Ed Mamula.com

2 Markets, 2 Parameter Sets, Entries from Futures Chart, Cross-Confirmation of Entry, Exits from Native chart , No Synchronization

I started using Tradestation to trade British Pound futures just two months ago.  The power and flexibility of Tradestation has really impressed me and allowed me to improve my trading model.

Today, I begin trading the 3rd generation of the Cable Glider system.  A summary of changes follows.

1) I will be trading British Pound futures at the CME alongside British Pound spot.  I started this side by side testing in August with the idea that I would like to have the systems synchronized and measure the relative costs of slippage and commission in each market.  One of the main things that drove me to the futures market in the first place was the idea that my trading costs might be reduced.  My current opinion is that this seems to be true at my current trading size, which to date has not exceeded 20 contracts on any single trade.

2) I will be using a different parameter set for each market, as determined by the ongoing optimization in both markets.  I’m currently using a genetic optimizer to periodically re-optimize the systems with a fitness function that uses net profit, gross profit, gross loss, and maximum intraday drawdown. 

3) Entry signals for both markets will be driven from the futures price chart.  Since the futures market is a true transparent market, I believe it gives me a cleaner picture to set up entries.  I never liked the fact that in the cash market, I’m getting a stream of bid prices rather than a stream of actual transaction prices.

4) Cross-market MACD confirmation will be used in both markets.  That is, I will require that a price breakout be confirmed by MACD in both markets.  This little tweak has already saved me from entering what would have been a losing trade in the futures market on the very first day of trading.

5) Exits will be managed by the optimized exit parameters in each respective market.  Once I’m in a trade, I don’t want to fool around with setting exits that rely on more than one data stream.

6) I will not attempt to synchronize trades in both markets.  The expectation of synchronized trades drove me crazy in the month of September.  By trading two different parameter sets, I gain a measure of diversification that is not possible otherwise.  This system diversification gives me a second level of equity curve buffering in addition to the smoothing effect of keeping a living expense capital reserve account.

Cable Glider II had a lifespan of only 4 months.  All months showed a profit, and the total compounded return on risk capital was just above 125%.  No, that is not an annualized figure.  It is a 125% return in four months.  I’m much happier putting CG II to rest this way;  the first Cable Glider system was suspended at the end of May after a large drawdown.

I’m still on the lookout for improved execution and reduced trading costs.  My next move on that front will be to investigate API trading with Interactive Brokers.  Their commissions appear to be identical to Tradestation, but the cash forex spreads look tighter, they pay interest on cash balances, and their unique umbrella account allows for cash balances to be SIPC insured.  The programming involved to trade at IB is a whole new ballgame, so I don’t expect I’ll be making the move anytime soon.

Mental Reset 

With the Cable Glider mired in an ongoing drawdown, and my former means of professional income now absent, my psychology is at an all time low.  I am in need of a mental reboot.  The following points attempt to address this issue.  

New System

 As always, I have been tinkering with variations of the Cable Glider system, and as yet, I’ve found no satisfactory way to revise the stop loss positioning or trade sizing algorithm.  I have, however, come up with a new entry signal that materially changes the nature of the Cable Glider system.  Previously, the system could be described purely as a channel breakout system.  After re-reading the chapter in Van Tharp’s Trade Your Way to Financial Freedom, I discovered a form of volatility breakout entry that works well in conjunction with the channel breakout entrys that were previously used.
  

New capital allocation 

At present, my total capital allocated for trading the FX market is $40,000.  I have decided to take $10,000 of that off the table as a living expense buffer, and to immediately withdraw enough profits to cover an additional month of expenses any time the system logs a gain that is twice the average gain.  Such gains have occurred 15 times in a 20 month backtest.  My current living expense buffer is approximately 6 months.  If the buffer falls below 3 months, I will immediately reallocate capital to the buffer to push it back to the 6 month mark.  If for any reason I am unable to refresh the buffer, I will look for other sources of income. 
 

Reaffirmation of devotion to pure systematic trading 

Within the context of the system’s recent drawdown, I have compounded the problem by manually taking trades that have lost me more money.  I hereby reaffirm my committment to pure systematic trading.  In order to accomplish this, I have set up separate machines for demo trading and live trading, and I intend to merely monitor the results once per day to ensure that trades were properly entered and exited.  No discretionary trading is permitted.  The system may succeed, and the system may fail, but damnit, I’m not gonna wreck it.

Recognition of large stochastic element

There is a large degree of randomness in the returns of the Cable Glider system.  As an example, I was stopped out of a long position this past Wednesday moments before the GBP/USD skyrocketed nearly 200 points.  My stop was penetrated by a mere 2 points.  This represents the difference between taking a 9% loss v. taking a 30% profit from the trade.  Lest you think I am just complaining, I recognize that there are several times where I come within a pip or two of entering or exiting a trade that would have proven to be unprofitable.  For this reason, I believe that my chances of long term success given my current capital level are a coin flip.  
 

New return chart 

Everyone likes performance charts, so I’ll be starting a new one dated from June 1 to represent this new phase of my trading journey.  For the record, the former version of the Cable Glider returned 73% over an 8 month period of live trading.  Given my current level of capitalization, a return like this is now actually required in order for my trading to be self-sufficient.  Yikes, I’d better keep my computer programming skills sharp in the meantime.

Optimism

 Every trade taken in accordance with the system’s rules, win or lose, is a good trade.