I AM A FUTURES TRADER

Thursday, May 03, 2012

HOW LONG CAN THIS LAST?

Here is a photo courtesy of Kira Brecht the Managing Editor of SFO magazine. She sent this to me after I met her in Chicago. This is what the pits used to look like "back in the day." One of the reasons why trading systems don't hold up over time can be seen in the above picture, things change. Look at the frenzy of action that is going on there. Today you can hear a pin drop at moments there it is so quiet. It logically follows that trading systems that worked back then are not going to work now. If you craft one to fit today's action it may not work tomorrow.

One thing I am sure of, we are never returning back to the days featured in the above photo. I heard an alarming stat last night on FOX business news. Of the last 59 weeks of revisions to weekly employment numbers, 58 have been to the upside.

Anyone care to venture what the odds are of that occurring in what should be a random series of events? This is another manipulation of the numbers by the government. Most of us who live in the real world with other business interests, know the spin about the recovery is complete BS. I was talking to a close friend of mine yesterday who works in a business that is as closely tied to day in day out economics as anything there is. He told me things have gotten eerily quiet for his company and "the government spin on the recovery is just that, there is no recovery." He went on further to say that he spoke with some of his vendors and they all told him they were experiencing the same thing.

The reason I am mentioning all of this is as follows. We see the trend toward all trading being electronic. I saw last week the lack of any locals to take the other side of trades making it really easy to move this market in a certain direction virtually un-opposed. We also see the about stats that essentially prove the government is altering data they report to us. We also have seen a lack of volume during the last 3 years worth of rally in the stock market, yet it keeps going up and up. This leads me to conclude that these types of trading conditions could persist for much longer than we think. We had all better figure out a way to trade these types of conditions.

History has told us that one thing that is constant is change. Typically when we get these quiet periods they are followed by volatile periods which are then followed by quite periods etc.. This is a natural flow that occurs in everything in life. That flow occurs until someone starts manipulating it. We are all guilty of trying to control our future due to the fear of the unknown. Unfortunately for most of us, we simply do not have the power to manipulate those things we try to. We are seeing that there are those that do have the power to do it over periods of time.

From a systems development stand point you have to do is layer things that cover certain time periods, and weed them out if they start to under perform. It is amazing how certain patterns in things that worked for decades, stopped working in 2000. In the ES and Bonds, there have been some patterns that have continued to work, but not many.

I would suggest in your research, developing patterns or approaches for the data period up to 2000, then test them out of sample from 2000 to present. If you find something that works well, guard it with your life. Most of the things I had back in 2000, have not carried forward at all, and have completely blown up. There are things that have not, and that is where my research is taking me.

I have not spoken about the Bond system because there have not been any trades generated since the last one. So far it has generated 3 trades, 2 wins and a loss, with the loss being more than the 2 wins combined. This is typical of systems with high accuracy from my experience. You trade off the payout ratio to get high accuracy. It works because you don't take many losses. It remains to be seen if that will be the case here.