “Well what I’m putting forward is … to time the market, not to ensure that you are in for the best days but to ensure that you are out for the worst days. So some of the techniques that I have used over the years is to… And there are many technical analysis techniques but to use weekly momentum indicators, so to look at things like the MACD, to look at momentum, to look at… We have an indicator which is a momentum indicator or trend/momentum indicator called SIROC which stands for Smooth Index Rate Of Change; that is a technique that can be applied but apply it to weekly charts, not daily charts.

The other indicators that I would say people need to look at is the concept of relative strength; so comparing one index or in the case of exchange rate funds or indices or even stocks to compare the movement of one price action to another price action to get a relative movement, relative strength on those and the indicators that I have spent quite a bit of time researching of late is swing charts. So to look at peaks and troughs that are done on three, four, five days swings and what that does is cuts out a lot of the noise. There is another one called average true range which measures volatility to bring that into your research as well and apply a trailing stop, a ratcheted trailing stop to using volatility. So those are the main ones. There are others out there that people would use and I would throw some acronyms in for people that are in the game of looking at technical analysis, is the ADX or the DMI, the Directional Movement Index invented by Welles Wilder, another one that could be used that also builds in a bit of volatility as well. So a combination of those or one or two of those, people with some time and putting some time into research and preparation should be able to work out a basic timing mechanism that will achieve being out for the worst days.”

Gary Stone has been trading the markets since 1989. He has spent 1000’s of hours researching the market, stocks and technical analysis criteria to understand what worked and what didn’t, using his mathematics and computer science skills to come up with a way for the computer to do the analysis and heavy lifting.

His work has been widely referenced and quoted over the years, has been a guest speaker and has been featured on TV, Radio and Print, including Sky News, ABC Radio, Your Trading Edge, Switzer Daily and the ASX.

Garys website is: Sharewealthsystems.com

“If the markets start becoming highly volatile and you just look at a two or three or four week period, the range of the bars are starting to widen so they begin to get much deeper and wider, those are the periods you want to be out because those are the periods where the best and the worst days over the long term are going to occur and if you can avoid those you’re going to be avoiding the worst peri ods in the market.”

“…so to actually beat the fund managers all you have to do is invest in an index ETF and reinvesting the dividends and you’re going to put yourself in the top 15 to 25 percentile of fund managers worldwide. It is that simple.”


Page 15 of 26

Gary Antonacci Episode 9

“About five, six well actually six or seven years ago I stumbled across some of the research papers on Momentum and I was familiar with Momentum because I had read about it back in the 1970s. There was Bob Levies' book on Relative Strength and I was intrigued by something like that. So it resonated to me and I looked at all the body of research that had been done since the early 90s in Momentum and I thought, “This is a true anomaly that can be and should be exploited." And I saw that people were not exploiting it in a way that made the most sense. Whatever was being done with Momentum was being done on an individual stock level. And Momentum was only good in certain ways, in other words they would give you enhanced returns but it did very little or nothing to reduce downside volatility or tail risk.

So I give it some more thought and I figured that by combining things other than just stocks into a Momentum portfolio, things such as fixed income and other diversifying assets you would be able to get out of equities at the appropriate time when the relative strength of these other assets was better and so I did some research on it and then I did a couple of research papers. The first one was a second place winner of the Wagner award in 2011 given by the National Association of Active Investment managers. Then my next paper on Dual Momentum was the first place winner in 2012 and it laid out a basic methodology of using relative strength and absolute Momentum which is trend following in order to enhance return and mitigate downside volatility. ”

Gary Antonacci has over 35 years of experience as an investment professional focusing on underexploited investment opportunities. His award-winning research on momentum investing combines relative strength price momentum with trend following absolute momentum. He is recognized as a foremost authority on the practical applications of momentum investing. He serves as a consultant and public speaker on asset allocation, portfolio construction, and advanced momentum strategies.

