TPS (Time, Price, Scale-in) Revisited

[dpaterso]

Hey.

ETX Capital

DF Markets

Both UK FCA registered and regulated and registered with the UK FSCS.

Deltastock.

UK FCA registered, MiFID and Bulgarian FCS registered and regulated, and a veritable list of other registrations worldwide.

All fall under ESMA regulations so leverage is restricted.

At ETX you may have your account denominated in ZAR but only on their TraderPro proprietary platform. Advantage of this is that you can trade instruments in ZAR which you would not ordinarily be able to trade with limited capital in USD, EUR, or GBP. But of course PL is also in ZAR.

[dpaterso]

You know. I always feel like such an idiot for watching charts when these Fed. rate decisions come out. Once in my entire career have I actually seen markets actually move more than a few points. But for the most part they’re a non event. I know price is usually ahead of these announcements but man: with all the flipping hype especially around this one well, I guess, was expecting just a little excitement. And people say this business is exciting and not boring!!! Nah. Don’t think so.

Mind you. I have seen markets take off when a Fed. Chairman has said something in his speech. But man: that people sit and analyze every single word and chech punctuation.

Anyway. Maybe we can resume something that vaguely resembles real trading again. That would be great. This buggering around waiting for this sh*t is just costing money in interest and dividends.

So. Can the S&P now just make the double top or overshoot so Bloomberg can have a big celebration and then we can all go home.

[dpaterso]

^^^ Be careful what you wish for as it might come true!!!

Suffice to say my resolve is currently being tested. Not because I doubt the trading system. But because as you know I made a real mess of opening two incorrectly sized positions on the S&P and the Dow and they are both looking pretty ugly right about now. Not much I can do about it. This being said: after having normalized the hard stop for the oversized positions such stop is still very far away. God forbid that we get to that point but should it come to that: the overall loss would be no greater than if I had six correctly sized positions and all six of those had to be closed out at their hard stops. Justification for keeping these trades open??? Maybe. And were it not for my experience with this system over the years: I may not be so confident. But I will bet the last that I have that the very moment I decide to bail on these positions and not wait for an RS(2) signal to TP: price will at that very moment reverse.

So I guess we just sit and wait for the reversal whenever that may be.

Where’s that buffoon and his Twitter machine when you need it most!!!

To wit:

SP 500 Daily

Text book trade. Following all the signals. Matter of fact even skipped a day and got in at a better price on the Tier 4 entry. But up she goes. For now.

One interesting thing to note is where RSI(14) is on the chart i.e. as near as dammit (this thing cannot spell) to poking above 70 and sure looks like it’s going to get to its all time high and form a double top. That opens up possibilities for the only other two trading systems that I may from time to time utilize i.e. Memory Of Price and RSI Rollercoaster. (although RSI Rollercoaster trades I’m notoriously bad for missing them for some obscure reason).

[dpaterso]

It’s been a while since posting one of these. Bottom line is that in spite of all of these amazing movements: there’s been no signals at all to close positions. So we wait. And this but one of the reasons why most will never trade this system i.e. not enough action. But if there’s one thing for sure: profits should be fairly substantial on a percentage basis once such signals are given.

So essentially as per the TPS I’m short:

France
Italy
Japan
S&P
NASDAQ
Dow

But notice something:

In the cases of France, Italy, and Japan these are late entries. In other words (and for a variety of reasons) I was unable to be being scaling in while they were moving up. So I’m now jumping in late but with fully scaled in positions. These are usually the best entries to be frank. Problem is that having the patience to skip over the initial entry signals is not something I have. And in addition of course you could end up missing good trades too.

You will also notice on these late fully scaled in positions I have set TP levels which are nothing more than today’s S3 pivots. I have something that I need to take care of this afternoon so if these markets tank for whatever reason I want profits and we’ll call it a day on these positions. Not standard TPS I know. And it the TP levels are not executed by the close I’ll simply remove them and let these trades pan out as standard TPS trades (which will probably end up with greater profits anyway). And frankly: were these long trades I’d not attempt to be taking profit at predetermined levels. But I hate holding shorts and one reason is the daily cost of holding them not to mention the fact that with stocks there is an inherent long bias.

