Ed Mamula.com

I’ve always been fascinated by how many major scientific and technological advances seem to be the result of accidents or dumb luck.  The discovery of penicillin, vulcanized rubber, plastic, and corn flakes come to mind.  Please do check that link…it makes me laugh out loud.

“…

He was in the process of boiling wheat in 1894 in an attempt to create an easily digestible bread substitute when he came across a discovery that would lead to Kellogg’s Corn Flakes.

He had boiled some wheat with the intention of making dough with it and accidentally let it stand for several hours. The wheat became softened, tempered. He decided to put it through the regular rolling process anyway for baking. When he rolled it out, however, he noticed that the individual wheat berries in the mash would roll out into flat, wide flakes. He figured he’d bake them and see what happened. The result was a crisp, tasty, easy-to-eat cereal product.

”

I always like to think that if I tinker around long enough with trading systems, I”ll make a mistake that will prove to be a gold mine.

 Cable Glider is the result of adapting the Turtle System for an intraday market.  I accidentally discovered that by shifting the price channel and anticipating breakouts, the returns were massively improved.  I guess that this wasn’t an accident, but it was the result of testing some “out of bounds” parameters.

Euro Ranger has a MACD filter in it that, to this day, I have no blessed idea how I came up with it.  These types of things are usually the result of trying to fix code that doesn’t work the way that I envisioned it…meaning that I’m kind of lazy like W.K. Kellogg.

Darth Fader works very well in the natural gas market.  It’s only after I tested it there that I realized I was testing a parameter set that was taking the first available profit, and not holding for a longer period as I had originally intended.  It turns out that both methods work, but the accidental one works better.

Now surely trading systems are not rocket science, and they are nowhere near as important as antibiotics or Coca – Cola, but it sure is nice to think that if you just keep tinkering, you might one day be the one shouting “Eureka!”.

Well, what a difference a week makes.  Last week I said that I had very little to report on the strategy development front.  I guess I don’t know when ideas will strike.  Last Saturday, after reading an article in Futures magazine about the best traders of 2008, including author Bob Pardo, most of whom seemed to be long term trend followers who caught bonanza oil trades in 2008, I thought to myself…”This is silly.  I don’t have any long term trend following systems that I’ve tested on multiple markets.”. 

So I set out to create a simple system with a trend component and a trigger.  That system, which is so simple, it’s almost shameful, seemed to return positive results for a variety of trading instruments, including individual stocks.  So I purchased more data…NYMEX, COMEX, CBOT, and S&P Indices.  The system seemed to work well in most liquid markets even without optimization. 

The problem is that in some of the markets, almost all of the gains had been made in 2008, which was a banner year for trend followers.  After a conversation with a friend, I realized that I should be testing the long run trend follower alongside a short term “dip buyer” type of system.  So I coded a simple system up. 

After I put 2 and 2 together, I realized that the short term “dip buyer” was really trading from the same principles as my production system for the S&P, Darth Fader.  So then I started testing DF on my new data feeds.  It turns out that DF performs well for stock indices, energy futures, treasury notes, currencies, metals, etc…

Next I took a look at my actual trading results for the week.  3 wins, 0 losses trading Cable Glider and Euro Ranger, which are both intraday systems.  I’m up 12.4% year to date by the way…however, Cable Glider and Euro Ranger do not perform as well as optimized versions of Darth Fader work on the Euro and the Pound.

So I’m at a decision point.  On one hand, it is nice to trade systems with different methodologies to guard against a wholesale failure of Darth Fader’s approach.  On the other hand, I really would love to trade systems on the daily charts only.  This way, I wouldn’t have to worry about keeping my computers on all night long and possibly getting booted off the network at 3AM when CG and ER want to enter trades.

So I have a little bit of work ahead of me to determine the best course going forward.  Without the benefit of hard data just yet, I’m leaning toward trading Darth Fader on the S&P (or the Nikkei–to reduce correlation with my 401k), the Euro, and on Natural Gas Futures.  I’ll need to compare the risk profile of that approach to the current Troika of DF on S&P, Euro Ranger, and Cable Glider.  I also need to remember that CG and ER have proven themselves to be profitable in real trading, while DF has not…I mean, it has shown me a profit, but I’ve only been trading with it since the beginning of 2009.