Garys websites are: optimalmomentum.com dualmomentum.net

“And in order to get the benefits of diversification, and the relative strength application of Momentum, with equities you have to have more than just one kind. So the natural split to me seemed to be US equities which has offered the very best returns historically and then the rest of the world, the All world without US equities. So I figured that would be the basis of any investment approach that I had. That would take care of relative strength Momentum, to enhance returns. Now in terms of reducing tail risk and volatility I needed to have a different way of doing that and that's looking at Absolute Momentum which Relative Momentum is comparing one asset to another and going with whichever is stronger. Absolute Momentum is looking at an asset compared to its own past performance. They are both trend following in the sense that Relative Momentum is looking at trends of one asset versus another whereas Absolute Momentum is looking at the trend of the asset itself over time. So typically one year is a look back period that a lot of researchers use and that has been shown to hold up well out of The Pro Guide To Trading Ideas – www.bettersystemtrader.com

Page 16 of 26

sample and in sample. So just for the sake of simplicity, let's say we are comparing US stocks to non-US stocks over the past year and we pick whichever those is stronger and that will be our investment choice. Let's say it is US stocks. What we also look at is what has been the trend of US stocks over the past year; has it been up or has it been down relative to a benchmark like treasury bills? If it's been up that means Absolute Momentum is positive and we can feel confident that the trend should continue into the future so we can go ahead and buy US stocks and continue to hold them as long as the trend over the past 12 months has been positive. Once the trend is no longer positive then we step aside and we exit into something of a more conservative nature. In my book I use aggregate bonds as a safe harbor in times when we are not in equities.”

“Well when you're dealing with stocks what the typical procedures is to skip the last month so you don't get caught up in that mean reversion on a short-term basis. I don't deal with individual stocks. I deal with broader asset classes where that's not such of a big problem. And because we have a 12 month window we are not subject to short-term volatility affecting our decisions on what to do as much as if we had a shorter window.”

“Well I use the social science research network SSRN a lot to uncover new research and new working papers that have come out that have all kinds of interesting ideas in them. I also use Morning Star as part of my research. I follow a few sites like Quantocracy and Abnormal Returns to keep me up on some of the interesting things that are going on in the investment world. And I also can recommend that people go on to Twitter and find some people who invest in a way that is like-minded to you and connect to them in Twitter. You can connect to me in Twitter and I repost a lot of things that I find interesting.” The Pro Guide To Trading Ideas – www.bettersystemtrader.com

Page 17 of 26

Perry Kaufman Episode 10

“When a new country comes on board like a country with a stock index, it is very easy to trade with a very short trend program because they represent what our markets were in the 1960s and 70s; very low participation, mostly commercials and they tend to have very strong trends. And you can watch them as they get participation over a few years they become not so easy to trade with the short-term trend and you have to extend the period of your trend out a little to avoid the noise that's developing in that market.

So if you rank all the index markets in the world you will find that the US markets are the noisiest and in this case "noisy," I am measuring with my Efficiency Ratio which measures how much back and forth movement there is given the net change over time. So the US markets are the noisiest followed by most European and then Asian and Latin America, South America. So the markets that are newer, less developed, less participation, will have stronger trends. Now that's a useful piece of information because if you are developing a trading strategy or trying to decide how you trade them, the markets with the most noise are best traded at short-term mean reversion and the markets with the least noise are trend following. So it can be very useful for finding your strategy.”

Perry Kaufman began his career as a “rocket scientist”, working on the navigation systems which were later using in the Apollo missions. In 1971 he became involved in the futures market and in that time has worked and consulted to a number of successful CTA, investment and prop trading groups, creating systematic trading and hedging programs. Perry writes extensively on markets and strategies. His seminal book, Trading Systems and Methods + Website, now in its fifth Edition, has been called “remarkably insightful,” “the most authoritative and comprehensive work” in the industry; it puts the process of research and development into a “cohesive framework.” He has published fourteen books, some translated into Chinese, Russian, Italian, Spanish, and Japanese. He continues to lecture to economic forums, investor groups, and graduate students.