Now insofar as orders are concerned:

Apple is apparently a good stock to be short when they re-balance the indexes today. Hence the order. It is also a late TPS short entry. Note that the order expires at the close.

Chesapeake and Fevertree: really self explanatory if you look at the charts (both double bottom trades).

Germany: this is an interesting one. If you can remember back I was toying with the idea of placing limit sell or buy orders at extreme pivot levels i.e. R3 or S3. First time I tried it this week was on Germany. Short limit order got executed but when I closed the trade out at the close it was a small loss. Yesterday, however, I did the same thing on the S&P and the Dow. Both limit sell orders were executed and both TP orders (at R2) were hit resulting in a nice little intraday profit. There is definitely something to this so I shall persevere with it. Note that the orders expire at the close.

NASDAQ: simply put it’s one little additional lot (opportunistic really) i.e. as per my newly revised risk management and position size calculations I’m short a lot on the NASDAQ so may as well take a chance and maybe try make some more on this.

So there you have it. For now.

I have also revised my risk management and position sizing calculations (and done away with any other spreadsheets so as to now screw up again on position sizing). Bottom line is that I have opted for an even more conservative approach. But I will post about this later.

And as I’ve been typing this something has spooked the markets. France and Italy went from the losses shown above into profits. Not sure what happened. Don’t really care.

[Spudfan]

I was unable to be being scaling in while they were moving up. So I’m now jumping in late but with fully scaled in positions. These are usually the best entries to be frank. Problem is that having the patience to skip over the initial entry signals is not something I have. And in addition of course you could end up missing good trades too.

Out of interest I compared results with the standard 1234 format and changed that to 1126 (as the EA cant handle 0 lot size, I was forced to use 10%). Off $3000. standard setting, I got $707 and off the 1126 setting I got $737. Off the 1117 setting it gave me $746. So, while it’s just one currency pair over 1 year, there does seem to be a pattern. I’ll see if the EA can be coded to accept a zero and see what that does.

[dpaterso]

On to position sizing…

I can tell you that the more research I’ve done and the more I implement risk based position sizing: the more convinced I am than ever that it’s just about the keys to the kingdom.

I’m posting the link again here as I believe this is very important. Best part (which I will demonstrate) is that it doesn’t apply only to this trading system i.e. it could be used with anything. And I tell you: as somebody who just cannot stomach being taken out by a stop (it really does do my head in and actually affects my trading and this I noticed in prior years) it’s the best thing since sliced cheese.

First of all my position sizing is now based on the following (a slight modification to the formula presented and slightly more conservative):

Original:

Shares To Buy = ( 2% of Total Equity) / 3 * ( 10-Day Average True Range )

Mine:

Lot Size = ( 5% of Total Equity ) / 5* ( 10-Day Average True Range )

Now why do I say this could be the keys to the kingdom for just about any trading system.

Check this out (and using a FOREX pair to demonstrate):

AUDUSD

Assuming capital of $55K (R55K) (long story).

5% Risk: 2 750
ATR(10): 0.0045
ATR(10) x 5: 0.0225
Lot Size: 12.20

Now check this out:

If I just went long AUDUSD right now @ 0.69065 with a lot size of 12.20 my soft stop would be at 0.66811. Just take a look and see how far away that is on a chart. But: I’m still getting 1.22 per pip movement. My point is: let’s say you have an entry method (could be SR or one of the other trading systems like the RSI Rollercoaster for example) you could loosely enter a trade in the direction indicated and the chances of that trade turning to a profit at some point in time are EXTREMELY high. So with these wide stops you would simply wait for the trade to move into a profit and then start trailing a profitable stop.

I guess what I’m saying is that it is the stops that kills this business. Just using AUDUSD as an example: it’s not rocket science to figure out where most stops will be placed. And they will be gunned by the market. But with ultra wide stops such as these: that’s not going to happen. But your pip value is still quite substantial.

