Quantified Trading

BarroMetrics Views: Quantified Trading

Joan asked:

“Do you believe that quantified trading can be successful?”

Thanks Joan for the question.

I certainly did not mean to give the impression that I am against quantified trading. Indeed, I often refer to Rob Hanna’s “Quantifiable  Edges” as a means of checking my reasoning.

What I did mean to convey, is that quantified trading does not suit my personality. At the end of the day, a trading method needs to suit our personality for optimal trading results. A method that does not suit, is more likely not to consistently executed. For example, many years ago, I had a look at Drummond’s P&L Dot approach. I found it logical and well taught. I spent a year learning to apply it; but when it came to real-time trading, I always felt uncomfortable; so I dropped it.

Now, anticipating a possible question: If I am uncomfortable with quantifiable trading, how come I use Quantifiable Edges as a reference point?

I find Rob Hanna’s approach rigorously tested and researched. For example for July 23, Rob said in his blog, quantifiableedges.blogspot.com, “The 3-Day Pattern That Suggests A Bearish Edge For Today “.

You will know from my own blog yesterday that I shared this view. But I don’t find Rob’s work so useful when he and I agree. It’s when he and I disagree that I derive the most benefit: the disagreement prompts me to check my assumptions. This does mean I’ll automatically change my mind, but I have found it useful to check my assumptions.

If it suits your personality, robust quants is a way to go.

Entry Zones III

BarroMetrics Views: Entry Zones III

We were looking at the UK 100 yesterday when I said that for Habits of Success traders, they usually look at the weekly for trend identification and zones. So let’s have a look at the weekly, Figure 1 (the yellow lines are the 1-period swing).

We see that from ‘0’, the instrument had an uptrend. But a ‘B’, we broke the low at ‘X’; so, whatever we had in the weekly, we did not have an uptrend. In this situation, there are three possibilities:

  • The start of a downtrend – we need to see lower swing lows, lower swing highs to confirm.
  • The start of a sideways pattern – we’d need to see a turn down from the Primary Sell Zone of ‘A’-‘B’ as a preliminary confirmation.
  •  The resumption of the uptrend. For this to be the scenario, we’d like to see a line turn on the monthly, preferably to monthly support followed by a monthly line turn up. The line turn up would suggest a resumption of the monthly uptrend.

Figure 2 shows the 1-period swing on the monthly.

What the monthly shows: a sideways pattern, with a pullback to the Value Area High [VAH] (support), followed by a bounce.

Normally I would not trade for a move up from there – for me, the reward:risk is just not there. To go long, I’d prefer to wait for an upside breakout (i.e. a move above 6950 and retest). The reason is in a sideways market, the Primary Sell Zone is usually a rejection zone for a move to the Primary Buy Zone.

As a weekly timeframe trader, I’d be happy to go short at the monthly Primary Sell Zone on a setup and entry on the daily timeframe.

But let’s say John has different reward:risk profile that would lead him to go long at ‘S’, what be the thought processes?

  • Trend up, looking for an upside breakout i.e. if we are long and the upside breakout occurs, we are looking for the uptrend to continue.
  • The zone is the VAH at 6076 to 6077.
  • (turn to Daily chart, Figure 3) Setup – a contraction setup at the VAH; the entry would be the following bullish conviction bar. If we entered at the close, entry would be 6187; stops would be below 6010.


FIGURE 1 Weekly UK 100


FIGURE 2 Monthly UK 100


FIGURE 3 Daily UK 100

Entry Zones II

BarroMetrics Views: Entry Zones II

The second question this week comes from John (pseudonym). John attended the final Habits of Success Seminar I gave in Singapore. He has been struggling with the idea of zones. The Word doc contains the charts he sent me of the FTSE.

In Habits of Success, I taught this analytical process:

  1. Identify the trend of the the timeframe you are trading; determine if this trend will continue or change. The answer gives you your strategy.
  2. Identify the short term bias of the timeframe.
  3. Identify the short-term structure of the timeframe. (2 and 3) will lead you to identify where you want to take a trade. (Zone).
  4. Identify your initial stop, and approximate entry price. You now have risk.
  5. Identify the exit for your core profit contract. You have reward.
  6. Ensure the reward:risk is adequate for your win rate.If so,
  7. Take the trade
  8. Determine how you will manage the trade.
  9. On an bar-by -bar basis take the new information and change, if necessary, the trade management.