Perrys websites are: perrykaufman.com kaufmansignals.com


Page 18 of 26

“I do like the efficiency ratio… I had originally developed it for a very short-term reaction trying to use as few days as possible to give me a longer view of the trend so I can be in faster. I have discovered over the years that it's actually better in a longer term view and in that when you use 40 or 60 days as the period instead of 8 or 10, it outperforms any one longer term moving average which is nice but it's still a trend system and it's still a longer-term trend system and it is still going to have swings that are typical of a trend system.” “In the 1950s George Douglas Taylor came up with a three day cycle system and it said if the market goes up two days in a row and opens higher the third day you sell it on the open and you hold it one additional day. So if you sell it on Wednesday you exit on Thursday on the close. If the market goes up two days in a row, does not open higher but closes higher, you sell the close and you then exit the next day on the close. So you have either a close to close trade or an open to the next day close… I have looked at those recently… on the SPY, the Q's, IWM.”

“I also am just working on volume spikes. A volume spike is when the volume of the day is at least twice the average volume and there has been a direction, notable direction in the last week so that the volume spike represents a change of direction, a mean reverting change. And I have found that if you take advantage of a volume spike in stocks, individual stocks as well as futures, it seems to work across the board, and you are buying from the spike, the spike occurs when the trend had been down, you want to hold that trade for about four days. If you are selling on a volume spike you want to hold it for about three days.” “John Ehlers has produced a number of indicators recently one of which I found fabulous and it is called roofing filter. It transforms data into cycles and you then take that transformed data and stick it into a stochastic momentum indicator. And what it does is it smooths it out tremendously with virtually no lag. I have used it in a number of programs very nicely, it really outperforms any other momentum indicator I've ever seen and the nice thing is it goes from 0 to 100 so you can use buy and sells or indicators at 5 or 10 versus 90 or 95.” The Pro Guide To Trading Ideas – www.bettersystemtrader.com

Page 19 of 26

Ernest Chan Episode 12

“Some of the ideas are just based on kind of straightforward market observations. You could say that it is based on logic. We categorize this sort of any market into two types, is it mean reverting or is it momentum? And so for any market we go into that's the first question we can study, if it is momentum then you can explore strategies to benefit from this momentum.

Now it depends on over what period of time it is trending, over what regime that it might not be and so forth so that those are the details. But once you decide that a market is momentum you can focus on using different kind of momentum strategies to extract profit.

Ernie Chan is an expert in the application of statistical models and software for trading currencies, futures, and stocks. He has built and traded numerous quantitative models for investment banks and hedge funds. He is now the Managing Member of QTS Capital Management, a commodity pool operator and trading advisor, managing a hedge fund as well as individual accounts. Ernie is the author of 2 books, maintains a popular quantitative trading blog and teaches courses and workshops in trading and finance.

Ernies websites are: epchan.com epchan.blogspot.com

So a lot of these ideas are just basically based on logic. So that's how I came up with them and there are a lot of creating hypothesis and testing these hypothesis based on this logic. Now of course there are others that I also read many academic papers and basically every day you can read about academic research that suggest this or that in marketing inefficiency in futures, in Forex, in equities and bonds and what not and a lot of these strategies are just very academic in the sense that they do not for example produce high enough Sharpe ratio or they produce too much drawdown or they don't stand up to transaction costs but occasionally some of these strategies will stand up to these stringent tests that a practical trader would need to apply and we would absorb them into our trading system. ” The Pro Guide To Trading Ideas – www.bettersystemtrader.com

Page 20 of 26

“Some recent ideas that I have is perhaps you can use order flow into a sector and to compare it. I have not tried it but that seems like a new potential avenue is to compute the intraday order flow into all the stocks in one sector and then aggregate them and see whether they are these tell-tale signs of mutual funds buying into a sector. But I don't know if it really works, just an idea.”

“The easiest place to look for trading opportunities that are not already taken up by bigger firms is in strategies that have low capacity. I have often times in my first book for example I talk a lot about those seasonal future strategies, trades that you might only get triggered once a year – "buy natural gas ahead of the winter" or something or, “Buy gasoline befo re the summer” or that sort of trade that is driven by some sort of global consumer demand for heating and for driving.

Well those trades are well known but they are not arbitraged away by the big firms because they are not terribly interesting to a firm that needs to make money every quarter, who wants to make money just once a year. But for independent traders, especially if an independent trader has a fulltime job and just trades part-time as a hobby or as a supplement to their income, well this is the perfect trade because who cares if it trades once a year as long as it is profitable?”