Now I’m not about to start trading FOREX pairs I assure you. But to most: I know the instruments that I trade are of little interest hence my using a FOREX pair for the purposes on demonstration.

Now let’s also say that you base your position size as I’ve noted. And let’s assume that you do indeed follow a trading system that clearly defines where your stops will be placed albeit that they will end up at very obvious places. Even if you then get stopped out and have to re-enter the initial trade: you are no longer wiping out 1% or 2% or 5% of your account on every single trade. That sh*t adds up very quickly let me tell you.

Of course: this will all have you trading much smaller lot sizes that you probably would be able to. Or would it??? And here we come to the wonderful dance that exists between this method of position sizing and capital and leverage. With low leverage: you would not be able to take a trade that would have you place tight stops and that would realize a 1%, 2% or 5% loss on that trade. Because of the tight stop: you position size could be absolutely HUGE BUT FOR ONE THING: you would not have enough capital to take the trade.

This post I don’t think is going to be too easy to understand. But read it and mull it over and you’ll see what I’m getting at.

Anyway. Here’s the link again. This is good stuff.

Learning to use EasyLanguage to build profitable systems

[dpaterso]

Interesting.

Where did you get 1126 or 1117 from though???

My plan (let’s call it the supercharged version) would be to go 1 + 2 + 4 + 8 (as opposed to the standard 1 + 2 + 3 + 4)…

Oh. I think it’s maybe because your EA scales in a percentage as opposed to a fixed number???

[Spudfan]

Where did you get 1126 or 1117 from though???

Standard is 1234 (10%, 20% etc)
But in order to scale in slowly at the beginning and more at the end: 1126 (10% up to 60%). As noted, the EA can’t handle 0. If it could I would do 0037 or some such combination.

[dpaterso]

Ahhh. OK. I get it.

[Spudfan]

Lot Size = ( 5% of Total Equity ) / 5* ( 10-Day Average True Range )

So taking $3000 as the capital, which is what i am using for my EA testing.

5% of 3000 = 150

5 * 10-day ATR = 5 * 47 = 235
(i.e. Actual ATR number of a yen pair is 0.4770, which in pips is 47 pips, hence using 47, is that correct?)

So putting that together: 150 / 235 = 0.625

Dale, could you explain what that 0.625 means in practice?

[dpaterso]

Gladly. But you’ll have to wait a while i.e. I have a meeting in the next thirty minutes for this property sh*t. Very NB meeting. Should be back in about an hour and a half. And hopefully with a big smile on my dial too!!! LOL!!!

[Spudfan]

My plan (let’s call it the supercharged version) would be to go 1 + 2 + 4 + 8 (as opposed to the standard 1 + 2 + 3 + 4)…

Oh. I think it’s maybe because your EA scales in a percentage as opposed to a fixed number???

Just tested this option and it copes with using 10, 20, 40, 80. Let’s see what profit it makes.

OK, it made $1086. This is, not surprisingly, about the same as the 1234 version * 1.5. I guess the trick is not just to trde more lots but to find the best combination of numbers in that sequence of 1234 or whatever, e.g is 0,0,0,10 better than 0,0,4,6, and so one. One could tinker all day! But I won’t.

[Spudfan]

One could tinker all day! But I won’t.

Looks like I just have …

I tried 1,2,3,4,5 and the EA handles the fifth option. This one gave me $899 (the standard 1234 version gave me $707 in otherwise identical conditions).

So the fifth option is not as good as 1,2,4,8 (noting the limitations of it being with one pair, one year etc). So perhaps expecting TPS to keep adding trades beyond 4 isn’t the way to go. But logic tells us this, since we’ve all seen trades not going the full 100% scale-in. Simply adding more beyond the 4th one won’t change that.

[dpaterso]

So perhaps expecting TPS to keep adding trades beyond 4 isn’t the way to go.

I’m back.