Before answering John’s question (how would you determine the zone?), a few contextual comments:

  • John is trading the weekly timeframe.
  • The instrument John chose is the UK 10.
  • He is using CMC’s charting platform.
  • He appears to have assumed the trend is up and is looking for an entry zone, and the entry pattern.
  • He did not send me his view of steps 1-9; and I have assumed he has not gone through the process.
  • I use one period swings to identify the magnitude of moves of a timeframe. Thus the one period swing on a weekly chart, defines the weekly trend.
  • I teach that a change in trend in one timeframe usually means a change in the line direction of the next higher timeframe.
  • Normally, in Habits of Success, we look at the weekly timeframe as the timeframe that defines the trend; it is also the first timeframe where we would look for a zone. BUT IN THIS CASE…..

….more next Blog…..


Entry Zones

BarroMetrics Views: Entry Zones

This week I’ll reply to the questions I have received – either to my email or comments here.

ZH raised the questions in the attached doc file. For those who have not read Nature of Trends, I use statistical price and time info as the first filter to position sizing.


You have misunderstood what I said in NOT – easy to do, I admit.

Let’s turn the chart you sent me. I have added the black line, labelled 0-1.

The stats I refer to in NOT I use as a first filter to determine position size. The stats you refer to are based on the magnitude of the swing line of the first higher timeframe. If we assume that 60-minutes is your trader’s timeframe, then the black line will represent the 290-minute (EURUSD trading hours/5). If your charting software does not chart 290-minutes, then use the 240-minute.

So, if:

  1. you assess that the trend is down, and
  2. you assess the trend is likely to continue, and
  3. you see sell signal at a zone when
  4. the black line has gone mean -1 one stdev,

then you look add a normal size position.

Where you have misunderstood my comments in NOT is the timeframe to which the passage refers.

If you are applying the time and price windows to the corrective moves in the trader’s timeframe, then normally I’d be looking to trade a normal position size at “mean +1 to mean -0.5” (i.e. normal correction) of the corrective mode. This comment assumes we are seeing, on the first higher timeframe, a swing magnitude that is normal, or in some cases, less than normal.

It is very important to appreciate that I do not use the swing magnitude of the first higher timeframe to determine if I should take a  trade. I first determine if current conditions qualify as a trade, and only if so, do I determine position size: ‘below normal’, ‘normal’ or ‘above normal’.

As for the second question: you need to calculate impulse and corrective stats separately. Combining them in one population will not produce the results you seek.



Shortening of Thrust

BarroMetrics Views: Shortening of Thrust

Continuing from Thursday’s ( 05-30) blog….

‘Shortening of Thrust’  is a tool for identifying end of moves. It’s to used within a context – the most important of which are:

  1. a possible termination zone, and
  2. the volume and range relationship. Are we seeing from a possible climax and/or from the volume and range relationship, a possible end to the current swing?

The idea is best explained by an example – let’s take the AUDUSD. For the volume/range component, I’ll use the futures contract of this FX pair.

Figure 1 shows that the monthly AUDUSD and shows that the pair has been in a sideways mode since 07-2011. There are three levels of support and resistance; in order of magnitude:

  1. 1. 1080 to .9581
  2. 1.0856 to .9581
  3. 1.0612 to 1.0151

The pair broke below the lowest magnitude support at 1.0151 and is now in the second magnitude Primary Buy Zone. For reasons I won’t go into here, I expected the AUDUSD to break below .9581, and possibly .9387.

However, last week the AUDUSD started to  show that the current down swing may be over, and that we may see a swing up. The matters of note:

  1. Figure 2 shows the weekly perpetual futures contract – we see the pair is at the Primary Buy Zone.
  2. Figure 3 shows the daily perpetual futures contract – we see that despite the increase in volume, there has been little downside progress.
  3. Figure 4 is the shortening of thrust data for Figure 5’s calculation. We see that the average spread between the lows is 55 pips, with a standard deviation of 7.  We can therefore expect that any range below 36 pips ought to occur only 1% of the time.
  4.  From Figure 4, we see that once the AUDUSD entered the Primary Buy Zone, the low to low range was 37 (5/28) and 28 (5/29) (Figure 5). Add this to what we know from Figure 3 – failure to establish new lows in the face of increasing volume, and you have grounds for believing that a rally is on the cards.
  5. Finally, Figure 6 – the 60-min VBI of the FX Futures. You will see the divergence prior to a sideways  move.