Page 21 of 26

Andreas Clenow Episode 13 “I mean keeping it realistic is the most important thing for me, I mean trading a broad concept and not some over optimised – you know I seek to many trading system ideas that are based on take these 10 indicators and optimise all these parameters and find some amazing pattern where you buy and sell with all these indicators – these things are never stable, they are never robust over the time. Also look at very broad concepts, start with a broad concept – I mean it doesn't have to be over optimised. I mean trading momentum for instance or trend following futures – those are very broad concepts. If you implement them in a simple way it doesn't matter exactly how you do it, all the details, you are trading a broad concept, not the tiny details.”

Andreas Clenow is a hedge fund manager who specialises in developing and trading quantitative strategies across all asset classes. He is currently a principal at ACIES Asset Management, which he joined after having successfully established his own hedge fund. Prior to his role as a hedge fund trader he had a lightning career with Reuters, where he, as Global Head of Equity and Commodity Quant Modelling, was one of the youngest ever in such a role. He was also the Global Head of Institutional Charting and Technical Analysis for Equis International before departing for the hedge fund world. He is the author of two books, the first being international best seller ‘Following the Trend’ and the second ‘Stocks on the Move’ has just been released.

Andreas website is: followingthetrend.com

“I started out like everyone else, building one system for one market and it's not a realistic way to do things. You open a trading magazine and there's a new, simple way to trade the NASDAQ way for instance, that's not really the way you work on my side of the fence. You need to start with a portfolio perspective. Position perspective doesn't matter any single position, who cares about a single position, the only thing that matters is your portfolio as a whole. I think that's the major difference between hobby traders developing trading systems and professionals, the portfolio thinking. That's the key thing that I would recommend people start looking at, develop portfolio models and not position models.” The Pro Guide To Trading Ideas – www.bettersystemtrader.com

Page 22 of 26

“…talk about stocks for instance. Every single position you buy, it doesn't matter whether it gains or loses all that matters is what happens to your portfolio as a whole. That means starting at the wrong angle and if you start by picking your stock and then try to develop a super trading model for this particular stock and timing the entries and exits... good luck! I mean some people can do it but it's not something I would recommend. Try to build something where you’re constructing pr oper portfolios hopefully without your bias…”

“I start off with concepts that I know work, something that I have been trading for many years. I start with a reasonable version of a broad concept that is very well known in the market, in this case the momentum effect. I show a variation, numbers I think more or less, I wouldn't say random, but numbers that are based on what makes sense, what I want to accomplish. I want to have medium term strategy, I want to have positions that behave a certain way. I don't want to have too high gaps because gaps make me nervous for various reasons. I start out with things that make sense, I show the strategy, I show that it works and I vary some parameters of the strategy, and show how does it change, what parameters are different or not. What I don't do here is run optimisation on part of the data set and do walk forward to see how it works on the remaining data set and so on. It's not that kind of strategy that I need to do that on. I show a broad concept, not an over optimised model on a certain data set.”


Page 23 of 26

Andrea Unger Episode 16 “I watch the charts, I notice things. Sometimes I get a headache looking at the open equity drops in some positions, so I wonder why does this happen, why does this happen always after lunch? So I may try to devise some behaviour in that specific market in a short period of time, in the afternoon for example, and when I have some doubt, some ideas, I just sit down and I write the code and I look to see what a system is doing and what it did in the past. From the results I get some information and from that piece of information I can start building if I see an edge in that. If for example if you look at the Euro based on central European time you may notice normally in the morning it has a bearish behaviour and in the afternoon it has a bullish behaviour. It's not gospel, it's a behaviour which is repetitive over the years. So based on that you can try to build something and this is something you may find in many other markets as well, and you may try to take advantage of that. And sometimes ideas also come from mistakes, I made a mistake writing a code and I got a very good performance, that’s why I noticed and I built something out of it.”

