Transcript Slide 1

Trading Rule Set
October 27, 2007
by Anonymous
(work in process – not for use)
Comments and editions by Ed, in Red
This document represents a start in the direction
of defining a trading system.
It is currently incomplete and ambiguous.
Rule Set Outline
1. Markets: Which markets to trade
2. Entries: When to enter a market
3. Position Sizing: How many contracts to buy or sell
4. Stop Losses: How to set stop losses
5. Exits: When to close a winning position
6. Tactics: How to buy or sell, how to enter orders
Whipsaw Song
(not in index)
by Ed Seykota
You get a whip and
I get a saw, honey.
You get a whip and
I get a saw, babe.
You get a whip and
I get a saw.
One good trend
pays for 'em all .
Honey, sugar baby, mine.
What do we do when the
market breaks through, honey?
What do we do when the
market breaks through, babe?
What do we do when the
market breaks through?
Our stops are in,
so there's nothing to do .
Honey, sugar baby, mine.
What do we do when the
drawdown comes, honey?
What do we do when it
gets really big, babe?
What do we do when it
gets even bigger.
We stick to the plan and keep
pulling the trigger .
Honey, sugar baby, mine.
How do we know when our
risk is right, honey?
How do we know when our
risk is right, babe.
How do we know when our
risk is right?
We make a lot of money and
we sleep at night .
Honey, sugar baby, mine.
What do we do when we
catch a trend, honey?
What do we do when we
catch a trend, babe?
What do we do when we
catch a trend?
We ride that sucker
to the end .
Honey, sugar baby, mine.
(1) Markets to Trade
Question from Ed: how do you get this list…
A: These are ones I can track on eTrade – I’m planning to change brokers and expand the
list.
•
•
•
•
•
•
Euro
Yen
Australian
Canadian
Swiss
Pound
•
•
•
•
•
•
•
•
•
Dow Jones
S&P
Russell
2000
30yr
Bonds
CrudeOil
Nat Gas
Gold
Silver
Copper
•
•
•
•
•
•
•
•
Sugar
Cotton
Soybean
Oil
Soybean
Meal
Wheat
Corn
Lumber
Pork
Bellies
(2-a) Entry Rule1—EMA Long
If
the Daily Low Price is greater than the 100day EMA
then
place the following market order for execution at the open of the next day:
•
GTD Buy 1 Contract at Market
Questions from Ed:
1.
Show me how to initialize the EMA.
2.
I don’t know a market order / GTD. A: This is how the software works.
3. Show me when you compute the order. A: After the markets close.
(2-b) Entry Rule2—Breakthrough Long
If
the Daily Low Price is greater than the 100day EMA,
and
a trendline drawn along the Daily Highs has a negative slope,
then
place the following buy stop order for 1 Contract at a price ¼ ATR20 above the
trendline:
•
GTD Buy Stop Limit 1 Contract at x price (calculated to be 1/4th ATR20
above trendline)
Ed: Show me how you draw the trend-line – such as how many days you consider and how
you select the points through which it passes.
“What do we do when the
market breaks through?
Our stops are in,
so there's nothing to do.”
-- Ed Seykota
(2-C) Entry Rule1—EMA Short
If
the Daily High Price is less than the 100day EMA
then
place the following market order for execution at the open of the next day:
•
GTD Sell 1 Contract at Market
(2-D) Entry Rule2—Breakthrough Short
If
the Daily High Price is less than the 100day EMA,
and
a trendline drawn along the Daily Lows has a positive slope,
then
place the following sell stop order for 1 Contract at a price ¼ ATR20 below
the trendline:
•
GTD Sell Stop Limit 1 Contract at x price (calculated to be 1/4th
ATR20 below trendline)
“What do we do when the
market breaks through?
Our stops are in,
so there's nothing to do.”
-- Ed Seykota
(3) Position Sizing
•
•
Trade3 CanadianDollar Aug 30
Account
Account
Target Heat (risk %)
Target Risk Amount
37,200
2.5%
930
Sizing
Buy/Sell
No. Contracts
Price
Stop Loss
Stop Loss Delta
Tick Size
Actual Risk Amount
Actual Heat (risk%)
Buy
1
9493
9403
90
$10.00
$900.00
2.4%
“How do we know when our
risk is right?
We make a lot of money and
we sleep at night .”
-- Ed Seykota
•
•
•
•
•
•
Set target amount of Heat (risk %)
Multiply Closed Equity in Account times Target Heat to
determine Target Risk Amount
Calculate difference between Entry Price and Stop Loss to
determine Stop Loss Delta.
Multiply Stop Loss Delta by Tick Size to determine Actual
Risk Amount
Divide Target Risk Amount by Actual Risk Amount to
determine Number of Contracts (rounded down to nearest
integer)
Multiply Number of Contracts by Stop Loss Delta by Tick
Size to Determine Actual Risk Amount
Divide Actual Risk Amount by Closed Equity in Account to
determine Actual Risk %
If Actual Risk Amount is less than Target Risk Amount plus
10% then OK to enter order
Ed: Show me how you determine the risk percent. A: Gut feel at
2.5%.
Ed: Stop Loss Delta is in units of price; tick size is in units of
price. Multiply these and you get price2. A: Use delta in ticks
and multiply by $ / tick.
Ed: Multiply # contracts x delta x tick size – units don’t match.
Ed: Show me how using closing equity is better than using total
equity. You can have negative closing equity and positive
total equity. By your formula you wind up going short on a
long signal.
(4 & 5) Stop Losses & Exits
•
Stop Losses:
–
–
•
For Long positions, Stop Losses are set 6 ticks below the low of the lowest day for the
Trendline that gives the Entry Signal (See Entry Rules).
For Short positions, Stop Losses are set 6 ticks above the high of the highest day for the
Trendline that gives the Entry Signal.
EMA Trailing Exit:
–
–
For Long positions, Trailing Stops are set 6 ticks below the 100day EMA.
For Short positions, Trailing Stops are set 6 ticks above 100day EMA.
Ed: I don’t know “low of lowest day for a trend-line.”
Ed: Show me how often you compute 100-day ema. A: every day after the close.
Ed: I don’t see how to close a winning position, per the index (#5).
“What do we do when the
market breaks through?
Our stops are in,
so there's nothing to do.”
“What do we do when we
catch a trend?
We ride that sucker
to the end.”
-- Ed Seykota
-- Ed Seykota
(6) Tactics
• Enter Stop Losses using Stop Orders that trigger when a certain
price is hit.
• Enter Buy Stop Orders and Sell Stop Orders for breakthrough
trades.
Ed: I don’t see any certain prices – I’d like to see some examples.
Ed: I’d like to see what markets the system is currently holding.