Having an understanding of shortening of thrust, provides a trader with an invaluable tool.

Tomorrow, the blog will the request Ryan made on 05-24:

“Where I struggle is in the rich process of generating the alternatives actions that are necessary for this process to evolve. Any further commentary on this topic in future would be great”.




FIGURE 2 Weekly FX Futures Perpetual


FIGURE 3 Daily FX Futures Perpetual


FIGURE 4 Daily Shortening of Thrust


FIGURE 5 Mean and Std Shortening of Thrust


FIGURE  60-min VBI FX FuturesNearest Continuation

Chart through the courtesy of MarketDelta

What It Takes To Succeed V

BarroMetrics Views: What It Takes To Succeed V

Today, let’s look at elements of a discretionary trading plan. It’s worth bearing in mind that as traders we create plans to help us determine when the probabilities favour a trade (entry) and when they no longer favour it (exit).

There are many ways to frame a plan – what is important is they suit our personality. For example, Rob Hanna is a swing (Quantifiable Edges) trader using quant methods. His approach could not be more different to mine – yet we both succeed.

[Speaking of Rob, he has a new service, Overnight Edges ‘dedicated to taking advantage of overnight movements’. Looks really interesting – a story for another day].

My approach is based on:

  1. A model to place structure around price action – based mainly on Wyckoff and Market Profile (note the CME is interactive; so, click on the headings to see what they say); and, to a lesser, my re-interpretation of the Elliot Wave (which I call the Ray Wave)
  2. Testing and validation of the setups that I use in my trading.

Figure 1 shows the Wyckoff-Tubbs model. Tomorrow, we’ll examine Wyckoff’s ideas in a little more depth.


FIGURE 1 WYckoff – Tubbs Model

Quant Studies

BarroMetrics Views: Quant Studies

As a visual, discretionary trader, quant studies are not my forte. But that doesn’t mean I can’t outsource the expertise. I have found Rob Hanna’s Quantifiable Edges to be by far the best (at least so far as I am concerned). His blog is well worth reading. (My link will take you there).

Another source is Sentiment Trader, and again a good source of quant studies. (My link will take you to the back issues)

I should not be taken to be saying that just because a site publishes quant studies, it is a source of robust information. One site that has proven a disappointment is  Market History. It’s a site that conceptually ought to produce robust quant information but the results I obtained are no better than random. I stress that the random results are ‘my use’; other traders may obtain different results.

I am not sure what causes the difference in results. Perhaps it’s the questions that are posed to the data base.

We currently have an interesting comparison.

Market History posed this question: “Since 1980, what is the historical performance for SPX after the Dow prints a 3-day percentage gain of 2.25% or more, the Transports 3.5% or more, Treasury Bond futures down 0.75% or more, all with the Dow within 2.5% of its highest close within the last two years?”

The answer was bearish: a target of 1315 to 1316 by July 19.

Sentiment Trader recently had this to say about the S&P rally to last week: “Stocks rallied strongly yet again on Friday, pushing the indexes into rarefied historical air.  This is only the 10th time in the history of the benchmark S&P index (dating back to 1928) that it gained at least +0.75% for five straight days.”

It concluded that while bearish in the next 1 -3 days,  buying weakness in the 1-3 day period would probably produce positive returns in the next two weeks.

You could not ask for a better head-to-head comparison. If my records are to serve as a guide, Sentiment Trader will prove to be the better bet.  Let’s see if history will prove kind to my conclusion.

Wolfe Waves

BarroMetrics Views: Wolfe Waves

I have received quite a few requests to follow-up on Wolfe Waves. Here is my take. In the free section of my site, I’ll be uploading the material I found on the net.

Figure 1 shows an ideal Bullish Wolfe Wave. It’s a very common pattern and I found that I applied it will-nilly, I’d lose money. I did find that I turned into a profitable pattern if I used it in the proper context. But before I get into ‘context’ let’s look at the essential characteristics of the BullishWolfe Wave.

  1. Wave 5 tends be identified by a trend line that usually originates from waves ‘1’ and ‘3’.
  2. Wave 4 tends be a deep retracement (greater than 61.5 but less than 87.5) of Wave 3.
  3. Wave 4 holds below the high of Wave 2.