Andrea Unger is the only trader to ever win the World Cup trading championships 3 years in a row, with returns of 672% (2008), 115% (2009) and 240% (2010). In 2012 he also took out first place in the Q4 contest. In 2005 he won the TopTraderCup in the Futures division with over 60% performance in 3 months. That year he also won the monthly race of the Tcup organisation with over 50% in one month. He is an honorary member of the “National Investment Consultant Organization” and graduated “honoris causa” in “Portfolio Management and Asset Allocation”.

“My approach to forex is very similar to my approach to futures. So my ideas are developed the very same way. I use trend following principles, I use counter trend principles, all similar development process on forex as well as on futures. And what I do, same as I do in futures, I study every single market as a separate entity. So I am not looking for a system working for example on EURJPY and on NZDCAD, no. Each market is studied on its own. Some of the articles about the most robust system are those which work for every market, every time Andreas website is: frame, this is in my opinion, bullsh!t really. Because first of all I don't Oneyeartarget.com think the markets are fractal, so I don't think that something that works on a daily basis will work on a three minute basis because of the noise in the market changes completely in those conditions. Second, this might be true to a certain extent if you base your choices on indicators but I don't work with indicators mostly. Many people think that trading systems are a clever mix of indicators, I don't think so. I study the behaviour of the markets, I study what they do and then I put this information into the code. I don't study markets based on indicators which are a mean value of what a market might do. I might use indicators as filters but not as a decision maker. And also the forex pairs have different behaviours. For example, the GBPCAD has a typical mean reverting behaviour. Also the USDJPY sometimes, until it changes then it’s very dangerous. But the EURUSD, the GBPUSD for example, all these markets have a very trend following behaviour. So the first thing to do is to identify the pair you want to trade, what kind of main behaviour it has and what kind of reaction it has to a certain input. So if you want to develop a trend following system you better choose GBPUSD for example and then The Pro Guide To Trading Ideas – www.bettersystemtrader.com

Page 24 of 26

you will have an easier life and if you want to build a mean reverting system buying at the bottom and selling at the top you might choose something like EURNZD or GBPCAD and then you will certainly find some better edge. So you have to screen your forex pairs and make a decision depending on what kind of system you want to trade.” “Based on my style of trend following systems which is my bread and butter, I prefer to work on forex pairs on 60 minute charts or 30 minutes. Sometimes I use the 5 minutes but it doesn't mean the 5 minutes were building my conditions, 5 minutes were simply to fine tune a single move during the time but I was still considering larger periods of time to make my decision. So I was for example, filtering the days on a daily basis as I mentioned before at the beginning of my interview, and the 5 minutes bar was just to have a very clear picture of what was happening during the day but not to make my decision out of it. If I want to make a decision using single bars I have to start with a 60 minute chart minimum – 60 or 240. I don't use daily because it's always a bit tricky on forex you never know when the day starts, if it's the New York open or London open or Australia, so I prefer to use the 60 or 240 bars.”

“As I mentioned in the earlier part of the interview I use some daily patterns and filters, and obviously these daily patterns have sometimes, mirrored from long to short if, for example, I decide to enter long only if the close of yesterday was smaller than the close of the day before, the short end of the decision would be the opposite so the close would have to be greater than the close of the day before. And with this point of view, the conditions would have to be different so I run the optimization separately in order to study the market. I stress this. I run optimizations to study the market not to find the best way to trade it. I study to see how it reacts to certain conditions and then I make my decision on what to use. Sometimes I find out that for example, for long trades you have good results with a number of filters while with short trades you have good results only with a couple of them. And this is a very dangerous situation where you have to consider that all the positive results of the long side may just depend on how the market moved in the last period. And those are very critical situations where you might consider either to take only long trades which is bad in my opinion as a decision unless you are trading in a very specific market such as mini S&P or Bonds where the situation is a bit different from a structural point of view. Or you might decide to put into the system conditions which lost money in the past but that you expect that if the market changes from bearish to bullish or the opposite, those conditions you chose which lost money in the past might make money in the future because the market changes to the opposite. So that is the most delicate, but I start the long and short separately to try to understand what the market is telling me.”


Page 25 of 26

If you enjoyed this guide please spread the word:

https://twitter.com/bettersystrader http://www.bettersystemtrader.com


Page 26 of 26

TheProGuideToTradingIdeas-BetterSystemTrader

Recommend Documents