This I can tell you for a fact based on my trying it doesn’t work. Problem is that you get so far away from price that RSI(2) will never close favorably. As I said: tried this. Didn’t work. At one stage I also thought well if you just kept on adding then you’d always be golden. Not so unfortunately. Fortunately only tried it once of twice!!! LOL!!!

[dpaterso]

Hello.

In practice I THINK that’s your lot size if I’m understanding your calculations.

Below is a screenshot of my spreadsheet that I’m now using. FOREX is in the last column.

But you are going to find that you need a big balance to be able to use this I’m afraid. But that’s what it’s all about in my opinion. Matter of fact I have heard it said the the number one reason for failure in this business is under capitalization (and the inherent evils thereof).

One other thing that needs to be said is that this type of position sizing also has an impact on psychology. Let’s say that you’re trading one of those system where you are required to place a stop at a certain point (which is usually in a very crowded and obvious place). So you get stopped out on your first attempt at the trade. That could now mean 2% or 5% gone. Chances of you taking the next signal and risking yet another 2% or 5% are not good. If that goes against you then you’re already 10% down on capital. At that point most all traders will move on to the next best thing. But if you’re calculating your initial positions sizes using this method: those same to losses would be a fraction of your account while at the same time still getting a decent per point (or per pip) value.

This may very well be my best contribution ever`to be honest.

---

[dpaterso]

And to further demonstrate my point as to risk based position sizing playing a part in psychology…

Take a look at the chart of Apple below for example. I’ve circled three failed RSI Rollercoaster trades. Now I’ve not traced the trades through exactly so one or two of them may have ended up at break even if the system was followed. But let’s forget that for a minute and assume that all three were losing trades (which is indeed possible). Assuming risk of 5% per trade: you would be down 15% after those three trades assuming you were following the system to the letter. There is no trader that I know that would keep trading the said system after the second failed trade let alone the third. But just look what happened afterward i.e. the trading system was spot on and you rode that downtrend until RSI(14) went below 30 etc. Using this method of risk based position sizing: those three losing trades were a fraction of the account when stopped out and nowhere near to your 5% risk allocation.

One could argue to just trade smaller lot sizes and risk a smaller percentage on each trade. Point is nobody is going to do that.

I guess what I’m saying is that this method of risk based position sizing ensure that you’re not over trading the account and it gives trades a LOT of leeway. You will probably even find (not tested and just a theory) that even with a half baked attempt at judging the general direction of price: you could take a trade and let it run until in profit even if that take a little while to happen and once in profit just lock in. Not that it’s a valid way to trade of course.

Anyways. There you have it. As I said: quite possibly my most valuable contribution thus far.

Apple Inc. Daily 21062019 1804

[Spudfan]

In practice I THINK that’s your lot size if I’m understanding your calculations.

Yes, of course it is - just checked your initial post on this topic. The reason I was asking about what this means in practice was that the initial conversation led on to stop distance. So once one has calculated lot size, it seems you also are able to calculate stop distance. Would you be able to take the lot size number I calculated and help me understand how to derive stop distance from this?

[dpaterso]

Well once you have calculated your lot size then your stop is simply the monetary value of 5% (in my case) of your account.

Let me pull up a chart of your pair and I’ll show ya.

While I’m waiting for you to respond as to which per you were referring let me say this:

On my platform it’s easy to do. Once the lot size is calculated I am able to then input the PL amount that I’m prepared to risk and it then tells me what the price will be for that amount of risk. But I’m sure there’s a calculator somewhere that will do this same thing. Maybe look on BP tools or something. Possibly just something else for me to include in the software that I’m now busy modifying to incorporate all of this.

Here is an example (AUDUSD using the same numbers as above):

Once I have input the lot size (12.2) I am then able to calculate the stop merely by inputting my desired risk in monetary value in the “PnL” field and it then calculates the price. (Figures are not exact as they are rounded to the accepted decimal level is all).

[dpaterso]

By the way and just to add to this:

Adding beyond the fourth tier entry is what makes the difference between this and it then becoming a Martingale type strategy. This needs to be clear.

[dpaterso]

Oh. You didn’t say on what pair this was???