OK, let’s turn to context. Here I need to turn to the Ray Wave. I successful Wolfe Wave tends to form as a continuation pattern in the wave 2 or wave 4 position of a 5-wave structure of in the wave b of 3-wave structure. It serves as a reversal pattern in wave 5 (of a 5-wave structure) or wave 5 (in a 3-wave; here best to see in the first lower timeframe).

That’s a quick summary of my context and essential characteristics. On Tuesday, I’ll look at the Wolfe Wave in the current S&P picture.


FIGURE 1:  Ideal Bullish Wolfe Wave

Context and Trading

BarroMetrics Views: Context and Trading

One of the areas I feel is most neglected trading education is the importance of context.

There is a pattern I use in my trading, Wolfe Waves,  that I find useful in the appropriate context. We are seeing the pattern and its context in the S&P today.

Figure 1 is the e-mini futures, Sept contract, including Globex session. You’ll see that the S&P is at the Primary Buy Zone. The low 1241 (1243 day session only and 1249 basis cash) is not only the beginning of the Primary Buy Zone but also the 2011 low. If we see  acceptance below  this number I’d say the high for 2011 is in. So, the March low is an important number.

Figure 2 is a 290-minute chart of the same instrument as Figure 1. I’d expect the low to terminate somewhere on the trend line that has joined 1 & 3. I have drawn the target (1-4) line for the sake of completeness. I don’t use it that often in my own trading.

So there’s a head’s up folks. If we see acceptance below 1241, look for a watershed type decline; otherwise I’d be looking for a high above 1576 and below 1736 by Sept/Oct 2011.


FIGURE 1 Daily S&P


FIGURE 2 290-minute S&P

Taylor Rule v QE3

Cross ref


QE3 v Taylor Rule

Many in the financial circle feel it is untenable for the interest rates to remain at zero.   According to the Taylor Rule, the Fed Funds rate should be at least 1%: here is why:

Tyler Durden's picture

Submitted by Tyler Durden on 06/01/2011 09:58 -0400

A month ago, Zero Hedge first posted (well, technically we read it at Stone McCarthy but beat everyone else to copying and pasting it first), that according to the Taylor Rule, so widely abused by the lemming central planners in the Marriner Eccles building, the effective Fed Funds rates should, for the first time since the GFC, be positive. This is what SMRA said: “For the second consecutive quarter, the original-specification, quarterly version of the Taylor rule, based on real GDP figures and the GDP price deflator, produced a positive result. The previous day, the BEA released its advance estimate for real GDP figures in Q1 2011. Based on those numbers, the Taylor rule prediction for the federal funds rate target in Q1 2011 is +0.4%. In the previous quarter of Q4 2010, the Taylor rule prediction was +0.1%.”

Now, Taylor himself, in his blog, confirms that not only should the Fed Funds rate be positive, it should be 1%.

  • Over here at Economics One, I can report that the Taylor Rule says that the fed funds rate should now be 1 percent, and I can provide the calculations. Available data (through the 1st quarter) show that the inflation rate is about 1.6 percent (GDP deflator smoothed over four quarters) and the GDP gap is about 4.8 percent (average of San Francisco Fed survey). This implies an interest rate of 1.5 X1.6 + .5X(-4.8) + 1 = 2.4 – 2.4 +1 = 1.0 percent. I am not sure why other reports differ, but at least the coefficients and numbers are here to see and check. Perhaps they are using different coefficients, but David Papell writing at Econbrowser earlier this month showed why the coefficients reported here work well.
  • So I think the economy would be better off if the Fed started moving to a higher funds rate now rather than later, and I certainly see no rationale for another round of quantitative easing. Unfortunately, it looks like the Fed will continue with its zero interest rate for a while longer, and traders will continue to debate whether or not there will be a QE3 adding volatility to the market.

It is ironic, then, that Taylor speaks up just in time for Jan Hatzius and Bill Dudley to start their behind closed doors meetings which will usher in QE3. After all, we have now gotten to the point where Hank Paulson will be brought out of retirement and paraded in front of Congress waving a 3 page term sheet demanding a blank check should the Russell 2000 retrace below the 100 DMA.

IDkit, Ag Moderator